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Staying Ahead of Employment Practices Liability Risk

As regulatory and legislative changes continue to unfold, Nationwide's loss control services build longevity and help insureds weather new risk exposures.
By: | August 2, 2017 • 6 min read

No human resource manager wants to hear that an employee feels discriminated against or harassed. It means that workers don’t feel safe or comfortable at their job, which hurts morale and productivity. And it also means that, if not promptly addressed, a lawsuit may be on the horizon.

In the world of employment practices liability, it’s a well-known risk.

“Gender, age, race, or national origin discrimination and harassment complaints account for about 96 percent of the EPLI claims coming across a claims person’s desk,” said Joe Werner, director, Management Liability and Specialty.

Most companies know that having an employee handbook that outlines expectations and consequences for workplace behavior, as well as clear policies and procedures for handling a complaint, are the best ways to mitigate the risk of a lawsuit.

But legislative and regulatory changes could make EPLI risk more dynamic and complex.

Emerging Employment Practices Risks

Joe Werner, Director

State and local laws can vary from federal regulation – and often have higher compliance standards.

“The new medical marijuana laws are a good example of state-specific legislative changes,” Werner said. “There are currently 29 states that allow marijuana for medicinal purposes. This could potentially open the door for new discrimination claims.1

Employers in a state with legalized medical marijuana cannot discriminate against an employee with a legitimate marijuana prescription. But they also have to be wary if a worker is using marijuana on the job. The law does not yet address whether employers can or should make accommodations for employees using medicinal marijuana.

“It’s a gray area. But as more states allow marijuana for medical use, I think we’ll start to see discrimination claims coming in around this issue,” Werner said.

Disparities also exist between federal and local minimum wage laws. While the federal minimum wage is currently set at $7.25 per hour, some states and cities have set a minimum wage that exceed the federal requirements. Unaware employers are thus more exposed to wage and hour claims, which can be costly to settle or litigate.

Even if companies have all their ducks in a row regarding policies and practices to prevent the known risks of harassment and discrimination, they need to remain vigilant and monitor these regulatory changes to stay ahead of emerging issues.

Practicing Proactive Loss Control

No matter what changes come down the pike, companies have a few ways to protect themselves.

Education and training are key. Human resource managers should stay up to date on the legislative changes happening in their city and state, and determine if those changes will impact their risk exposure. Training employees thoroughly and regularly on employment law and on workplace policies regarding harassment, discrimination, and ethical behavior in general can help to prevent problems.

Managers and the HR team should also know when and how to investigate if an employee reports feeling discriminated against or harassed in any way at work.

But even those measures will occasionally fail. When that happens, companies need to know who to turn to for legal advice. Because of the variances between state and federal laws, relationships with attorneys who specialize in employment law in their specific state are critical.

Through a partnership with Littler Mendelson, Nationwide policyholders may obtain legal advice if they encounter a situation they don’t feel equipped to handle. Their legal hotline is available to insureds at no additional cost.

“Other carriers may offer a hotline to provide general guidance, but we feel it’s important to leverage Littler Mendelson’s national presence to provide actual, state-specific legal advice,” Werner said. That advice can help prevent an incident from spiraling into a claim — a benefit for both insurer and insured.

The hotline is just one of the loss control services that come standard with Nationwide’s private company package policy — Freedom 360° — which includes coverage for EPLI, directors and officers, fiduciary liability, and commercial crime.

Educational Services at Insureds’ Fingertips

Clients also have access to Freedom 360° HR, an online portal delivering daily news updates and human resource developments, as well as educational materials around all aspects of employment practices.

“These updates touch on all employment issues — not just what our policy covers — across any state or jurisdiction,” Werner said. “There is also a library for HR policies and documentation so you can download a new hire checklist, for example, or use them as a guide to build or update an employee handbook.”

A series of short videos dubbed Littler Learning Points feature two attorneys having a Q&A-style conversation about topics ranging from EEOC filing requirements to the definition of reasonable accommodation and wage and hour compliance.

