Rick Betterley of Betterley Risk Consultants joins The HR Risk Podcast to discuss risk issues involving employment practices insurance, as well as the results of his 25th annual Employment Practices Liability Insurance Market Survey. Subscribe to The HR Risk Podcast on iTunes/Apple Podcasts, Stitcher, or your favorite podcast app!
Jennings: Welcome to The HR Risk Podcast, the show where we talk to experts about the things that can go wrong in the workplace and how to avoid them. This podcast is presented by Ekdesk, the software that helps employers prevent harassment and spot talent inside their organizations. After the show, learn more at Ekdesk.com. But for now I’m your host, Andrew Jennings.
Jennings: Our topic today is employment litigation risk in 2019. Today’s HR professionals juggle dozens of issues in their risk portfolios: retention, recruiting, benefits, engagement, succession, and the list goes on and on. But perhaps the most haunting risk of all is the specter of litigation, which can cost an employer dearly in attorney fees, settlements and judgments, reputational damage and business disruption. To mitigate this litigation risk, some employers purchase employment practices liability insurance, also called EPLI. EPLI covers litigation brought by employees over such issues as harassment and discrimination, or compensation concerns like wage and hour disputes. Just like general commercial insurance, EPLI can help cover not only settlements and judgments, but also legal fees. So in a year marked by increased awareness of workplace harassment and #MeToo issues, as well as an uptick in wage and hour disputes in some states, we wanted to see where the employment litigation trends are headed in 2019 and where they were in 2018.
Jennings: To help answer those questions, our guest today is Rick Betterley, the president of Betterley Risk Consultants. For over 25 years, Rick has surveyed EPL insurance carriers annually to learn about trends in employment practices coverage and where the industry sees the future headed. His annual EPLI reports have become must reads within the EPLI industry, among employment and labor attorneys, and others in the broader HR and risk worlds. Rick, we’re excited to chat with you today, but before we get into some of the findings of your 2018 report, we might have some listeners who aren’t yet familiar with employment practices insurance. I wondered if you could give us just a high-level overview of what EPLI is, who takes out these policies, what do they cover, how can they be gotten, and maybe a ballpark estimate of what do they typically cost?
Betterley: Thanks Andrew. Those are really good questions. And although this insurance product’s been around for almost 30 years, it’s still questions that we hear pretty frequently. What’s it cover? So if you think about it, it’s liability insurance, which means that it covers the defense costs and the settlements and/or judgments, mostly around allegations by employees, potential employees, or future or former employees, that they were discriminated against, harassed, or wrongfully terminated, etc. Those are employment relations kinds of issues. Although those are three examples, I don’t want listeners to think, well that’s all that it covers, because the policies have gotten quite a bit broader. They’re basically around the idea of employees who have experienced or believe they’ve experienced mistreatment. So it’s liability insurance, and it comes out of the employment relationship. Who buys it? Well, these are bought by employers. Employers could be of course for-profit, not-for-profit, governmental, you name it.
Betterley: If there were employees or people that are like employees–could be contractors, independent contractors for example, although less likely–that’s who buys it. Sometimes people think it’s only for big companies or only for small companies, or only for medium-size companies. That would not be true. It’s really for all employers. Most likely it’s bought by mid-sized companies. But large employers, the very largest employers, tend to buy it. They’ll have a much larger deductible, or what we call “self-insured retention.” And then a lot of smaller employers buy it also, but not as often as they probably should. And of course the really tiny employers below 15 employees or so, you probably are not buying it. What’s it cost is one of those things like “what’s it cost to go out to dinner?” Well, it depends on where we’re going. So it’s kind of hard. It’s impossible really to answer that. You could be talking about some hundreds of dollars for a very small employer, and you could be talking about millions of dollars, a low millions for the largest employer. I wish I could answer that one, but I really can’t.
Jennings: That’s fair enough! Thank you for that overview. Workplace harassment and #MeToo have been really headline issues over the last two years. In your 2017 report you noted that the EPL industry was really bracing for an uptick in #MeToo litigation and you speculated that carriers might need to change their underwriting practices, particularly for high-risk industries like entertainment. But it was a little bit of a wait-and-see at the end of 2017. With 2018 now pretty much behind us, what have EPL insurers seen in terms of workplace harassment and #MeToo litigation? How’s it affected the business EPL insurance and what are the expectations for 2019?
