Riders on the Storm

Risk managers from across the country and around the world gathered ‘on the Rock’ in September for the Risk and Insurance Management Society (RIMS) Canada Conference in St. John’s, Newfoundland, to share knowledge on how to navigate the course through these choppy financial waters.

A popular topic for discussion was when and if a hard market will take hold in Canadian commercial lines. Part of those discussions centred around talk about what type of coverages are available and best suited to employers’ needs, and which lines seem to show the first real signs of hardening.

Two areas of coverage received particular attention. The first, employer practice liability (EPL), was described as a viable alternative or add-on to a standard Commercial General Liability (CGL) or Directors & Officers (D&O) policy, but it suffered the weakness of lacking a standard Canadian wording. The second, credit risk insurance, once had rock-bottom loss ratios. But now, in the new financial context, loss ratios are skyrocketing and, as a result, so are rates.

EMPLOYER PRACTICE LIABILITY COVERAGE

The Risk Management Counsel of Canada delivered a seminar called Employer’s Dream: Insurer’s Nightmare! Employer’s Liability:The Need for a Canadian Model on Sept. 15. Panel speakers identified the need to create a distinct Canadian wording for EPL policies.

EPL policies differ from CGL policies and D&O liability policies, in the sense that EPL policies are not triggered — as are CGL and D&O policies — by occurrences or accidents.

“This is important since, depending on the definition in the policy, ‘event’ may actually include intentional acts such as harassment, discrimination and wrongful dismissal,” said panelist Genevieve Cotnam, partner at Stein Monast in Montreal. “Normally under CGL policies these specific acts would not be covered, as they can be construed as intentional acts with expected results.”

For example, discrimination is covered under EPL policies — whether it’s failure to promote an employee or the dismissal of an employee.

As long as there is a violation of a human rights code or the Charter of Human Rights, such a claim will be covered by the EPL policy, even if it is construed to be intentional under the circumstances, Cotnam said.

The EPL policy will cover a former employee; it can also cover a supervisor or an officer, depending on the wording, Cotnam continued. In Quebec, the EPL insurer can be named as a defendant in the statement of claim if it is covering the risk.

“Now, we often think of EPL policy claims as claims being brought by employees who are being harassed,” Cotnam said. “But they can also apply to former employees, retirees of the company, and also by applicants (someone who applied for a job in the company) or, in certain circumstances, to third parties,” she said. “The scope of EPL can be quite large.”

Employment liability programs of this sort are becoming more frequent because people are increasingly becoming aware of their rights and the potential for compensation on these types of claims, said Monika M.L. Zauhar, partner at Cox and Palmer.

So for smaller businesses that are on the lower end of the wage scale and see a higher turnover, they can become quite vulnerable to these types of claims, she added.

On the flip side, larger companies have many more employees and therefore greater potential exposure to liability because of the sheer volume of personnel interactions, Zauhar said. In addition, the type of work environment and work activities also can lead to some significant claims. All in all, EPL insurance policies can make a lot of sense financially for all sizes of companies, she said.

“The main selling point of an EPL policy is that it allows employers to plan ahead and assess their risks and to be able to know that the cost of defending these types of claims, which can be very significant, will be covered at the end of the day,” Zauhar said.

“It’s actually reported that in the United States, the 300 or so reported EPL and wrongful dismissal claims averaged in settlements in excess of US$50,000.”

There is a breadth of issues dealing with EPL policies, said Elizabeth J. Forster, panel member and a partner at Toronto’s Blaney McMurtry. “There are a huge number of different areas of liability that an employer can face,” she said. “And secondly, we [Canadians] don’t have consistent policy language.”

Panelist Jorge Segovia, partner at Cox and Palmer in St. John’s, noted two main differences between Canada and the United States; each highlights the need for Canadian insurers to approach EPL coverage in a distinct manner, he said.

First, the definition of wrongful dismissal is different in both Canada and the United States. In the United States, a wrongful dismissal claim can arise if the termination involves some form of statutory breach such as discrimination, he said.

In Canada, on the other hand, “wrongful dismissal is simply the fact that an employee that has been terminated has not been given reasonable notice or pay in lieu of notice,” he said. “Because our [Canadian employment] contracts, if it’s not built in, have an implied term requiring the reasonable notice or termination or payment in lieu of notice. So, most Canadian EPL insurers will likely try to remove that coverage.”

The second distinction has to do with punitive damages, he said.

“A lot of EPL claims will involve claims for punitive damages,” he said. “In the U.S., punitive damages are not covered by EPL policies because the size of the damages being awarded in the U.S. is quite high.”

In contrast, in Canada, where the awards are quite modest, most insurers agree to cover the damage awards. “It certainly would be useful over time to develop standard wording and clauses such as what we have for our CGL policies,” Segovia said.

CREDIT RISK INSURANCE

Loss ratios for credit risk insurance climbed from between 20% and 30% prior to the financial crisis that began in 2008 Q3 to 100% currently, driving a hard market in the line, said Daniel Galvao, senior vice president of financial products at Marsh Canada Ltd. (Toronto).

Galvao spoke at the RIMS Canada Conference as a panel member in the session, Credit Risk: Risk Management Implications on Managing Financial Volatility, Corporate Governance and Counter Party Exposure.

Prior to September 2008, the credit risk market was incredibly soft and ultra-competitive, with plenty of capacity and lots of new product launches, said panelist Todd Pickett, a general agent with Coface Canada (Toronto).

“Fast forward to 2008 Q3, and it’s now a very hard market with record losses,” he said.

“Underwriting is definitely conservative. We have done three major cuts in our capacity in the past 12 to 18 months; each time, we have cut capacity by about 5% across the board, so capacity is definitely shrinking.”

Account receivables premium is derived from sales. Larger sales volume translates into larger premium volume. In the current economy, sales are slowing, so premium is shrinking — even though rates are increasing, Pickett continued.

Higher reinsurance rates are also a factor in the rate increases, Galvao added.

“The large monoline global players have implemented programs to ‘re-calibrate’ their exposure (through cancellation or reduction of coverage) and adjust premium rates upward,” Galvao wrote in material he distributed to delegates.

“Multi-line insurers typically offer non-cancellable coverage and therefore couldn’t trim down their exposure, however terms are hardening for upcoming renewals.”

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Differences between Canada and the United States highlights the need for Canadian insurers to approach EPL coverage in a distinct manner.