There’s no denying the impact the #MeToo movement is already having on the employment practices liability insurance market. But the ripple effects of the viral campaign will reach far and wide, putting directors & officers squarely in the crosshairs as well.
Although public companies typically buy EPLI and D&O insurance on separate forms, both coverages are almost always included under one management liability policy for smaller, private companies, along with fiduciary and sometimes cyber.
“For the private company buyer, the bulk of the cost of insurance for that management liability is the EPLI,” explains Kevin LaCroix, Esq., attorney and executive vice president at RT ProExec, a division of R-T Specialty, LLC. “That’s where #MeToo is really going to impact small to medium businesses—the kind of company a lot of independent agents are representing.”
“Just about every company looks at #MeToo and says, ‘We’ve got an EPL risk,” agrees Bob Bregman, senior research analyst at the International Risk Management Institute (IRMI). “Even small companies with 10-20 employees now need an EPL cover, and if you’re talking a need for EPL cover, that’s the entrée to D&O.”
Here are three predictions for the D&O insurance market as the #MeToo movement keeps sexual misconduct and harassment in the spotlight:
Greater claims frequency. Although the #MeToo campaign first went viral last fall, “it just keeps coming up. This isn’t going away,” LaCroix says. “It’s one thing that there are revelations about media stars and politicians and so on, but what’s not making the front pages is whether there are similar revelations about the shift manager at the Denny’s. Those kinds of things could really mount up.”
That’s especially true for insureds in industries that are notoriously risky from an EPLI standpoint—hospitality, health care, restaurants, auto dealers, casinos and the like.
“Obviously everybody’s talking about entertainment, but it’s just the tip of the iceberg,” says Peter R. Taffae, managing director at ExecutivePerils. “What #MeToo is doing is taking away a lot of the stigma associated with reporting the harassment that has been going on in every industry. We really anticipate a lot more volume on that, and those are not cheap claims.”
“There’s a great deal of concern that that is going to translate into not just a little bit of increased claim activity but a lot of increased claim activity, and that the view of courts and of juries is going to be changed because of social perception,” LaCroix adds. “This could become a very significant area of claim activity and claims losses.”
Stricter underwriting scrutiny. This shift from financial-related claims to what Sean Jordan, research analyst at IRMI, calls “scandal-driven litigation” has significant risk management implications. “It’s a switch from more technical, really specific concrete controls to culture controls, and that requires people to think about things in a different way,” he points out.
In the past, “underwriting scrutiny may have been limited to finding out about the dollars involved. Now, they’re looking to see if there are prior sexual harassment or discrimination claims,” LaCroix explains. “What they’re really looking for is a pattern—the same individual involved or repeated instances of certain kinds of allegations. That information was always available, but #MeToo has really underscored the need for that specific line of inquiry.”
Jordan expects insurers to start asking more specific questions about employee handbooks—"not only what’s in the handbook, but how often is it updated and distributed? Is there anything employees are required to sign off on in terms of harassment? Especially for private companies of a decent size that still have a D&O exposure, they might not have quite as structured of an approach in the way they train and handle awareness of harassment.”
Of course, “any company that’s larger than a five-employee mom-and-pop operation has the policies and procedures. You can practically get these things off the shelf,” Bregman points out. “What the underwriters are looking at now is what are you doing with those policies? How are you enforcing them? Underwriters are going to want to differentiate between which companies are active, which are passive and which are kind of in the middle.”
Underwriters will pay particularly close attention to training programs, “especially of supervisors, because it’s at the supervisory level that they can catch a lot of this stuff,” Bregman adds. “Peer-to-peer harassment is not nearly the issue as superior-subordinate. The maintenance person never harasses the CFO.”
Eventually, higher rates. LaCroix believes whether all of the above will translate into significant price increases “remains to be seen.” But Taffae says the future is uncertain for those that operate in the EPLI and private D&O market.
“They’re worried about it. The market was already contracting a little bit, but this is going to be very significant,” says Taffae, who expects EPLI and private D&O carriers to “come out of the box at 10-15% higher if the account is exactly the same as last year.”
Although companies with a “rampant sexual harassment culture” may have difficulty finding any coverage at all, “more frequently you’ll find cases where there happens to be just one bad apple,” Bregman says. “Assuming they throw the guy out and then take steps to prevent it from happening again in the future, these companies won’t get 100% rate increases. They may pay a little more, they may even get a significant bump, but they’re still going to have coverage available at reasonable terms.”
In the longer term, will #MeToo have an impact on management liability forms? “I haven’t seen any evidence yet of that, but if the claim volume does materialize, it wouldn’t surprise me,” LaCroix says. “I could see something like higher retentions or a coinsurance requirement, particularly for companies that have a pattern of problems in the past.”
The goal, LaCroix adds: “to put the company in a position where they have a financial incentive to control this.”
Jacquelyn Connelly is IA senior editor.