KEY EPLI MARKET TAKEAWAYS

This January, I had the privilege of participating in a presentation on employment practices liability insurance (EPLI) at the Fisher Phillips PeopleLaw Conference. The conference was outstanding in its entirety, and it was an honor to be part of a panel that was moderated by David Lichtenberg of Fisher Phillips. The panel included experts Michelle Gordon of Markel and Alyssa Pianelli of Aon, each of whom possesses an exceptional depth of experience in this specialized field of insurance, especially in the areas of policy language, underwriting and claims. My role was to play broker in giving people an expectation of what to expect during this year’s renewal.

We dissected the current state of the EPLI market, with a particular emphasis on market trends and critical developments to monitor in the upcoming year. Here are the key takeaways that you should keep in mind.

IMPORTANCE OF CORRECT EPL POLICY FORM

Differentiating between the models of a PEO, staffing firm, and employer of record (EOR) is essential to obtain the correct policy and ensure coverage is provided to those that expect it. It is especially crucial to tailor coverage to specific needs and risks, especially when multiple business models are operating under a common named insured. It’s important to note that staffing forms are designed for single employers, so unless the PEO is explicitly named (as opposed to just the client company), the coverage will not be activated. So, to have coverage for a PEO on this form type, the PEO must be in the complaint, which leaves the client company without coverage until that happens.

INTEGRATION OF POLICIES

If a client company has an existing EPLI policy, understanding how that policy integrates with the PEO’s policy is paramount. This ensures “continuous coverage” without gaps. Factors to consider include differences in coverage, limits, retro dates, and which policy is primary versus excess. Master policies for PEOs are typically written on a claims-made basis, which can be complex and requires careful attention to avoid potential coverage gaps. The claim must both occur and be made during the coverage period. This period starts at the retro date on the policy and ends on the expiration date of the policy in force.

The integration of policies is a delicate balancing act. It requires a deep dive into the fine print of each policy to ensure that there are no overlaps or gaps in coverage. This is especially important when transitioning a client from their own policy to that of the PEO. The goal is to create a seamless coverage experience that protects all parties involved without any surprises in the event of a claim. This type of analysis should be done by internal or external licensed brokers that specialize in these types of policy forms and how they apply to PEO.

CLIENT SERVICE AGREEMENTS
A well-defined client service agreement (CSA) dictates the “extended coverage” provided to the client company from an EPLI perspective. It’s recommended that the EPLI policy of the PEO not be shared with the client to protect the named insured (PEO or staffing company) from unwarranted claims or incorrect interpretation. The client company is not the named insured in a master policy arrangement and the CSA is often used to set time periods and narrow scope so it does not get triggered for claims the PEO should not be responsible for. The clarity in these agreements is crucial for risk mitigation and protection for all parties involved.

A well-crafted CSA not only protects the named insured but also provides peace of mind to the client company, knowing exactly what their coverage entails.

CHOICE OF COUNSEL
For larger client companies that have retained their own EPLI policy in the past, the choice of counsel can be a significant factor in the buying decision. The PEO’s master policy is designed to cover both the PEO and the client company, but the named insured is the PEO, and they, along with their carrier, ultimately control the decision of which counsel to use. I recommend that clients who want their choice of counsel should purchase their own EPLI with them as the named insured as that is the only way to be control the policy as the named insured. While most of the time the PEO and client are aligned in strategy and exposure, sometimes they are not and separate counsel is necessary.

DUTY TO DEFEND
The “duty to defend” clause can be a slippery slope, especially when multiple allegations are involved, some of which may not be covered by the CSA. It’s usually best practice as a broker to always request a duty to defend, but with defense fees being significant in troubled states like California and New York and retentions for many at $100k and higher, there are new opinions on how or whether to deploy this. Understanding how the duty to defend clause is articulated in the agreement is vital to address situations where some allegations might not fall under CSA coverage, yet the duty to defend forces the EPLI carrier to extend coverage to the client company for issues that have nothing to do with EPLI, but are part of a broader suit that does.

EPLI MARKET STABILITY
The current EPLI marketplace is stable and profitable for both industry stalwarts and new participants, as evidenced by relatively flat renewals. Underwriters are employing creative strategies, including different retentions based on various factors such as individuals involved and their compensation range, client companies, zip codes, wage bands, NAICS groupings, and employee count. The stability of the EPLI market is a positive sign for the PEO business and we do not foresee material increases in the next renewal cycle. It indicates a level of predictability and reliability in the availability and pricing of coverage. The creative underwriting strategies employed by insurers are a testament to the industry’s adaptability and commitment to meeting the evolving needs of the PEO industry.

AI MODELS IN THE PEO SPACE
While there haven’t been significant challenges yet, it’s likely that AI models deployed in the PEO space will face scrutiny. There are several known areas of concern and potentially many others that have not even been thought through yet. The group felt the greatest potential exposure right now for PEO arises from usage of AI hiring models. There are already cases and laws suggesting these models inherently are biased, coupled with their lack of transparency, attracts attention from policymakers. So much so that a first-of-its-kind law requiring companies to audit artificial intelligence systems for bias when using them in hiring and promotion decisions recently went into effect in New York City, leaving employers and auditors scrambling to comply. As of July 2023, New York City employers have to independently audit their systems for bias and publish the results on their company websites, or face fines.

Another insurance-related area to watch is the use of employee personal information to price group health insurance and workers’ compensation. Additionally, other AI models profile “problem claimants,” using unpublished scoring techniques which could be found biased by flagging some employees versus others and expected outcomes based on things like sex, age, race and income level.

EMPLOYEE OR INDEPENDENT CONTRACTOR MISCLASSIFICATION
The recently approved federal rule by the U.S. Department of Labor in March 2024 focuses on the issue of employees not being properly classified as employees but as independent contractors with none of the rights or benefits an employee would have. This is particularly relevant in the context of “people insurance” such as workers’ compensation, health insurance, and EPLI, as it affects the classification of employer-employee relationships for the purposes of being a “covered employee.”

The new law seeks to provide clarity and consistency in the classification process, which is a welcome development for all stakeholders involved. This currently active law can have material effects in audits of employees, especially in workers’ compensation where past premiums can be charged if it is proven an employer-employee relationship exists.

As we look ahead to 2024, the EPLI landscape is poised for continued evolution. Staying abreast of these trends and developments is key to navigating the market effectively and ensuring that coverage remains aligned with the needs of businesses and their employees.