EPL for small accounts

Changing landscape increases need for EPL insurance

By Phil Zinkewicz

Employment practices liability insurance claims are on the rise. There’s no doubt about that. The U.S. Equal Employment Opportunity Commission (EEOC) recently announced that 93,277 workplace discrimination charges were filed with the federal agency nationwide during fiscal year 2009. That is the second highest level ever reported by the EEOC, and monetary relief obtained for victims—through enforcement, mediation and litigation programs—totaled more than $376 million.

“The latest data tell us that, as the first decade of the 21st century comes to a close, the Commission’s work is far from over,” says EEOC Acting Chairman Stuart J. Ishimaru. “Equal employment opportunity remains elusive for far too many workers, and the Commission will continue to fight for their rights. Employers must step up their efforts to foster discrimination-free and inclusive workplaces, or risk enforce­ment and litigation by the EEOC.”

The FY 2009 data show that private sector job bias charges (which include those filed against state and local governments) alleging discrimination based on disability, religion and/or national origin hit record highs. The number of charges alleging age-based discrimination reached the second highest level ever. Continuing a decade-long trend, the most frequently filed charges with the EEOC in FY 2009 were charges alleging discrimination based on race (36%), retaliation (36%), and sex-based discrimination (30%).

The near-historic record level of total discrimination charge filings may be due to multiple factors, according to the EEOC, including greater accessibility of the Commission to the public, economic conditions, increased diversity and demographic shifts in the labor force, employees’ greater awareness of their rights under the law, and changes to the agency’s intake practices that cut down on the steps needed for an individual to file a charge.

For the past 30 years, employment practices liability insurance (EPLI) has been available as a stand-alone policy to large employers because it was believed that they were more vulnerable to discrimination lawsuits. However, according to Jeffrey O’Shaughnessy, vice president of employment practices liability for The Hartford Steam Boiler Inspection and Insurance Company (HSB), that particular dynamic is changing.

“For the past five years, especially the last two years, smaller employers have felt the sting of discrimination charges,” he says. “The danger to small businesses of employment-related charges and claims continues to grow. Combine the current business climate that has forced many employers to trim their staff with evolving employment laws and an aging and more diverse workforce, and the trend is more risk for employers.”

O’Shaughnessy referred to a recent HSB survey that showed two out of three small business owners are concerned that employees might bring discrimination claims or other employment-related charges against them. More than 40% blamed a poor economy and 60% cited new worker-friendly employment laws and legislation.

In addition, the survey revealed that 43% of those responding didn’t know that coverage designed and priced specifically for smaller employers is increasingly available. “Small business owners need to be better informed about the resources and options that are available to help employers prevent an employment charge and defend their company when an allegation is made,” says O’Shaughnessy.

When asked how much it would cost to defend and settle a typical employment charge, 60% of the small business owners estimated it would be less than $20,000. “In fact,” says O’Shaughnessy, “81% of employment-related charges are settled for an average of $22,400 to $40,500, even when the claim is found to be groundless. The survey shows that many small business owners greatly underestimate the true cost of defending themselves against an enormous claim. With nearly half of those responding unaware that more affordable coverage is available, it’s clear that many small business owners are exposed to the threat of a costly and distracting employment charge.”

O’Shaughnessy says that there are three main reasons why employment-related claims against small businesses are on the rise. “Reports show that employment-related claims increase as unemployment rises, and we all know what’s happening with unemployment in this country. In addition, the evolution of employment law has created an environment in which larger numbers of individuals are being protected. And, finally, press reports in the media bring attention to workplace discrimination issues.”

HSB, in conjunction with Munich Reinsurance America, has announced a new, jointly developed Employment Practices Liability program that O’Shaughnessy says makes broader EPL coverage and risk management services available to small businesses at affordable premiums. The new EPL insurance program is designed specifically for businesses with 50 or fewer employees and includes advanced EPL coverage that, until recently, was available only to large employers, says O’Shaughnessy. These include coverage for prior acts that occurred before the policy’s inception date, punitive damages coverage, a broadened definition of employees to include independent contractors and optional third-party coverage for discrimination and harassment claims made by business customers or vendors.

Says O’Shaughnessy: “A legal helpline is included to help business owners avoid employment practices claims and obtain general employment guidance. This service gives business owners access to best practices advice about a broad range of subjects including factors to consider when making specific employment decisions. More than 50% of EPL charges are brought against smaller firms, yet only 1.2% of small businesses purchase EPL insurance protection.”

It should be noted that HSB does not deal directly with small business purchasers of this coverage. It is reinsured by HSB but sold to the primary carriers who can then make it available to the small business owners. “This EPL program is a turnkey reinsurance program with limits available from $25,000 to $1 million. Coverage is endorsed to commercial policies of insurance companies that partner with either HSB or Munich Re America. The program is reinsured, implemented, and administered by HSB. A separate underwriting process is not required, and it is simple and inexpensive to administer because HSB fully supports product implemen­tation,” observes O’Shaughnessy.

The HSB executive says that EPL insurance represents significant growth opportunities for primary companies and their agents.