With the unsteadiness of the current economy, it’s more important than ever for companies to think about the adequacy of their management liability insurance limits.
Economic headwinds such as inflation and interest rate volatility, supply chain disruptions, labor shortages and changes in the global political climate may all be potential factors leading to an increase in frequency or severity of management liability claims. CEOs, CFOs and risk managers need to ask themselves, “Are we buying enough limits in this economic environment?”
Companies in distress are often aware of their potential exposures, but even healthy companies with growing revenue and a strong employee and customer base may want to re-evaluate excess insurance limits during these uncertain times.
6 exposures that necessitate revisiting your excess coverage
Consider the following six risk exposures that may affect your company — and your excess coverage needs — in 2023:
1. Employment costs
Compensation costs for private industry workers have been on the rise for years, with a 4.4% increase in 2021 and another 5.1% by the end of 2022.[1] At the same time, benefit costs increased a total of 7.7% during the same period.1 This cost creep will have an effect on any organization’s bottom line.
2. Downsizing
If your business is looking to downsize as a cost reduction strategy, allegations of discrimination, retaliation, or wrongful termination and possibly class action suits may arise. With remote work, “single site work environments” are becoming somewhat of a moving target definition, subject to court interpretation. Lawsuits are expensive and potentially damaging to the brand; Having excess limits in place may help mitigate the impact of EPL related lawsuits.
3. Rising defense costs outpace inflation
Prices for legal services are 305.21% higher than in 1986, with an average inflation rate of 3.92% per year — higher than the average yearly inflation rate of 2.75% during the same period.[2] This trend, on top of the current inflationary environment, means it is more important than ever to make sure you have adequate limits to transfer risk. With prices rising, excess limits should as well.
4. Enforcement trends of the Equal Employment Opportunity Commission (EEOC)
The Biden administration has increased staffing and budget allocations at the EEOC[3] and made enforcing EEOC Right to Sue letters a new focus.
Class action EPL claims make up a significant portion of employment discrimination suits. In 2020, EPL suits had the highest settlement amounts of any class action litigation at $422.68 million.[4] The EEOC’s 2021 expansion of the use of virtual mediation led to $176.6 million in recovery to claimants, $20 million more than 2020.[5]
The White House’s renewed expansion of the EEOC means more employment-related charges in the near future. Businesses who haven’t increased excess EPL limits could be in danger as the EEOC’s concentration on this space continues.
5. Increased fee litigation for retirement plans
In the past, fiduciary coverage for 401(k) plans was not a hot topic. Fiduciary coverage has historically been relatively inexpensive with a nominal retention. After a recent period of double-digit investment loss, fees associated with the administration of defined contribution plans have come under additional scrutiny initially by employees of large healthcare and educational institutions.
Fiduciary liability saw significant claims and subsequent losses in 2021, which disrupted multiple insurance segments.[6] Plaintiff firms are doggedly following fee and expense claims and have received large settlements across an increasing array of markets and industries. This squarely puts adequate fiduciary coverage back on the radar of risk management teams.
6. Risks around M&A.
M&A growth is expected this year,[7] with many analysts suggesting Q3 2023 may be an inflection point. Once the interest rate environment stabilizes, companies are likely to seek out traditional M&A targets to acquire expertise they don’t currently have in house or to further expand their footprint geographically. This can bring about changes in management, shareholder disputes, employee turnover, regulatory issues and countless other considerations that could lead to allegations of wrongful acts.
Your company may be a target for an M&A — even without your knowledge — making it essential that you have considered adequate limits before a transaction is initiated. Unfortunately, such coverage may not be readily available to a company mid-transaction.
Whether you are the target or acquirer, management liability limits are essential.
Right sizing your risk
Insureds may benefit from refreshing their consideration of limits adequacy amongst a myriad of factors. Limits may experience more rapid erosion in the current environment than they ever have in the past.
Excess insurance policies are one way to mitigate this growing risk.
To learn more about how to manage management liability insurance-related risks, contact us today.
This information is intended for informational purposes only. Protector Plans Executive Liability is not liable for any loss or damage arising out of or in connection with the use of this information.
[1] U.S. Bureau of Labor Statistics “Employment Cost Index Summary,” January 31, 2023.
[2] Official Data Foundation “Prices for Legal Services, 1986-2023,” Accessed February 15, 2023.
[3] Business Insurance “EEOC funding would increase 10.6% under proposed 2023 budget,” March 29, 2022.
[4] Seyfarth “17th Annual Workplace Class Action Litigation Report,” January 2021.
[5] The National Law Review “EEOC Roundup: Top 5 Takeaways for Employers on the 2021 Enforcement and Litigation Statistics,” April 7, 2022.
[6] Willis Towers Watson “Fiduciary liability: 2021 in review and a look ahead to 2022,” January 4, 2022.
[7] PwC “Global M&A Industry Trends: 2023 Outlook,” January 2023.