Wage and Hour Claims Exposure and Employment Practices Liability Insurance

Wage and Hour Claims Exposure and Employment Practices Liability Insurance

Cases alleging violations of wage and hour laws have been a growing source of litigation activity in recent years. These cases present a variety of allegations, such as unpaid overtime, employee misclassification, and failure to pay minimum wage. A March 21, 2011 NERA Economic Consulting publication entitled "Recent Trends in Wage and Hour Settlements" takes a look at evolving settlement patterns in these cases. The report, which can be found here, contains a number of interesting observations and underscores the litigation risk that these cases present. The report's findings have a number of important Employment Practices Liability implications, as discussed below.

The report examines 187 wage and hour case settlements reported between 2007 and 2010. The report notes in a footnote that the settlement data, derived from a number of sources, while inclusive of a large number of settlements, "is not likely to be comprehensive." In addition, some potentially significant settlements were excluded due to incomplete information. Moreover, the settlement information regarding 48 of the 187 cases studied is confidential. For that reason, many of the observations in the study may be more a reflection of the data available that of the overall trends. Notwithstanding the possible data constraints, the report reflects a number of interesting observations.

Over the entire four year period of the study, the average settlement per case was $12.8 million and the median settlement was $4.3 million. However, these summary statistics "mask a large range of settlement values." About 25% of all settlements were under $1 million, while about 20% settled for $20 million or more.

In addition, the report reflects a "sharp decrease "in both the average and median settlements in 2009 and 2010 relative to 2007 and 2008. This apparent difference may be a reflection of the data available. For example, in the first two years of the period there were very few reported settlements under $1 million, while in the last two years there was an increased proportion of these smaller settlements. The low number of these smaller settlements in the first two years "may be a result of data limitations." The pattern in the data could be explained "if lower-value settlements were systematically less publicized in earlier years'"

Of course, the relative absence of lower settlements in the two earlier years may also reflect "differences in the underlying characteristics" of the cases during that period. The study does reflect that the nature of the cases shifted in the second two years of the study period. There were more overtime and off-the-clock allegations in the second two years and relatively fewer misclassification cases in those years than in 2007 and 2008. The report notes that "cases with overtime allegations tend to settle for lower amounts," when controlling for other factors.

Two specific factors seem most determinative of settlement size, the number of class members participating and the duration of the class period. The number of plaintiffs involved in the cases varied widely, with about 80 cases involving fewer that 1,000 plaintiffs while six cases had more than 100,000 plaintiffs. The average per-plaintiff settlement amount was $5,700 and the median amount was $3,500. The average settlement amount per year of the class period was $1.2 million. The average settlement amount per plaintiff-year was about $1,000. Consistent with the overall settlement trends, the average per plaintiff settlement and the average per year settlement amount declined in the second two years of the four year study period.  

Discussion

The NERA study provides a detailed if not entirely comprehensive overview of the severity risks associated with these kinds of cases. It is apparent that the settlements examined in the NERA study were largely class or at least mass actions involving large numbers of plaintiffs acting collectively. Nevertheless the per plaintiff settlement data may be useful in assessing wage and hour cases that are not presented as collective actions.

The study certainly does underscore the seriousness that wage and hour collective actions may represent to employers. The settlement amounts obviously do not include the costs that the various defendant companies incurred in defending these actions. But taking the additional if not precisely known costs of defense in account, it is clear that these kinds of cases represent a serious exposure for the defendant companies.

The typical Employment Practices Liability (EPL) insurance policy contains exclusions for wage and hour cases. The usual carrier explanation for these exclusions is something along the lines that insurance for this liability would create a moral hazard, as it might otherwise encourage employers to withhold pay owed to employees with the idea of shifting the compensation expense to the insurer. A June 2010 National Underwriter article discussing EPL coverage issues involving these types of claims can be found here.

But while the liability for these cases is typically excluded, EPL policies increasingly include some defense cost protection for these kinds of claims, often on a sublimited basis. The NERA report underscores the seriousness of these kinds of claims, which in turn highlights the importance for the defendant companies of mounting an effective defense. For that reason, the inclusion of the defense cost coverage for wage and hour claims, even if sublimited and even if subject to a self insured retention, could represent a valuable coverage extension for insured companies.

It is important to note that not all EPL policies contain this coverage extension, and that some carriers will provide this extension only upon request. This issue represents one more reason why it is critically important for insurance buyers to retain knowledgeable and experienced brokers in their insurance purchases.  

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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