My recent post about wage and hour exposure and insurance triggered an email exchange with one of the blog’s readers, Machua Millett, who is the Chief Innovation Officer for the financial and professional unit (FINPRO) at Marsh. The email exchange involved a lot of information that we both agreed might be of interest to all of the blog’s readers. Rather than try to turn the email correspondence into a blog post, we reconstructed the exchange in the form of a Q&A, which is set out below. I would like to thank Mach for reaching out to me in the first place, for his willingness to share ideas and information, and for his willingness to participate in the Q&A, below. My questions are set out in italics, Mach’s answers to each question follow.
- How has the insurance market for Wage & Hour exposures changed recently?
As the wage and hour insurance market has matured since its basic inception five or six years ago, the coverage, minimum retention, premium pricing and general appetite have all trended in a direction favorable to insureds. The basic scope of coverage has become more robust, complemented by a greater willingness by insurers to combine EPL and wage and hour coverage within one policy. Minimum retentions have decreased to as little as $250k to $500k, though a $1M and above retention base remains more common for most insurers. Minimum premium has also come down significantly, with premiums for certain risks dipping below $15k per million in primary coverage with even lower excess pricing. Finally, as the market has grown and competition has developed between insurers, the general appetite for taking on different wage and hour risks has developed positively, as insurers have been able to build a positive premium base to diversify their own exposure profiles.
2. How is the current model of Wage & Hour insurance different from prior model? What is the target company (employee size, or other criteria?)
Whereas the market in its infancy truly was for the large retailers willing to take a high retention and high premium to manage their truly significant exposure to wage and hour litigation, the types of companies that have purchased wage and hour insurance now really runs the gamut in terms of industry, employee count, etc. We have seen retailers large and small, financial services companies, couriers, chemicals companies, consulting firms, health care companies, construction firms, government contractors, manufacturers, life sciences companies, CMT (communications, media and technology) companies, real estate firms, and transportation companies all bind wage and hour coverage. In the end, I would say that the decision about whether or not to consider wage and hour insurance is best made through a frank discussion between a company’s risk management, legal and HR personnel about the insured’s exposure to wage and hour litigation and the cost/benefit analysis as to potentially shifting some of that risk to insurance. As a useful example, perhaps, I am aware of one buyer that had less than 200 employees, but did determine that it still made sense to purchase the coverage given internal legal concerns about past classification of certain employees/independent contractors.
3. As a general matter how does the pricing work?
The pricing is based upon individual underwriting, of course, but there are certain factors that do play a significant role in premium-setting: number of part-time employees and/or independent contractors, geographical location (California, New York, Texas being particularly highly-exposed states for wage and hour), claims history, and compliance program strength. While these factors do not at this point generally impact appetite (i.e., “yes” or “no”), they do understandably impact pricing and retention.
4. What limits are available, and what about retentions? Is there coinsurance?
The highest total limit I have seen purchased in $100M, but that is more a factor of individual company’s cost/benefit analysis than truly reflecting the market’s maximum capacity, which I think at this point could build a total program significantly larger than that. As noted, the minimum retention offered is $250k by one insurer, with other insurers offering retentions as low as $500k or $1M for the right risk. Coinsurance can be an element of some programs, sometimes having an ameliorating effect on premium and retention, but is not a universal requirement.
5. Are there particular exclusions or other notable terms and conditions?
The most significant exclusion simply reflects the universal insurance truism and cliché that you cannot buy insurance for a burning building – the policies do contain a prior and pending litigation exclusion, so you cannot purchase limits to apply to a piece of wage and hour litigation that is already ongoing. However, even that exclusion can be negotiated to be quite narrow so as not to preclude coverage for potential wage and hour issues or subsequent wage and hour litigation that policies with broader interrelated wrongful acts provisions might relate back to such pre-existing or past resolved wage and hour suits. There are also certain exclusions that relate to the true nature of a wage and hour policy – the EPL exclusion, for example. However, combining wage and hour and EPL coverage together into one policy can significantly reduce the impact of any such exclusions.
6. What does the underwriter require to provide an indication? A bindable quote?
To provide an indication, the insurers need a detailed breakdown by state of the number of full-time, part-time, union, temporary, leased, exempt and non-exempt employees and independent contractors, and a description of any wage and hour claims in the preceding five years.
For a bindable quote, the insured will need to submit a completed application; a copy of written company policies relating to wage and hour, employee use of cell phones and blackberries; wage and hour compliance documentation and internal training programs; copies of wage and hour audits (internal and/or external); job descriptions (including reclassifications); policies relating to IT classifications and exemption status; payroll and timekeeping practices, policies and procedures; policies relating to independent contractors, consultants and/or temporary workers; and a detailed claims history. An underwriting meeting or call can also enhance proposals.
Fortunately, we have found very little variance between insurers’ initial indications and bindable quotes, absent a significant issue with claims history or compliance.
7. Any sense of the takeup?
It is our understanding that there are now over 100 bound wage and hour programs in the overall market.
8. What has the claims experience been?
Claims experience has been good thus far. For the most part, claims determinations have been as expected. Insureds have certainly submitted claims and received confirmation of coverage in numerous instances, with most matters remaining in their early stages or resolving within the applicable retention. However, we are aware of at least five claims exhausting the retention and the insurers making several multi-million contributions toward settlement.
9. What is your sense of how the insurers are dealing with the moral hazard issue (insuring employers who fail to pay their employees – in effect paying unpaid wages)?
My sense is that the insurers deal with this issue as they do with any other type of policy, whether it be D&O, EPL, etc. – through diligent underwriting. If your company does not have industry standard compliance policies and procedures in place, you will likely find it difficult to find insurer appetite to provide you with wage and hour insurance coverage. This coverage is not meant to serve as a replacement for appropriate HR and wage and hour policies and procedures. It is meant to serve as a backstop to proper corporate oversight, and simply acknowledges the complexities involved in trying to ensure complete compliance with a multi-tiered and ever-changing wage and hour regulatory regime.