Additionally, Nationwide offers employee online training modules provided by HR Classroom. The modules are designed to satisfy an employer’s legal training requirements and provide educational programs covering workplace topics, such as ethical workplace behavior, proper anti-discrimination and anti-harassment prevention and policy, workplace diversity and wage and hour issues.

Using loss control services, especially when they are provided free of charge, should be a no-brainer. But they are often underutilized.

“That’s a trend we are trying to change,” Werner said.

Often, clients simply aren’t aware that such services are available. Nationwide remedies that by having its loss control providers send an introductory email to new insureds detailing their services.

Financial incentives don’t hurt either.

“Where we can, we will reduce the deductible or retention if an insured has made efforts to improve their risk,” Werner said.

“Every claim that comes in will be expensive. No one wants to shoulder those costs, or go through the process of a lawsuit. If companies use these loss control services, it’s a win/win. We want to reward our insureds for improving their risk.”

Building Dependability and Longevity

Recognizing and investing in efforts to reduce risk also goes a long way in building a long-term relationship within a market which can see some carrier turnover.

“We are able to achieve stability and dependability in the market through smart underwriting,” Werner said. “That means offering terms and conditions that are appropriate for a risk.”

“We’ve come across competition offering more favorable terms and conditions that we may not be willing to offer for a given risk,” Werner said. “That’s just not practical if the goal is to be profitable so that we can remain in this market for the long haul. Sacrificing sound underwriting for the sake of attracting clients makes an insurer more likely to exit the market because they aren’t profitable.”

The goal, Werner said, is for brokers and their clients to see Nationwide as a consistent presence in the market. Loss control services and incentives help to earn clients’ trust, build credibility, and maintain that presence.

And as regulatory and legislative changes continue to unfold, those services help insureds weather whatever new risk exposures might come their way.

Contact Joe Werner, director, at 212-329-6961 or [email protected] for more information

To learn about Nationwide’s EPL loss control services, visit www.freedom360hr.com and http://nationwide.hrcare.com.

1Source: National Conference of State Legislatures

About Nationwide

Nationwide is a Fortune 500 company with 16 million policies in force and an A.M. Best Rating of A+ XV.  We are committed to responsive problem-solving and providing flexible and customized coverage.

Products underwritten by Nationwide Mutual Insurance Company and Affiliated Companies. Not all Nationwide affiliated companies are mutual companies, and not all Nationwide members are insured by a mutual company. Subject to underwriting guidelines, review, and approval. Products and discounts not available to all persons in all states. Certain property-casualty coverages may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds, and insureds are therefore not protected by such funds. Home Office: One Nationwide Plaza, Columbus, OH. Nationwide, the Nationwide N and Eagle, and other marks displayed on this page are service marks of Nationwide Mutual Insurance Company, unless otherwise disclosed. © 2017 Nationwide Mutual Insurance Company.

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Risk Report: Hospitality

Bridging the Protection Gap

When travelers stay home, hospitality companies recoup lost income through customized, data-defined policies.
By: | October 12, 2017 • 9 min read

In the wake of a hurricane, earthquake, pandemic, terror attack, or any event that causes carnage on a grand scale, affected areas usually are subject to a large “protection gap” – the difference between insured loss and total economic loss. Depending on the type of damage, the gap can be enormous, leaving companies and communities scrambling to obtain the funds needed for a quick recovery.

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RMS estimates that Hurricane Harvey’s rampage through Texas could cause as much as $90 billion in total economic damage. The modeling firm also stated that “[National Flood Insurance Program] penetration rates are as low as 20 percent in the Houston area, and thus most of the losses will be uninsured.”

In addition to uninsured losses from physical damage, many businesses in unaffected surrounding areas will suffer non-physical contingent business interruption losses. The hospitality industry is particularly susceptible to this exposure, and its losses often fall into the protection gap.

Natural catastrophes and other major events that compromise travelers’ safety have prolonged impacts on tourism and hospitality. Even if they suffer no physical damage, any hotel or resort will lose business as travelers avoid the area.