Betterley: That was a nice characterization that you just gave. It was definitely a “we’re well aware of it” back in end of 2017. “We’re very cautious. We’re keeping a close eye on it, but we’re not doing anything particularly yet,” would be an underwriter’s position. 2018. We’ve got 12 months under our belt. We’ve seen how much more pervasive this has been. It’s, well, I don’t want to say an “uptick” because it’s a lot larger than an uptick, but an increase in something that has always, it seems like always been going on, has always been a source of claims. But now there’s been what seems to be a substantial increase in the amount of attention. But what we don’t know, because litigation takes a long time, is where this all really shakes out. It’s possible that for some of the most egregious headline employment practices misbehaviors–and I, boy, that’s underplaying the word–but when I say misbehavior, that may well be that some of the worst examples are going to be excluded under the policies because they were so egregious, so intentional.
Betterley: From an insurance company standpoint, there’s still a lot of unknown. So what we found is quite a variation. We did the research for the 2018 report. We’re just just now releasing that report, and it shows the wide variation of the insurance companies’ responses. When I asked the questions about how are you responding to this #MeToo experience that we’re going through, they could respond by saying, “look, we’re going to pay more attention to certain industries” and I think that’s a fairly pervasive answer and a smart one too. It looks like entertainment, it looks like where a celebrity–not necessarily a cultural celebrity, but where a very famous person owns or leads the employer–they’re paying a lot more attention to those situations. Not a lot yet of “we’re automatically charging more” or “automatically not offering insurance to them.”
Betterley: Having said that, I want to be really cautious that what I’m being told is not always what’s actually happening. The insurance company might not want it known that they’re taking a much harder look at, let’s say an entertainment industry; but it may be that in fact for each individual application from that industry, they will come at it very skeptically, that’s quite possible. And so sort of along with that, is they’re being very, very cautious when they have an applicant that’s never bought EPL insurance before, because of course it raises the “why now” question: “what do you know you’re not telling us?” would be an underwriter’s thought.
Jennings: Right, it’s a little bit of an adverse selection issue at that point if somebody is just now coming to the market. So apart from #MeToo, I’ve also spoken with a few people in the EPL industry who’ve really been focused in on the rise of wage and hour class actions. I was even actually at a wedding a month ago or so, and during the cocktail hour, before the reception, just as part of casual conversation, folks started talking about this wage and hour class action against a popular local restaurant. So it seems to be something that there’s some movement out there. What have you seen in your 2018 report about wage and hour litigation? What’s maybe driving it and where do you see it going in 2019?
Betterley: Well that is funny about the question at the wedding. Who knew insurance would be so much fun? Wage and hours are a really interesting employment practices subject because insurance companies largely view wage and hour as a voluntary decision by employers to have a pay system that could lead to problems. And is the thinking, “hey, we can get away with it, we won’t get caught, they wouldn’t sue us?” I don’t know. So insurance companies are very reluctant to ensure wage and hour. The trouble with that is there are two parts of wage and hour. One is, what about the wages that should’ve been paid and now because of a judgment or a settlement will be paid, probably plus interest? “Well, you should have paid that anyway or already,” one might say to the employer, and “we’re not going to pay that.” But then the other part is the defense. They know there’s a lot of litigation leading up to that decision and not everybody with the wage and hour violation did it intentionally. In fact, it’s probably a lot that are not done intentionally, especially the mid-size and smaller employers, I would suggest. So you see very differing responses from the insurance companies in our survey. Many of them will provide defense coverage, lawyer costs, but they won’t cover the damages, the actual wages plus interest. And some don’t even provide the defense.
Jennings: I think that makes sense as a distinction. In a way, it would almost incentivize wage and hour violations of, if you’re kind of covering the, the back wages and the interest on that.
Betterley: Well exactly. It’d be a foolish employer indeed if they thought, “well that’s all right, the insurance company will pay for it,” because the ramifications are way worse than just what the insurance is gonna pay for it. But yes, that behavior is something that an underwriter properly is afraid of. I don’t see a whole lot changing in terms of the availability of wage and hour coverage. It’s still out there. It’s still an area of concern. Not a lot of change either way at the insurance company side.
