The Next Chapter: Employment Practices Liability
Employment Practices Liability (EPL) insurance has been available since the late 1980s. But it was not until September 1991 when the world witnessed the Clarence Thomas Supreme Court hearings and Anita Hill’s testimony, that people recognized that sexual harassment was prevalent in society.
The phrase, “sexual harassment,” was coined by a group of women at Cornell University in 1975 who were exploring the behaviors that comprise sexual harassment. In 1976, Redbook magazine conducted a survey that showed 80% of the respondents had encountered sexual harassment. Although existing for decades, it was the Supreme Court hearing that made the insurance industry stand up and focus on a risk transfer solution for the issue.
Initially directors and officers (D&O) underwriters were tasked with the underwriting, but not only were the two products — EPL and D&O — different in litigation frequency but also in severity. As one can imagine, and with the advantage of hindsight, that approach did not fare well for the insurance companies. Dedicated employment practices underwriters were created, and they too faced challenges. Since 1991 when the insurance industry became focused on sexual harassment, wrongful termination, discrimination, etc., other than the introduction of “third party” coverage in 1997, with a few minor exceptions, the coverage has not changed, with one exception recently introduced.
The coverage is 32 years old, and the wording, approach, and underwriting has for all purposes not kept up with the employment and litigation landscape.
Over the course of 32 years, we have experienced cultural events that have had a direct impact on the coverage, those being: sexual harassment; gender discrimination; sexual preference discrimination; #MeToo; Black Lives Matter; and now, wage and hour frequency and severity at an all-time high.
Before detailing the current state of the market with regards to Wage and Hour (W&H) insurance, a look back might be helpful.
After the Depression, in 1938, the Fair Labor Standards Act (FLSA) was passed to address certain employment practices common during the Depression such as child labor, no maximum-hour work week, no minimum wage, lack of record keeping and overtime pay, etc.
In 1941, United States v. Darby handed a significant decision confirming the constitutionality of FLSA, finding that it relates to the federal government’s power to regulate interstate commerce and provides uniform labor standards across the nation.
Personal Liability Exposure
In the past decades, there have been many amendments and new legislation that have expanded employees’ rights. Typically, when one thinks of wage and hour laws, one thinks federal (FLSA). However, changes occurring in states in the last few years compound the challenges for corporate America and those underwriting W&H, with states enacting state laws on W&H and often imposing “personal liability” (personal liability exists in FLSA).
The approach is concerning not only due to the number of states enacting such laws, but also because of the ability of plaintiffs to file litigation in W&H friendly states. Personal liability is a major concern as the states reference “owners, directors and officers” as those with possible personal liability exposure.
Wage and hour litigation is very difficult to defend, and expensive. Most of the litigation occurs against firms with 10 to 2,000 employees. These firms typically have a “family like” approach to their employees, not the most significant record keeping, and often misclassification. In addition, one significant reason for the upswing in personal liability is the increasingly rigorous enforcement of W&H laws by government agencies.
Regulatory bodies, such as the U.S. Department of Labor, have intensified their efforts to ensure employers’ compliance with labor laws. They actively investigate and penalize violations, holding responsible individuals accountable.
Employees are recognizing their rights, maybe due to more media attention, and are increasingly willing to bring litigation when they feel that there has been mistreatment, leading to a surge in complaints and legal action. Adding to all this is changing workforce dynamics. Today’s workforce is evolving, the gig economy and remote work becoming increasingly prevalent. This adds to the complexities of classifying employees, tracking hours worked, and deciding on overtime pay, leading to personal liability once violations are discovered.
The rise in personal liability arising out of wage and hour violations can be attributed to a combination of factors, including stricter enforcement, heightened employee awareness, changing workforce dynamics, lawsuit-friendly environments, and evolving legal standards. This trend underscores the importance of staying well-informed about labor laws, maintaining compliance within organizations, and implementing proactive measures to prevent wage and hour violations.
In an era where accountability is paramount, both employers and individuals in management roles must prioritize fair labor practices to protect themselves from the legal consequences of noncompliance.
Today’s insurance options, with one exception, are fairly limited unless the firm has 5,000-plus employees and is willing to turn to Bermuda for answers. Those in the 10- to 2,000-employee range have historically had few options and all of those have their limitations.
The most frequent approach taken by underwriters willing to offer W&H coverage is a sub limit of $100,000 to rare cases of $250,000. This “endorsement” is a sub limit of the policy aggregate. It is also “defense only.” It is also solely entity coverage.
There are key components of the sub limit endorsement that it would be wise to understand. The coverage limit, as stated in the typical approach, is a sub limit of $100,000 to $150,000 of defense costs and is part of the policy aggregate limit.
No one will deny that something is better than nothing but with that said, will the insured’s balance sheet be able to absorb $100,000? Frequently, however, we see a broker overwhelmingly prefer the option with $100,000 W&H, when the overall coverage is better on the option without W&H.
Coverage triggers are different in each of the available endorsements. The most frequent trigger among underwriters is a written demand (most often summons and complaints being served).
Is the “defense costs” amount enough coverage? Average defense costs are estimated at around $250,000. Penalties are substantial and determined by the pertinent state and/or federal guidelines, but significant enough that studies have shown 98% of all wage and hour litigation gets settled. I attribute that to two main reasons: First, the allegations are very difficult to disprove, and second, the stakes are so high defendants ultimately conclude the only prudent course of action is to settle.
There is one market that offers up to $1 million defense and settlement.
Insurance professionals not following wage and hour personal liability state reforms and the increase in claims are doing their constituency a disservice. Plaintiffs see the opportunity; the personal assets of “owners, directors and officers” are vulnerable. Some states allow for indemnification, but that can jeopardize the financial stability of the company’s balance sheet due to the size of W&H litigation costs.
The industry needs innovate and respond to these perils as it did in 1991 after the Clarence Thomas hearings. Join the lead in providing comprehensive EPL with wage and hour coverage.