Employers can now require workers to sign arbitration agreements waiving their right to file class-action lawsuits over workplace issues, a federal court ruled last week. According to one industry expert, the Fifth Circuit Court of Appeals’ decision may have insurance ramifications for producers—particularly with regard to employment practices liability insurance.
In recent years, class-action lawsuits have fueled high sales of employment practices liability insurance (EPLI), a product which covers costs related to legal action and other financial damages stemming from wrongful workplace actions. Now, however, the appeals court has made it possible for businesses to limit such legal exposure.
Dr. Robert Hartwig, an economist and president of the Insurance Information Institute, believes the new opportunity for businesses to limit their legal exposure will not result in a decrease for EPLI demand, however—merely its cost to commercial clients. That could be a powerful sales tactic for producers.
“In general, programs or strategies that avoid or minimize litigation can benefit the employer in terms of EPLI cost,” Hartwig said. “If there is a demonstrated reduction in the overall cost of litigation, which is the result of fewer cases or potential cases, that is potentially a benefit.”
Because carriers assess businesses individually, Hartwig added, a choice to limit exposure to class-action lawsuits would reflect favorably on the company’s risk, thereby decreasing costs and helping producers make a sale.
Hartwig added that EPLI is “one of these products that’s become more ubiquitous” in recent years, and will continue to be a strong profit source for producers. Even with class-action lawsuits potentially off the table for some employers, the potential for litigation based on employment practices is a powerful motivator for commercial clients.
“In some sense, the headlines sell themselves,” Hartwig said. “Scarcely a month goes by where you don’t read about some lawsuit involving employees versus their employers.”
Ann Longmore, EPLI leader for Willis, said the risk is particularly high for small commercial enterprises, which could make them a prime target for producers.
“Smaller companies do have to worry about one big, bad case taking them down,” she said. “A single individual could take them down.”
“The lesson that can be learned here is that this is not necessarily litigation that only involves giant corporations. It can involve medium and small corporations as well,” he said. “My guess is every broker or agent out there has a story about litigation against a moderate-sized employer. Those sorts of stories help sell the product.”
The Appeals Court case involved a Fort Worth-based homebuilder, which required all its employees to sign agreements to resolve workplace disputes in individual cases rather than sue as a group. The ruling overturns a previous decision by the National Labor Relations Board, which held that such employer requirements go against federal law allowing employees to pursue collective action.