“The hospitality industry is reliant on people moving freely. If people don’t feel safe, they won’t travel. And that cuts off the lifeblood of the industry,” said Christian Ryan, U.S. Hospitality and Gaming Practice Leader, Marsh.

Christian Ryan
U.S. Hospitality and Gaming Practice Leader, Marsh

“People are going away from the devastation, not toward it,” said Evan Glassman, president and CEO, New Paradigm Underwriters.

Drops in revenue resulting from decreased occupancy and average daily room rate can sometimes be difficult to trace back to a major event when a hotel suffered no physical harm. Traditional business interruption policies require physical damage as a coverage condition. Even contingent business interruption coverages might only kick in if a hotel’s direct suppliers were taken offline by physical damage.

If everyone remains untouched and intact, though, it’s near impossible to demonstrate how much of a business downturn was caused by the hurricane three states away.

“Hospitality companies are concerned that their traditional insurance policies only cover business interruption resulting from physical damage,” said Bob Nusslein, head of Innovative Risk Solutions for the Americas, Swiss Re Corporate Solutions.

“These companies have large uninsured exposure from events which do not cause physical damage to their assets, yet result in reduced income.”

Power of Parametrics

Parametric insurance is designed specifically to bridge the protection gap and address historically uninsured or underinsured risks.

Parametric coverage is defined and triggered by the characteristics of an event, rather than characteristics of the loss. Triggers are custom-built based on an insured’s unique location and exposures, as well as their budget and risk tolerance.

“Triggers typically include a combination of the occurrence of a given event and a reduction in occupancy rates or RevPar for the specific hotel assets,” Nusslein said. Though sometimes the parameters of an event — like measures of storm intensity — are enough to trigger a payout on their own.

For hurricane coverage, for example, one policy trigger might be the designation of a Category 3-5 storm within a 100-mile radius of the location. Another trigger might be a 20 percent drop in RevPAR, or revenue per available room. If both parameters are met, a pre-determined payout amount would be administered. No investigations or claims adjustment necessary.

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The same type of coverage could apply in less severe situations where traditional insurance just doesn’t respond. Event or entertainment companies, for example, often operate at the whim of Mother Nature. While they may not be forced to cancel a production due to inclement weather, they will nevertheless take a hit to the bottom line if fewer patrons show up.

Christian Phillips, focus group leader for Beazley’s Weatherguard parametric products, said that as little as a quarter- to a half-inch of rain over a four- to five-hour period is enough to prevent people from coming to an event, or to leave early.

“That’s a persistent rainfall that will wear down people’s patience,” he said.

“A rule of thumb for parametric weather coverage, if you’re looking to protect loss of revenue when your event has not actually been cancelled, you will probably lose up to 20 to 30 percent of your revenue in bad weather. That depends on the client and the type of event, but that’s the standard we’ve realized from historical claims data.”

The industry is now drawing on data to establish these rules of thumb for more serious losses sustained by hospitality companies after major events.

“Until recently the insurance industry has not created products to address these non-physical damage business interruption exposures. The industry is now collaborating with big data companies to access data, which in turn, allows us to structure new products,” Nusslein said.

Data-Driven Triggers

Insurers source data from weather organizations that track temperature, rainfall, wind speeds and snowfall, among other perils, by the hour and sometimes by the minute. Parametric triggers are determined based on historical storm data, which indicates how likely a given location is to be hit.

“We try to get a minimum of 30 years of hourly data for those perils for a given location,” Phillips said.

“Global weather is changing, though, so we focus particularly on the last five to 10 years. From that we can build a policy that fits the exposure that we see in the data, and we use the data to price it correctly.”

New Paradigm Underwriters collects their own wind speed data via a network of anemometers that stretch from Corpus Christi, Texas, all the way to Massachusetts, and works with modeling firms like RMS to gather additional underwriting information.

The hospitality industry is reliant on people moving freely. If people don’t feel safe, they won’t travel. And that cuts off the lifeblood of the industry.– Christian Ryan, U.S. Hospitality and Gaming Practice Leader, Marsh

While severe weather is the most common event of concern, parametric cover can also apply to terrorism and pandemic risks.

