A form of liability insurance often touted as a potential lifesaver for small businesses could be driving business away from small law firms and toward their larger competitors.

Employment practices liability insurance (EPLI) generally covers employers for harassment or discrimination claims from employees who belong to a protected class based on their race, sex, disability, ethnicity, national origin, or age. It also generally extends to whistleblower claims and claims based on the Family and Medical Leave Act.

Smaller businesses, which often lack sophisticated in-house legal or human resources departments, may be most vulnerable to employment claims.

“It helps especially small and midsized firms defend their legal rights,” Jackson Lewis principal Paul Siegel told Bloomberg Law. The “big difference” provided by EPLI, especially for smaller businesses facing a lawsuit, is the knowledge that they’ll still “be in business next week” despite potentially ruinous litigation expenses, he said.

The irony is that smaller law firms, whose bottom lines could benefit from the client pipeline that EPLI carriers could provide, actually may be losing business to larger law firms as the insurance companies become bigger players.

“The carriers are dictating where all the business goes,” another Jackson Lewis principal, Michael Lowenbaum, told Bloomberg Law. “It’s just harder and harder to compete with these national firms.” Lowenbaum used to run a small employment law firm in St. Louis but recently closed it in part because it was losing EPLI cases to larger firms. “The future is the national practice,” he said.

A Start in the 1990s

EPLI started in the early 1990s, when various statutes such as the Americans with Disabilities Act and the Civil Rights Act added opportunities for jury trials and penalties for employers that failed to comply.

Originally, EPLI was offered as extra coverage that could be added on to other types of insurance, “but as there were more claims assessed against it, it became a stand-alone policy” starting around 2000, according to James Lynch, chief actuary at the Insurance Information Institute. The coverage became “fairly standard” for businesses during the years between 2000 and 2010, Lynch told Bloomberg Law.

By 2016, about 39 percent of employers had EPLI coverage, Lynch said. The “penetration rate” varied by industry, with more than two-thirds of information technology firms and banks having EPLI, but only 8 percent of educational institutions and 28 percent of health-care institutions, he said.

“Any company with employees needs it. The bigger the company, the bigger the risk,” Lynch said. “The losses can be substantial” if a company loses this sort of litigation, he said.

“Employers like it because they pay to offload the risk of the legal risks they might face,” Michael Rynowecer, president of BTI Consulting, told Bloomberg Law. “Law firms hate it” because insurance companies have been “especially aggressive” in lowering the fees they pay law firms to handle these cases, he said.

Carriers Negotiate Lower Legal Fees

“The law firms are willing to offer a reduced rate because of the ongoing relationship that we have with them,” said Michael Schraer, a senior vice president at Chubb, an insurance company that offers EPLI. Chubb wants to get “the absolute best expertise at the most competitive price,” he told Bloomberg Law Jan. 11.

“The firms that specialize in labor and employment seem to be more comfortable with it,” Rynowecer said. “Some of those have robust systems to drive costs down, so you’ll find them finding it slightly less distasteful than the others.”

At first, EPLI would seem to be a bonanza for employment law firms, providing new clients that are guaranteed to pay. Small and midsize firms, which generally have lower overhead, would seem like the main beneficiary.

Indeed, some law firms were able to flourish based largely on EPLI business from insurance carriers. “It had a significant impact on our business,” Patricia Nemeth, who founded a labor and employment boutique law firm in Detroit 26 years ago, told Bloomberg Law Jan. 8. Nemeth Law now participates with about 10 insurance carriers, she said.

It probably would be harder for Nemeth to establish herself with EPLI carriers today. “We got in when it was pretty new,” about 20 years ago, Nemeth said. As EPLI’s market presence grew, however, “the national firms started to come in and scoop up a lot of that business,” making it harder for boutiques to land cases, Nemeth said.

Pressure to Cut Costs

Presumably, the national firms are accustomed to charging higher fees than they receive from EPLI carriers and “staffing their cases” more fully, Nemeth said. EPLI carriers typically won’t pay for two attorneys to attend the same meeting, especially if one attorney is there primarily to observe for learning purposes. “Probably the larger firms will be eating more of that cost,” Nemeth said. “The national firms can do it because of the volume.”

