Author: Emily Loupee
Introduction
In many ways, claims trends for Employment Practices Liability (EPL) follow broader social and economic trends. In 2022, the lawsuits brought by employees against their employers may have been related to COVID-19 vaccine requirements, return to work protocols or the continued focus that social movements have brought to sexual and racial harassment or discrimination.
Toward the end of the year, inflationary pressure and recession worries led to layoffs that increase the risk of wrongful termination lawsuits.
As we move into 2023, new categories of employment lawsuits emerge stemming from Environmental, Social and Governance (ESG) and Diversity, Equity and Inclusion (DEI) initiatives — and the political division relating to these movements — are increasing exposures and changing the way EPL insurers craft insurance policies to respond.
What we saw in the EPL market in 2022
- Most insurers were not looking to grow or increase their exposure in EPL. Limits primary insurers offered typically didn't exceed $5 million, though excess EPL limits are easily purchased and competitively priced.
- Retentions continued to increase in 2022, and toward the end of the year, most insurers felt that retentions had reached sustainable levels and didn't need further increases, outside of companies with a lot of claims or growth in employee count. Insurers increasingly offered split retentions, with higher retentions for high-wage earners or employees that earn more than $250,000 to $350,000 per year. These split retentions are negotiable and a creative way to keep "all other" retentions lower while satisfying the insurer's concern.
- EPL premium continued to see rate pressure in 2022, but at a slower pace than in Most insureds saw EPL rates increase in the 0%-10% range, with the market improving throughout the year. At the end of 2022, many insureds are seeing flat rate for EPL, with claims or employee count growth contributing to increases.
- Coverage remained consistent and broad in 2022, Some insurers added privacy or biometric exclusions related to losses in Illinois and other states that allowed for private right of action for these violations. Some insurers look to restrict coverage for third- party (nonemployee) claims alleging discrimination for companies in higher risk industries, like real estate and healthcare.
- COVID-19 vaccine and back-to-work mandates have led to an increase in claims alleging discrimination due to disability and religion, which are protected classes. Employees cannot sue simply for not wanting to get the vaccine, and courts have upheld that companies are allowed to mandate vaccines in general.
Current state of the EPL market
- Most insureds can expect a flat rate for their EPL insurance renewals. Premiums will increase generally with increases in employee count, and companies with paid claims or layoffs can expect to see some rate pressure in the 0%-15% range.
- Many insurers feel that they have increased retentions enough in the 2019-2021 hardening market cycle and don't need further increases. However, companies that are in higher-risk states or with increased exposure or claims may see continued pressure on retentions.
- It's increasingly common to see higher retentions for high-wage earners, and the specifics of this provision can be negotiated to tailor to the company (the threshold for "high-wage earner," for example, can be set higher for a company with a large population of high-wage earners) and can help to keep retentions lower for other employees.
- Insurers are also using state-specific retentions to mediate their exposure by state, while keeping other retentions low and competitive. The states with the highest Equal Employment Opportunity Commission (EEOC) charges in 2021 were California, Pennsylvania, Florida, Illinois, North Carolina, Georgia, New York and New Jersey, with Florida having the largest percentage of all EEOC discrimination charges in the country, at 7.3%.*
What EPL trends we are watching
- New trends began to emerge in 2022 that we'll be watching closely in 2023. First, a potential backlash to DEI and ESG initiatives is leading to claims alleging discrimination brought by traditionally majority race and age groups. These "reverse" discrimination claims allege that corporate drive to increase DEI and ESG marks led companies to fire good employees because they were part of a majority class, just to improve diversity at the firm.
- Second, it's more common to see high-wage-earning plaintiffs make allegations. Years ago, most EPL suits came from lower- level workers, and it was seen as career suicide for a higher-level executive to bring allegation against their firm. However, it's increasingly common to see earners of very high wages bring allegations of wrongful termination, discrimination and harassment, which leads to more costly settlements and insurance payouts.
- Social inflation (and dollar inflation) continues to increase defense costs and settlements, leading to higher single-plaintiff payouts than are typically seen. A census of large EPL insurers relays that it's more and more common to see single-plaintiff lawsuits result in seven-figure settlements in pre-litigation/ confidential mediation, due to the high wages of the plaintiff making the allegations and the companies' desire to settle quickly to avoid any press around these allegations.
- Data from the EEOC — with which all employees must file a charge prior to bringing a lawsuit — has seen charges decrease since 2016. EEOC charges aren't the same as EPL claims, but the figures tend to trend together, with EPL claims lagging the EEOC charge trends. As such, the reduction in charges should translate to an overall lower frequency in EPL This lower frequency, coupled with the reduction in COVID-19-related matters, will help the marketplace continue to improve.
- The issue plaguing large EPL insurers is not frequency, but severity. Also, insurers see more and larger single-plaintiff claims brought by high-wage earners settled in mediation, which may be entered into without the employee filing an EEOC charge.
Conclusion
- Insureds should conduct a full and complete marketing of the renewal this year to reap the benefit of increased competition compared to the last few harder market years.
- The Directors & Officers (D&O) marketplace has improved significantly, and therefore leveraging the D&O to improve the EPL may be a worthwhile strategy.
- Insureds should request split retentions by state or level of earnings to minimize the "all other" retentions and reduce.
- Insureds should pay special attention to maintaining full third party coverage, which provides for defense costs coverage for Americans with Disabilities Act claims and other discrimination and harassment allegations coming from nonemployees.
Because of the highly nuanced nature of this market, it is imperative that you're working with an insurance broker who specializes in your particular industry or line of coverage. Gallagher has a vast network of specialists who understand your industry and business, along with the best solutions in the marketplace for your specific challenges.
Please note: A client's risk profile is the primary variable dictating renewal outcomes. Loss experience, industry, location and individual account nuances will also have a significant impact on these renewals.