Jennings: Sure. Are there any categories of employment practices issues that weren’t really on the radar a few years ago, but they’re coming up now? I know in your 2017 report you mentioned immigration as a potential area. Are there any new frontiers of employment litigation or enforcement actions that employers need to be thinking about? Or what are insurance carrier forecasting for 2019 that you’ve seen?
Betterley: A good question. That’s hard to tell. So from a litigation standpoint, it seems like there’s, the insurance has been around a long time. The litigation’s been around a long time and from a forecasting standpoint, you may not know what area of litigation’s going to be hot this year, but it’s probably going to be a lot of activity. So when you think about how large the employment practices insurance book of business would be for all of the carriers combined, the fluctuations in how much they’re having to pay for claims and how much they have to pay for the defense is more sort of long-term variations. For example, lawyers’ fees keep going up and up on the per-hour basis, and the complexity of the cases goes up and up and up. In terms of where those are coming from, one year it’s racial; another year it’s religious; another year, it’s country of origin.
Betterley: It’s kind of, some waves that go up and down. It seems between all those, gotta believe that the–and we are concerned that the perhaps more widely spread belief or widely held belief that it’s okay to be mean to your fellow man or woman–and maybe that’s country of origin, more so than immigration, these days could be a push towards higher levels of claims and more claims. On the other hand, sometimes people just feel like, “well, I can’t win this, so I’m not going to bring a suit.” One impact for now is that with virtually full employment–which we seem to have in the economy at the moment, or until recently–people that are being harmed in the workplace, who have options like, “I’m just going to go get a different job, I’m leaving” may not be as likely to bring litigation. And that’s been the case in the past. If they can go find another job pretty easily, far less likely to go get a lawyer because let’s face it, it’s ugly to get involved in litigation. It’s not fun. So we’ll get a different job and that’s a lot easier, in this economy. What’s that going to be like next year and the year after, I wish I knew. But I don’t think the tea leaves are looking too promising in terms of continuing full employment.
Jennings: I have those same concerns with the tea leaves for 2019. But it sounds like from just a macro trend perspective, if we start seeing job growth slow down or reverse and we see–hopefully not–but if we see unemployment start ticking up, then we might see a rise, kind of a lagging indicator of a rise in employment litigation, it sounds like.
Betterley: Yes, exactly. And when you mentioned lag indicators, that’s a really important insight that insurance companies have trouble with is, they’ll see things happening, maybe after they’ve already written the price to the policy and then they’re just along for the ride and it’s a matter of expense control. So sure wish we could do a better job at the insurance company level of preventing the things that lead to claims. And that’s still, it still has a lot of promise that’s not yet been realized.
Jennings: I think that gets to a pretty neat feature–the idea of preventing claims–of your EPLI reports, which is the value add-section. For our listeners, this is a section of Rick’s reports that break out the types of services and benefits carriers are providing to their insureds beyond just “pay me X premium and you’ll get Y coverage.” Some of these value-adds are things like hotlines to run legal questions by employment lawyers, employee handbook and policy reviews, and workplace training resources. Have you seen anything new in 2018 in terms of the value-adds carriers are offering, how they’re using the value-adds to maybe compete in the market–I know it’s a pretty competitive market–and maybe whether they’re trying to align those value-adds with the goal of not just winning the business, but preventing claims in the first place?
Betterley: If an insurance company could have its insureds have fewer things that lead to claims, that would be good for everybody, right? Great conceptually, hard to implement. But there’s a long history in the insurance industry of providing valuable services that relate to not having events that lead to claims happening in the first place. Think about workplace safety for workers’ compensation, driver training for automobile, things like that. So one of the real pleasures of writing and researching the market survey is trying to follow what’s going on and see what the trends are with these value-added services, most of which come for free with the insurance policy. And I’m really intrigued that when I started writing about employment practices and we saw that value-added services was going to be a product differentiator and it was a very, very short list of services that were offered, and it was great there were any services being offered.
Betterley: But they would largely go to sample employee handbooks, a free audit of your employment practices risk, some things like that. And to see that the use of those services by the insureds was approaching negligible. I remember one time an insurance company telling me–and this was probably 20 years ago–he said, “you know, it’s great that we have all these services, but we can’t give much credit on the premium for them because almost none of the insureds use them, even though they’re free.”
