Why A Captive Insurance Company Should Cover Employment Claims

We're hosting a webinar titled "An Introduction to Captive Insurance" on Thursday September 29.  You can register at this link.

If you're unsure if your company is a viable captive candidate, we'll perform a free evaluation​ It starts with a conversation that lasts between 30-60 minutes and is followed by an analysis of your currently in force insurance policies.

We formed and operate the first series LLC in Montana (named Aegis) for captive insurers.  Several other firms provide key services such as accounting, audit and actuarial work.  Please contact us at 832.330.4101 if you'd like to discuss forming a captive for your company     

   There are several reasons why insurers offer employment liability as a separate policy, starting with the potential cost of each claim:

The reality is that defending a discrimination or other employment lawsuit is expensive. Defending a case through discovery and a ruling on a motion for summary judgment can cost an employer between $75,000 and $125,000. If an employer loses summary judgment (which, much more often than not, is the case), the employer can expect to spend a total of $175,000 to $250,000 to take a case to a jury verdict at trial.

Most employers, if acting rationally, will chose to retain an employee instead of assuming the risk of a $250,000 legal bill with an uncertain outcome. Moreover, employers cannot avoid this risk simply by settling every claim that is filed, lest the company risk the perception of being an easy mark by every ex-employee.

Second, there’s a 10% chance of this risk occurring, which is a higher probability than insurers desire.  The following causes of action are the most common: discrimination, discriminatory discharge, retaliation and harassment (for further information, please see the EEOC database located at this link). 

   The higher probability of occurrence combined with large payouts makes this risk perfect for a captive.  Writing this policy in your captive provides two distinct advantages over third party policies:

1. Control over policy language: insurers or insurance company organizations such as ISO write insurance policies.  While certain interpretive presumptions supposedly counter-balance this advantage, these are insufficient to effectively level the playing field.  For example, some policies state the insurer will only reimburse “reasonable” legal fees, potentially granting the insurer the ability to minimize payments, thereby compromising the insured’s defense.  Contrast this with a captive insurance company, where the insured writes the policy, thereby granting him maximum drafting flexibility.  Ask any lawyer whether or not they want control over contract drafting and they’ll invariably tell you, “yes.”    
   
2. Control over the litigation process: some insurers have a cadre of on call attorneys who defend insureds; others have a list of attorneys they recommend while still others have a maximum rate they’ll pay for representation, leaving the insured to find an attorney within a specified price range.  The basic problem with all of these options is the insurance company is still somehow involved with the process, potentially altering or even interfering in the attorney client relationship.  Compare that to a captive, where the insured is also the insurer, granting the insured maximum control over the litigation process.    

These two facts provide sufficient justification for a captive writing this policy.  Please call us at 832.330.4101 if you’d like to learn more.