“We offer a terror attack quote on every one of our event policies because everyone asks for it,” said Beazley’s Phillips.

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“We didn’t do it 10 years ago, but that’s the world we live in today.”

An attack could lead to civil unrest, fire or any number of things outside an insured’s control. It would likely disrupt travel over a wide geographic region.

“A terrorist event could cause wide area devastation and loss of attraction, which results in lost income for hospitality companies,” Nusslein said.

Disease outbreaks also dampen travel and tourism. Zika, which was most common in South America and the Caribbean, still prevented people from traveling to south Florida.

“Occupancy went down significantly in that region,” Marsh’s Ryan said.

“If there is a pandemic across the U.S., a parametric coverage would make sense. All travel within and inbound to the U.S. would go down, and parametric policies could protect hotel revenues in non-impacted areas. Official statements from the CDC such as evacuation orders or warnings could qualify as a trigger.”

Less data exists around terror attacks and pandemics than for weather, though hotels are taking steps to collect information around their exposure.

“It’s hard to quantify how an infectious disease outbreak will impact business, but we and clients are using big data to track travel patterns,” Ryan said.

Hospitality Metrics

Any data collected has to be verified, or “cleaned.”

“We only deal with entities that will clean the data so we know the historical data we’re getting is accurate,” Phillips said.

“There are mountains of data out there, but it’s unusable if it’s not clean.”

Parametric underwriters also tap into the insured’s historical data around occupancy and room rates to estimate the losses it may suffer from decreased revenue.

Bob Nusslein, head of Innovative Risk Solutions for the Americas, Swiss Re Corporate Solutions.

“The hospitality industry uses two key metrics to measure loss of business income. These include occupancy rate and revenue per available room, or RevPAR. These are the traditional measurements of business health,” Swiss Re’s Nusslein said.  RevPAR is calculated by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate.

“The hotel industry has been contributing its data on occupancy, RevPAR, room supply and demand, and historical data on geographical and seasonal trends to independent data aggregators for many years. It has done an exceptional job of aggregating business data to measure performance downturns from routine economic fluctuations and from major ‘Black Swan’ events, like the 9/11 terrorist attacks, the 2008 financial crisis or the 2009 SARS epidemic.”

Claims history can also provide an understanding of how much revenue a hotel or an event company has lost in the past due to any type of business interruption. Business performance metrics combined with claims data determine an appropriate payout amount.

Like coverage triggers, payouts from parametric policies are specifically defined and pre-determined based on data and statistical evidence.

This is the key benefit of parametric coverage: triggers are hit, payment is made. With minimal or no adjustment process, claims are paid quickly, enabling insureds to begin recovery immediately.

Applying Parametric Payments

For hotels with no physical damage, but significant drops in occupancy and revenue, funds from a parametric policy can help bridge the income gap until business picks up again, covering expenses related to regular maintenance, utilities and marketing.

Because payment is not tied to a specific type or level of loss, it can be applied wherever insureds need it, so long as it doesn’t advance them to a better financial position than they enjoyed prior to the loss.

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Parametric policies can be designed to fill in where an insured has not yet met their deductible on a separate traditional policy. Or it could function as excess coverage. Or it could cover exposures excluded by other policies, or for which there is no insurance option at all. Completely bespoke, parametric coverages are a function of each client’s individual exposures, risk tolerance and budget.

“Parametric insurance enables underwriting of risks that are outside tolerance levels from a traditional standpoint,” NPU’s Glassman said.

The non-physical business interruption risks faced by the hospitality industry match that description pretty closely.

“Hotels are a good fit for parametric insurance because they have a guaranteed loss from a business income standpoint when there is a major storm coming,” Glassman said.

While only a handful of carriers currently offer a form of parametric coverage, the abundance of available data and advancement in data collection and analytical tools will likely fuel its popularity.

Companies can maximize the benefits of parametric coverages by building them as supplements to traditional business interruption or event cancellation policies. Both New Paradigm Underwriters and Beazley either work with other property insurers or create hybrid products in-house to combine the best of both worlds and assemble a comprehensive risk transfer solution. &

Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]