Betterley: And so I would talk to insureds in my role as a consultant and a researcher and find they weren’t even aware of the services’ availability, that somehow, or rather the message from the insurance company never got through to the insured: “hey, here are these services. You might want to use them.” Now, there’s some skepticism often in the mind of an insured that if it’s services from the insurance company, it can’t be any good. And there’s also typically some pushback from their own employment attorneys that, well, “you know, we could do that for you, we can provide those services, let us do it and here’s what it would cost.” So some of the variation in some of the change we’ve seen is more about messaging about the services, trying to get the insureds to make use of the services. And we’ve seen some nice things where there’s follow-up through the broker to the insured if the insurance company sees that the free services aren’t being offered: just as a reminder, they’re available. Very light touch, but still good follow-up.
Betterley: What I’ve also seen is that some of the original services have just gone by the boards. For example, that audit of employment practices. It’s amazing to me to see–and the tables in my report show how few of the insurance companies are even offering those anymore. I think there’s a couple of reasons. One is I don’t think they were being used. And the second, and probably more important, is I doubt the insurance company wants its name attached to an audit of whether you’re good at managing employment practices and then having to pay the claim later on. So that’s probably going on, too.
Jennings: That is unfortunate though. If an employer is receptive to having issues spotted, an audit might really kind of open eyes about some issues that maybe they hadn’t really thought about, but that might be easy fixes in some ways.
Betterley: Right. And so I think one of the important roles the insurance companies can play is to help sort of separate the really effective services from those that sound great but don’t really accomplish much. And there’s a lot of entrepreneurial spirit chasing those dollars that employers spend, or ought to spend, on reducing the potential of employment practices bad events, that if it’s insured would lead to a claim. And how does an employer know which ones are the good ones and which ones aren’t? It’s ideally the insurance company that can be helpful in sort of helping identify and make aware and make available services that are really good versus the ones that aren’t.
Jennings: One dynamic there too is probably, with the competitive market for EPL coverage, there’s only so much value-add that carriers can provide on their own dime. Just the economics don’t necessarily work out. And so I think that’s a good point that you made about maybe if not providing services, then helping insureds identify services that might be helpful.
Betterley: Absolutely. I think one of the really valuable services that insurance companies could be helpful with, and is not terribly expensive, is helping find those events that could blow up and lead to substantial, whether it’s the number of claims or the size of the claims. With especially the size of the claims where you’ve got something that if you had only known that it was happening, that the red flag goes up to say “you know, you need to intervene in this situation and cut off what could be millions of dollars of loss because of one action or inaction; maybe spend a few hundred thousand to make it go away. We’d all be better off.” And so I think that’s one of those kinds of things that can be delivered relatively inexpensively. But it is a challenge figuring out what are the services that work, what are the ones that don’t. And from the insurance company standpoint, they just don’t have enough margin at the end of the day to just go off and buy all these things for the insureds. The insureds are way too price conscious when they’re buying the policy. Agreed.
Jennings: Have you spotted any changes in who the typical EPL policyholder is, whether it’s in terms of what industries they’re coming from or their headcounts or maybe their geographic locations? And if you are spotting changes, does that say anything about how employers are thinking about litigation risk going forward? We talked at the beginning of the conversation about the adverse selection of “I’m buying EPL insurance the first time now and what does that maybe mean, do I have concerns that are leading me to do that,” or are you seeing any trends along those lines?
Betterley: I don’t, and in the part of the world I work in–which is across the United States, some globally, but mostly U.S.–if I were to come across a client that was not already carrying employment practices insurance, I would be just the professional reaction, totally baffled. So why is it that this client isn’t buying this kind of insurance? And my point being, this is a really rare event when in the world that I, as I see it, that an insured doesn’t buy employment practices liability insurance already. They might decide to buy more. They might decide to change insurance companies. They might decide to self-insure more and then just have catastrophe insurance on top. But it’s unlikely that they’re not buying it now. Now the big, what’s the big exception? The big exception would be small employers.
Betterley: I know about small employers because I see the numbers, but I don’t have a lot of direct interaction often with really small employers. So where’s the growth? The growth possibility, should it occur is largely around that small employer market. And that small employer has been in denial for the last 25 years about whether they need to buy employment practices insurance. And I don’t know that the #MeToo movement does a whole lot to cause them to get past their “well I don’t need that, my employees love me and if something goes wrong, we’ll see. We’ll find out. We’ll fix it.” Both of which are really naive statements,
Jennings: There’s a little bit of a sense of, “we’re all family at this small firm,” and that might be well and good. But families have pretty harsh disputes sometimes, as well.
