The disruption to labor practices following the Covid-19 pandemic has also caused major upheavals in the Employment Practices Liability (EPL) market. Reporting by Tim Evershed
The coronavirus has brought unprecedented changes to the way we live and work, leading to significant uncertainty about employment risks. Remote work, furloughs, layoffs and many other staff issues have added to a complex set of challenges for businesses.
Some employees fell ill with Covid-19 while others faced significant pressures in managing childcare and other family responsibilities. Repeated confinements have harmed the mental health and well-being of individuals. These issues have combined to complicate the EPL market where rates have tightened markedly.
“A lot has happened to employers over the past two years. They had to put people on leave, [then] bring people back. What we have seen from the start of the pandemic is a sharp increase in the number of people seeking legal advice [including how best to] restructure their staff,” says Dave Haynes, director of underwriting at ARAG.
“We expected a large increase in claims following the end of the furlough. We saw a peak, probably at the end of 2020, but then [furlough was] extended multiple times, so we never really saw the expected volume of claims.
A complication for employers centered on the fact that vulnerable employees, who had to protect themselves, were classified as disabled. Therefore, any less favorable treatment of these people or the lack of reasonable accommodation increased the possibility of claims of discrimination on the basis of disability. Additionally, as employers adapted workplace health and safety practices, employees raised concerns about potential vulnerabilities.
“All of these issues have forced employers to make decisions and introduce new policies and ways of working in the face of ever-changing government regulations and rules,” says Louise Bloomfield, partner and head of CAD Beachcroft National EPL team. “It brought a risk, and it inevitably led to an increase in claims, as some employers didn’t handle business well enough or employees felt they weren’t being treated fairly. For some employers, the pandemic has gone too far and forced their hand in terms of layoffs that [caused] a spike in complaints.
Due to uncertainty and escalating risk, some insurers have withdrawn from EPL Marlet. This capacity has tightened, so the market has hardened, with deductible levels increasing significantly or coverage being reduced at renewal for some policyholders.
However, the market is now seeing tentative signs of recovery. According to Karen Cargill, Chief Customer Officer, Executive Responsibility and DO product manager at the broker Marsh Specialty, some carriers are returning to the market.
“The last two years have been a bit difficult, to put it mildly,” she says. ” There is not a lot of EPL capacity approximately, at least in the London market. Much of this has to do with Covid. EPL insurance is clearly rooted in the employment relationship.
“The optimistic outlook will continue if carriers continue to re-enter the market. However, if there is a sudden increase in complaints, people might get nervous. If I were a subscriber, I would be less concerned about people returning to work and I would have more of an eye on this backlog of industrial tribunals.
Charles Emkes, senior account manager, liability management at brokerage Protean Risk saw less evidence of insurers going back to the EPL Marlet. He says other lines of management responsibility have been adequately remedied over the past 24 months, which has attracted new capital to enter these insurance categories, thereby increasing supply.
Emkes also points to the fact that customers have more control over the coverage offered to them.
“Insurers…may need to review retentions against territories more carefully than before…to maintain competitive rates and stable portfolios,” he explains. “EPL should be viewed as an insurance policy to protect a business against large claims that will damage an insured’s balance sheet, rather than a claimable policy for day-to-day concerns.
“This will maintain some stability over the next 12 months until more insurers offer a wider range of options to policyholders. If this does not happen, we could see premiums soaring and collapsing that will not be in the interests of either policyholders or insurers,” Emkes adds.
The increased interest in EPL is driven by increasing employment litigation and the expectation that the Covid-19 pandemic will only exacerbate disagreements between employers and employees. Businesses of all sizes are vulnerable to the cost of defending employee claims, which can prove to be ruinous.
“Unfortunately, legal costs may need to be paid even if the claim fails, which is why it’s important to have insurance in place that will cover these costs,” says Neil Hodgson, managing director of risk management at Gallagher: “Companies should talk to their broker about EPL insurance that will cover costs resulting from certain disputes with employees.
He adds, “When workers at a company claim their legal rights as employees have been violated, it can protect them from resulting litigation, including claims of discrimination and wrongful termination.”
How to do EPL and commercial legal expenses insurance differ? And what are the alternatives?
A hardening EPL means more challenges for policyholders trying to get the right coverage for their businesses. Coverage, premiums and overage fees from providers can vary, so it’s worth looking into. In such circumstances, companies should review their risk mitigation practices and consider other types of insurance that can provide some of the necessary protection.
“They need to improve their TIME procedures and need to make sure they have the right people in-house to make sure they don’t expose themselves to potential claims,” says Dave Haynes, director of underwriting at ARAG.
“The alternatives would be self-insurance or legal fees – that may be another option. Then the company could get legal advice before doing anything to make sure it follows the right procedures and… not be burdened with rewards in case any claims are brought against it.
Both EPL and legal expense coverage are suitable for an organization that wishes to protect itself from the payment of legal expenses arising from a labor dispute. They both respond to claims of wrongful and wrongful dismissal, constructive dismissal, discrimination and equal pay.
Although there is considerable overlap between the two covers, there are also key differences. Legal fees have a “prospect of success clause” which requires a 51% or greater chance of the organization winning or successfully defending its case.
Del Sharman, director of brokerage Pound Gates, says: “The proceeds of legal fees are based on the ability to successfully defend the client. [If that prospect is not there]the legal protection insurer will not undertake [with] whatever that job issue is.
“EPL takes the rough with the smooth,” he adds. “You don’t have the prospect of a pass test, so the insurer takes care of everything. [As a result] there is a higher deductible and higher premiums. The insurer could also seek to [take] the client through some sort of pre-qualification as well, to understand their employment processes in more detail…before they begin coverage.
EPL Brokers and insurers offer a range of services and expert risk management advice to help businesses guard against any potential claims and mitigate risk. The pandemic has made employers aware of the value of this advice and has helped to raise the profile of EPL.
ARAG‘s Haynes describes EPL as the “Rolls-Royce of legal insurance”. “EPL is different in that we will always defend the claim. People make mistakes – they might fire someone without due process. They might think they have [followed the rules]but they missed something.
“It is not deliberate or negligent and in these cases the court will find that they have unfairly dismissed or unfairly selected someone for dismissal. We will continue to defend this and pay the indemnity.
“We provide a health check for the company. We look at the documents, the employment contracts, the standard letters and we make sure that they are in good condition. In addition, we offer 24-hour legal advice and [provide] a suite of legal documents that form a user guide for support.
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