Insurance companies increasingly are seeking to eliminate wage and hour coverage in employers’ policies. While some insurance companies may be willing to allow coverage to be added back, it can come at a steep price that you should evaluate first with the help of experienced coverage counsel.

Insurance Surprises

As claims skyrocket under the Fair Labor Standards Act (“FLSA”) and similar state wage and hour laws, employers have found out the hard way that their insurance policies may not cover their claims, leaving them to bear the entire cost of the liability. It’s happening because insurers have started to insert broadly worded wage and hour exclusions in their insurance policies.

While the insurer sometimes may be willing to allow policyholders to buy back the wage and hour coverage, the buyback often comes with a high premium or is subject to a relatively modest sub-limit. Additionally, an insurance broker recently introduced a new product that may be available to some employers to cover wage and hour claims. However, before buying the new product, employers must carefully evaluate their existing insurance program to determine whether a gap exists for this growing and costly risk.

FLSA Lawsuits Soar Along With Costs
The FLSA and state wage and hour laws generally require employers to pay employees a minimum hourly wage and overtime wages for hours worked in excess of 40 hours a week. These statutes also classify workers who are required to receive overtime pay. State laws may also impose on employers more nuanced or industry-specific requirements.

Violations of wage and hour laws are one of the largest employment practice risks that employers face. In 2011, 84% of all employment class action lawsuits alleged wage and hour violations. The number of lawsuits claiming a violation of these laws is growing exponentially. In 1993, only about 1,450 FLSA lawsuits were brought nationwide. By 2002, the number had inched to 2,035 cases. But by 2012, the number of FLSA lawsuits had nearly quadrupled, to 7,064.1

Defending and paying wage and hour claims is not cheap. A class action or multiple plaintiff lawsuit substantially increases the cost. Where the average discrimination or retaliation claim settles in the $600,000 to $700,000 range, wage and hour class actions settle for $4.6 million, on average.

The most costly part of defending a wage and hour claim may be the legal fees. Not only do employers pay for their litigation expenses, but employers may also have to pay the employees’ legal fees because of attorney fee-shifting provisions in wage and hour laws. In addition to paying the unpaid wages, the FLSA and many state laws also require employers in violation to pay “liquidated” damages and interest. Under the FLSA, liquidated damages are an additional 100% of the unpaid wages.

Insurance Coverage Is Disappearing …
Employers that have had to litigate wage and hour lawsuits know all too well that insurance coverage for these claims may be difficult to access and is fading fast as wage and hour exclusions grow. Those employers that haven’t faced a lawsuit must immediately review their insurance program to determine whether they have coverage for wage and hour claims and, if not, what can and should be done to close the coverage gap.

Commercial general liability policies usually do not cover wage and hour claims. Rather, employers typically must evaluate their employment practices liability (“EPL”) coverage for such employee-related claims. However, in recent years, many EPL insurers have started to exclude wage and hour claims or have assigned a low sub-limit to such claims, which are quickly eroded by the payment of defense costs.

… and New Coverage Emerges
Recently, Marsh introduced a new insurance product called the “Marsh Wage and Hour Preferred Solution,” which it says is designed specifically to cover wage and hour violations for employers with 4,000+ employees. While niche policies such as this one – which would not be “standard form” and often are heavily negotiated – may be appropriate for some employers to purchase, employers need to review all the facts before deciding if it’s necessary and advisable. The devil will be in the details of evaluating the scope of coverage provided and securing terms that provide the greatest protection to employers.

Conclusion
With so many issues to consider, employers should hire a professional to help them buy these policies and handle wage and hour insurance claims. While an insurance broker may be one source of advice, they often have conflicting interests between policyholders and insurers. To protect against that conflict, employers should rely on experienced coverage counsel to make sure the appropriate coverage is obtained at the outset and, if there is a claim, that the insurer complies with its obligations under the policy.

A version of this alert appears on the Society for Human Resource Management Web site.