In this three-part series, Woodruff Sawyer management liability expert Jon Janes shines a light on three often-overlooked lines of management liability coverages: Employment Practices Liability, Fiduciary Liability, and Crime Insurance. Although referred to as “auxiliary lines” or “ancillary lines,” this trio of insurance policies are essential to most organizations. They also are being impacted by the pandemic, changes in the workforce, and fluctuating market conditions, just like many other lines of insurance. In this “Management Liability Auxiliary Lines” series, Jon examines how pricing, retention, capacity, and terms are being impacted—and what it means for you. First up: Employment Practices Liability Insurance.
Perhaps surprisingly, given all that is happening in the employment landscape, the Employment Practices Liability (EPL) market is relatively stable. This is not to say that insurance underwriters are unconcerned. They will certainly insist on material changes in EPL programs when there are material changes in the risk profile of the buyer, including claims. Underwriters are also focused on pandemic-related issues, like workers returning to the office and changing vaccine mandates, as well as non-pandemic issues such as employee privacy and social justice.
Current EPL Renewal Trends in 2022
As we move into the second half of 2022, we are closely following four trends dominating renewals in the EPL market. These trends include price, retention, terms and conditions, and capacity.
- Price: The extent of premium increases on EPL renewals will be driven primarily by industry, including the impact of COVID-19 on the industry, loss history, and location of employees. Renewals with no change in risk profile or losses can expect premium increases to be minor. Retail and healthcare continue to be difficult industries. California continues to be the most problematic jurisdiction, with New Jersey, New York, and Florida not far behind.
- Retention: Expect continued pressure on primary retentions. Separate, higher retentions for California claims and claims involving highly compensated employees (particularly in healthcare and financial institutions) should be expected.
- Terms & Conditions: Few COVID-specific retentions are being required, and coverage otherwise remains consistent as well. Underwriters continue to limit their exposure to privacy- and biometric-related claims by excluding or significantly limiting the amount of coverage available to defend such claims.
- Capacity: Capacity in the EPL market is stable, and some new excess EPL capacity has recently entered the market. Primary- and low-excess capacity can be difficult to find for businesses and industries (healthcare, retail, hospitality, and leisure) that have been more impacted by COVID-19. Lack of competition for these risks is contributing to rate increases.
Hot Topics in 2022
The news headlines—particularly those involving the pandemic, social justice issues, and data privacy—continue to impact the EPL market.
COVID-19: Labor and employment law firm Littler Mendelson has tracked more than 5,432 lawsuits (including 625 class action suits) filings between March 12, 2020, and March 11, 2022. Return-to-office and vaccine requirements are top of mind not only for employers but also underwriters. They both anticipate an increase in claims alleging employers failed to make reasonable accommodations for employees reluctant to return to the workplace or be vaccinated for health or religious reasons, or that these policies have had an adverse impact on their employment status. See my article, Back-to-Work Preparedness Includes Your EPL Policy, for more detail.
Social Justice: Socially driven movements like #MeToo and Pay Equity continue to affect employment-related litigation. Congress passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, which was signed into law by President Biden on March 3, 2022. The act prohibits the enforcement of pre-agreed arbitration clauses to resolve sexual harassment and sexual assault disputes, even if all parties had put an arbitration agreement in place before the alleged assault or harassment started. See Ending Forced Arbitration of Sexual Assault and Sexual Harassment for more detail.
The Biden administration has also expressed support for pay equity, including passing the Paycheck Fairness Act. If passed, this act would add procedural protection to the Equal Pay Act and Fair Labor Standards Act to address the gender pay gap.
Privacy Protection: Biometric data privacy laws are stringent, and plaintiffs’ firms have taken notice. Illinois passed the Biometric Information Privacy Act (BIPA) in 2008, but there were very few claims until recently. Now insurers are excluding coverage or capping their exposure at a fraction of the limit purchased as more states pass BIPA-like laws and BIPA-related lawsuit filings explode.
The Changing EPL Claim Landscape
I recently spoke with Joseph Kelly, Senior Vice President and Employment & ERISA Liability National Practice Leader of Sompo International, to get his thoughts on the current state of EPL insurance market.
Return to the Office
The EPL landscape is proving to be challenging as office employees return to the workplace. The primary obstacle for employers is the web of overlapping and contradicting regulations on vaccine mandates, masking requirements, and other COVID-19 mitigation requirements.
For example, an employer could have an office in one state where they are restricted from implementing a vaccine mandate and in another where they are required to mandate vaccines. This complexity creates an environment ripe for litigation brought by employees who either feel that their rights have been restricted or that they are not being adequately protected in the workplace.
There has been a rapid rise in COVID-19-related accommodation request litigation over the past 12 months. Employers who deny a specific request for religious or disability accommodations for vaccine mandate policies will be most vulnerable to this kind of litigation. Similarly, there is an increase in claims alleging retaliation or wrongful discharge brought by employees who filed complaints about COVID-19 safety violations, such as masking or social distancing.
Other frequent claims are related to denied leave requests to care for sick family members or to care for children who could not attend school or daycare based on COVID-19 closures. As COVID-19 cases subside and safety protocols are relaxed, the frequency of these claims will dissipate.
The Great Resignation
“The Great Resignation”—the term for the large numbers of workers who have chosen to resign from their jobs or switch careers during the pandemic—is causing concern in the EPL market. Large increases in employee turnover have long been an underwriting barometer of future claims activity.
What is most troubling about this trend is that many employees are leaving their jobs on bad terms with their employers. They may be frustrated by long hours, low pay, COVID-19 concerns, or dealing with irate customers. This friction coupled with the turnover can lead to increased litigation frequency.
Furthermore, employers facing a labor shortage may be forced to relax hiring standards, which could have negative implications on work product, employee morale, and corporate culture. These factors can lead to a ticking time bomb of potential litigation.
Social inflation, a term that refers to the trend of rising insurance costs due to increased litigation, plaintiff-friendly judgments, and higher jury awards, is also on the rise. In recent years, there have been numerous instances in which injustices have been brought to light, often pointing to longstanding wrongful acts or inaction by corporations and their leaders to address these acts.
Social justice movements like #MeToo and Black Lives Matter have raised awareness of these issues, which can result in judges and juries being more sympathetic to plaintiffs who are bringing harassment and discrimination claims.
The impact of social inflation has contributed to some large judgments against employers. Data from Lex Machina shows a 97% increase in average damage awards in federal discrimination cases decided in 2021 versus 2020. The average award increased from $280,000 to $552,000. One year does not constitute a trend, but this issue is something that is likely to continue to influence litigation outcomes.
Employment matters should be a key agenda item for boards.
The #MeToo movement ushered in a new era of accountability for corporate boards as shareholders brought securities and derivative litigation based on the actions of officers and the alleged failure of corporate boards to properly mitigate these actions. Beyond the reputational damages, some of these cases resulted in large monetary damage awards.
This trend has continued as social justice issues continue to impact corporations with shareholder activism and litigation. In most instances, corporations have reacted positively to concerns raised in #MeToo and social justice initiatives by responding quickly and thoroughly to allegations of misdeeds by corporate officers in the following ways:
- Conducting pay equity audits and initiatives
- Implementing diversity and inclusion programs for the benefit of all key stakeholders.
These steps will continue to have a positive impact on employee relations, business results, and in mitigating potential litigation.