Betterley: That is so true. So we do see, I do hear, let me put it this way: I hear this largely from the insurance companies. I do hear of a little bit of increased interest from employers who aren’t buying employment practices insurance. To which the insurance company product lead and I both, both of our reactions are “how is it even possible that there are any out there that aren’t already buying this kind of insurance?” Sometimes the coverage for employment practices is part of another coverage, and so what seems like it’s a previous or currently uninsured employer is actually insured through a different mechanism and they just going to buy a separate policy. In terms of trends, it’s more about buying more insurance and maybe still getting at that tiny employer market, which has been a tough market all along. So it’s probably more that, “hey, we thought 20 million was a lot of limit. Right now we think we buy 50, or whatever, or up.” Trends in terms of purchasing, and that’s a tough one, you would think there would be a tsunami of potential new insureds until you realize this is a pretty mature market already.
Jennings: Are there any headlines or big trends in your 2018 report that we haven’t touched on that are kind of a big ticket thing that listeners might be interested in?
Betterley: I think you’ve covered it really nicely. The one distressing thing from our standpoint has always been that a large number of the insurance companies focus too much on expense control when it comes to defense cost and not enough on the quality of the representation. I can’t say that that’s a new trend. It’s kind of an ongoing thing that I’ve been bewailing for years. I think that’s still important from the listener’s standpoint, to be really sure that you’re going to be able to use the defense attorneys that you think are suitable for you and make sure that the insurance companies approve that before you have a claim and have a problem.
Jennings: Are there any big open questions that you have for what employment litigation’s going to look like in 2019? Or what are some trends that maybe you’re in a wait-and-see mode at this point?
Betterley: Employment litigation, judgements and settlements–except way out there at the end of the curve–have largely been a couple of million here, a couple of million dollars there. And I don’t mean to trivialize that; that’s still a lot of money. But if you’re a major employer, you can look at employment practices liability insurance cost as–I’m going to have to define this in a moment–but as a cost of doing business. By that I mean, unfortunately they might be thinking “these things are gonna happen. The statistical probability and stability is pretty predictable. We think we have a handle on how much of this is going to happen in any given year. And our big worry is the real blow out when, what used to be 2 million turns into 20 million, and the few headline events which maybe go to class action that go into conceivably hundreds of millions.” Those are the real problems. And what’s disturbing for me is that if we’ve come to accept a million or 2 million is sort of the routine costs of doing business with these claims, I think that’s a tragedy.
Jennings: You lose sight that it’s actually quite a bit of money for any business.
Betterley: Well, and quite a bit of pain, too. If I think about the pain from the victim side and I think about the pain from the employer’s side, and I think about not only the pain that led up to the filing of the complaint, but then the pain during the process of settling and fixing and all that. We can all dream about these things never happening. But I’ll tell you, I’m going to keep dreaming. I’ll keep trying as hard as I can to see what are the best ways to minimize–if not better yet, eliminate–the things that are done that lead to these bad situations.
Jennings: It’s the old cliche that an ounce of prevention is better than a million dollars of cure.
Betterley: Yeah. We need a vaccine, right?
Jennings: It’s a disease that has many different forms, so it’s definitely in need of new treatments. Rick, where can our listeners go to get a copy of your 2018 EPLI report? And I believe the full name of the report is the “Employment Practices Liability Insurance Market Survey 2018.”
Betterley: The best place to find it is my publisher, it’s very well known in the insurance and risk management community. It’s called IRMI, IRMI.com. IRMI stands for “International Risk Management Institute.” They’re in Dallas, they’re my publisher. If you want to learn about The Betterley Report–which is the report that we do six times a year, one issue of which is employment practices–IRMI.com and, and do a quick look for The Betterley Report and you’ll get it. And you’ll come up with some good descriptive information about the reports and there’s a posted complimentary PDF of the first few pages.
Jennings: Okay, great, so people can get a taste and decide if it’s something they need. It is a very long document, it has a lot of detail, a lot of care has gone into putting it together and if somebody is in the HR risk realm, it is definitely a very useful reference. And I’ll put a link to into our show notes on the website. Our guest today has been Rick Betterley of Betterley Risk Consultants. Rick, thank you for joining us.
Betterley: Thanks Andrew, a pleasure!