To the delight of those able to afford it, several markets now exist for companies looking to insure Wage and Hour (W&H) risk, which is one of, if not the, largest employment-related exposures in the U.S.
“Carriers are beginning to dip their toe in,” says Gerald L. Maatman Jr., a partner in Seyfarth Shaw, a leading national employment and labor law firm. “They are beginning to warm up to the idea.”
There may be no better time for the insurance market to enter this particular risk transfer.
According to Seyfarth’s widely attributed “Annual Workplace Class Action Litigation Report,” penned by Maatman, the top 10 private settlements entered into or paid on W&H class-action lawsuits in 2012 amounted to $292 million, up from about $221 million the previous year.
“Five years ago, of every 10 big lawsuits, seven were employment discrimination and three were wage & hour,” says Maatman. “Now for every 10 big lawsuits, nine are wage & hour and one is employment discrimination.”
Coverage isn’t cheap for cases involving employee claims that weren’t paid properly. And for now, W&H coverage is basically meant for larger corporations since retentions are very high (at around $5 million for starters). But this testing of the waters—especially if these W&H solutions are relatively successful and gain the attention of competition—could push W&H insurance into the mainstream, similar to how Employment Practices Liability Insurance (EPLI) has become more common.
W&H claims remain largely nonexistent from coverage under EPLI policies under the Fair Labor Standards Act exclusion. An insured could perhaps get some defense costs paid if it creatively wrapped a covered peril into the claim, but carriers had become increasingly aware of this tactic and tightened up policy language. Some policies included W&H defense costs, but limits were very low; therefore, the coverage was meant for smaller businesses.
However, as insurers largely shied away from the exposure, businesses did more to mitigate on their own. After all, W&H claims remained an enormous expense: As a result, data was accumulating.
“We felt it was necessary to begin to look at this exposure differently,” says Adeola Adele, U.S. Employment Practices Liability product leader in Marsh’s Financial and Professional Liability Practice (FINPRO).
It didn’t happen overnight. Adele says this was a three-year process of data compiling and careful policy creation, but there are now three lead markets on Marsh’s Wage & Hour Preferred Solution program, introduced in January.
“We convinced these markets they wouldn’t lose their shirts,” Adele says from her office in New York. The policy is gaining traction, she adds: Marsh has one completed application, and there are a few more submissions.
“If you don’t test new ideas, you don’t get to develop them,” she says. “You have to start somewhere.”
At least initially, the starting point is with large clients who may still be able to benefit from retaining the first $5 million. This is also the business segment most likely able to absorb the premium the market is demanding. The policy provides up to $100 million in coverage.
Marsh’s product also includes a proprietary W&H risk management toolkit from sister company Mercer.
Last year, Aon Risk Solutions was first to appear on the W&H scene with a $50 million-limit W&H product for large employers.
“The problem has always been the archaic nature of the law—a Depression-Era statute applied to the 21st Century workplace,” says Tom Hams, national Employment Practices Liability practice leader for Aon Risk Solutions. “This disconnect created an opportunity for the plaintiffs’ bar.”
However, corporations have been trying to “get it right,” Hams adds. Human resources departments are initiating controls to limit claims.
“They’ve always had the exposure but couldn’t transfer the risk,” says Hams. “The challenge was educating the marketplace and then one [carrier] stepped up and said, ‘I got this.’”
Four others have stepped up as well to create a core W&H market of five carriers. The competition has surprised Hams: Changes within the first few W&H insurance deals related to terms and conditions offered has been “dramatic,” he adds.
“You get the competitive juices flowing—the desire for premium,” he says. “It’s promising for clients.”
Richard Betterley, president of Betterley Risk Consultants, once predicted insurers might first start offering W&H coverage to small and mid-sized businesses, whose violations of the FLSA are often times unintentional because they can’t keep up with regulations, he says. Still, he calls the current W&H products a “significant step forward in EPLI coverage for larger employers,” adding that he “would not be surprised to see other carriers offering comparable products, and perhaps even extending into smaller employers” eventually.
A W&H solution for all could be even more welcomed soon. Maatman says he predicts W&H claims trends to continue since a recent Supreme Court decision (Dukes v. Wal-Mart) makes it much more difficult for plaintiffs to certify class-action discrimination lawsuits.
Whether this ruling applies to W&H claims has yet to be seen, which means “a lot of good lawyers are migrating into [W&H],” observes Maatman, adding in his report that the “crest of the wave of W&H litigation is still not in sight.”
W&H litigation outpaced all other types of employment class actions in 2012, and W&H-related ruling from state and federal courts more than tripled decisions for class actions for employment discrimination or Employee Retirement Income Security Act (ERISA) combined.
“We are advising employers to make wage-and-hour compliance and risk management a top priority,” says Maatman.