Even at the Nemeth boutique, “we had to adjust,” she said. Attorneys at her firm “are collaborative,” but the lower fees paid by EPLI carriers have curtailed case discussions among attorneys.

Lindner & Marsack, a 20-lawyer management-side labor and employment law firm in Milwaukee, also has felt the impact from cost-conscious EPLI carriers. “We’ve actually turned down cases from EPLI carriers because they want us to do work at a rate we’re not comfortable with,” Lindner & Marsack shareholder Oyvind Wistrom told Bloomberg Law.

The insurance is still a major factor for his firm, however. Wistrom estimated one-third of his firm’s clients have EPLI. When existing clients buy EPLI, the firm wants to be able to continue representing them, so “we’re recommending to our clients when you renew your EPLI coverage that you get a rider on your policy that allows you to use the counsel that you’re comfortable with,” Wistrom said. In these cases, “we have to agree to their rates,” Wistrom said.

Win Some, Lose Some

The effect of EPLI has been “a bit of a mixed bag,” Wistrom said. “It’s beneficial because if we have a relationship with an EPLI carrier, we may end up getting referrals from companies we don’t normally have a relationship with, but we may also lose some clients because they may have a policy that doesn’t allow them to choose who their attorneys are going to be.”

Of course, clients that find a firm through an EPLI panel may decide to stick with that firm after the EPLI-covered case concludes, giving the law firm “the potential to get more new work” from that client in the future, Wistrom said.

“Most boutique labor and employment firms realize that it’s part of the game now, and it’s a market that they need to tap into,” Wistrom said. The playing field may not be even, though. “There is a tendency for those big carriers to be more confident using bigger firms or national firms” rather than smaller firms, he said. “I would think it would hurt the smaller firms that are trying to break into the market.”

Chubb looks “for firms that have breadth and depth of experience,” Schraer said. “We can get a consistency” with a national law firm, and some clients are impressed by the “name cachet” of large, well-known law firms, he said.

One such large, well-known firm is Jackson Lewis, with 58 offices and more than 800 attorneys. “We get a lot of case assignments,” Siegel said. “About 40 percent of the firm’s billable hours in a year are subject to EPL insurance,” Siegel said. “Probably half of the litigation hours are subject to it.”

Changes in Rate Structure

The prevalence of EPLI has “probably in some part changed the rate structure,” Siegel said. He acknowledged that Jackson Lewis “negotiated discounts with the carrier” because business volume “is part of the equation.”

Small law firms may get EPLI business if they “serve an industry niche,” Schraer said. Jobs differ markedly among industry sectors, he said, noting that hedge funds have very different workplaces than colleges. A law firm that has industry expertise would have an advantage in handling cases from that sector.

Another asset a small firm may have is regional expertise, a “deep understanding of what’s going on in the region or locality you’re in,” Rynowecer said. A well-entrenched small firm may know the local government’s enforcement strategy and possibly even the local officials, he said.

Trends in litigation also can inspire interest in EPLI. Some observers expect the #MeToo movement—through which workers publicized their experiences with sexual misconduct—to spark a firestorm of lawsuits alleging sexual harassment or discrimination. If so, EPLI could become more prevalent and therefore influence an even greater share of the employment law market.

#MeToo Movement Sparks Interest

“There’s a lot more interest in this because of the #MeToo movement,” Lynch of the Insurance Information Institute said. “When awareness rises,” insurance agents tend to get “a lot more inquiries.”

“I have personally only had one recent case that I would classify as a #MeToo case, but I have heard from other employment defense lawyers that they are seeing an uptick in harassment-type allegations,” Wistrom told Bloomberg Law in an e-mail.

EPLI is “a response to the litigious society we live in,” Nemeth said. As an employer, “even if you’ve done nothing wrong,” the cost of defending a lawsuit “is astronomical, and it could put a small company out of business.” With EPLI, “the insured benefits in the ultimate analysis,” she said. “They’re getting an excellent product in the most streamlined, efficient way.”

EPLI can help a business “stay in business,” Siegel said. “The legal system is expensive and confusing,” he said. “It’s good to have a friend in that process.”