Once the domain of large clients, employment practices liability coverage is trickling down. A specialist can help retail brokers find the right coverage.

By  Kevin Amrhein

There’s no question that economic conditions influence employment liability trends. While evidence is conflicting at best, there are those who firmly believe the connection between profit and loss and employee sensitivity is very real. The U.S. Equal Employment Opportunity Commission has been awfully busy since 2007—the genesis of an explosion in discrimination claims that continues today.

Employment-related risk is certainly not new, and the largest organizations have been buying employment practices liability (EPL) insurance to cover that risk for at least a decade. However, the evolution of employment law, a more aggressive plaintiffs bar, and other factors continue to force a broader range of employers—and the insurers and brokers who serve them—to adapt.

Phil Holderness, senior vice president of wholesale brokerage Westrope’s Executive & Professional Liability Department, is a witness to the evolution. He grew up in what he calls “the non-EPL era,” when the only coverage available for any kind of employment practices liability might be found in a directors and officers liability policy. “EPL was introduced in London in the late 1980s, but we didn’t really see it in the mainstream until the mid- to late ’90s,” he says.

The few carriers involved in the early EPL scene primarily served Fortune 500 companies. “The underwriting strategy was always ‘big,’” he says.

Big insureds, big limits and big retentions for big claims. “What they’re really worried about is the $30 million or $40 million class action for age discrimination, etc.,” he says. Retentions were generally set at seven figures. “With retentions this large, it’s not unusual to see limits of $150 million to $200 million,” he says.

While large placements are a specialty for Holderness and his team, he explains that businesses with fewer than 1,000 employees are experiencing the most growth in EPL, and in the last five years, organizations with fewer than 300 employees have exploded onto the scene. “These businesses are more concerned with single-plaintiff claims,” he says. “They have begun to realize that a single claim could damage an entire year or worse.”

These businesses are fueling growth of package-type policies that include EPL, D&O and fiduciary liability coverage. They typically buy a combined single-limit policy with a “reasonable retention, somewhere in the four figures neighborhood,” he says. “From where this was years ago, when it wasn’t affordable, it has become affordable for all employers.”

Patrick Hanley, president of San Francisco-based Socius Insurance Services, portal to the Lloyd’s “Empower EPL” program, agrees. “Pricing continues to soften for most insureds,” he says. Where previously only a few markets would quote retentions of less than $25,000 to $50,000, Hanley now sees more markets that will drop retentions to as low as $5,000 to $10,000.

Wholesalers are in an excellent position to help retail agents and brokers increase profitability and retain clients by assisting with oft-misunderstood EPL placements. Market access to a broader range of insurers is certainly one advantage. But consider market conditions, Hanley says. “As an elective coverage, the decision to purchase EPL is sometimes tied to total insurance costs. When the market is tightening and price is up, insureds that should buy EPL often do not… In a softening market however, when retail brokers are delivering reductions in the insurer’s workers comp, GL, auto, etc., it makes the idea of buying a new coverage that they’ve discussed for years with their broker much more realistic.”

Many wholesalers have found success by making EPL education a priority in their conversations with retailers.

“EPL is certainly a vehicle to fill some holes,” says Anthony “Tony” Strianese, president of Peachtree Special Risk Brokers and regional executive vice president of Brown & Brown. An effort to educate retail partners about EPL risk and products seems to be paying off. “We’ll write twice as much in ’08 as we did in ’07,” he says.

Holderness believes the breadth and complexity of EPL risk makes working with a specialty wholesaler essential. Many exposures, such as wage/hour and illegal alien coverage, are potential killers yet remain nonstandard, he says. There’s also the issue of venue, which he believes provides an advantage to brokers with a more national view of the marketplace.

“Certain states concern underwriters more than others. Maybe it’s because there are more plaintiff’s attorneys, more sympathetic juries or more favorable employment laws,” he says. “The truth is that it is more difficult to underwrite a risk located in certain venues.” These include California, Florida, New Jersey, parts of Michigan and parts of Texas.

Retailers going direct are in danger of falling into a one-size-fits-all trap. “If you aren’t doing it day-in and day-out, you won’t know the nuances that an expert does,” he says. “We know EPL because we’ve lived through it since its beginning.”

History shows that employment trends will improve, and most agree this will help calm employment-related risk. Until then, specialty wholesalers are standing by.

Amrhein is wholesaler editor. Kevin.Amrhein@LeadersEdgeMagazine.com