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Why all financial institutions should consider purchasing employment practices liability insurance

Many non-US financial institutions think the environment for EPL losses is benign elsewhere. However, big compensation awards are becoming more common in the UK.
Modern buildings in a financial district in London

25/02/2022

Many financial institutions located outside of the United States do not purchase employment practices liability (EPL) insurance due to their belief that the legal and cultural environment for large EPL losses is benign elsewhere. This perception may begin to change, however, as we start to see significant compensation awards in gender discrimination cases becoming more prevalent in jurisdictions like the UK.

While financial institutions have made progress in reducing the gender pay gap over the past few years, in 2021 the mean hourly gender pay gap for financial institutions in the UK was 26.5% (UK Government Gender Pay Gap Data). The bonus pay gap was even higher than that, reflecting that women working in financial services in the UK receive on average £52,000 in bonuses for every £100,000 awarded to men (Office for National Statistics).

The UK Treasury Committee has highlighted that a lack of clear guidelines with respect to how bonuses are awarded in financial institutions leaves the system open to subjective judgment and unconscious bias, which of course increases the risk of EPL claims.

Given these facts, recent UK cases may not only set a precedent in terms of large damage awards, but could also have the effect of encouraging aggrieved employees to file EPL claims.

Why financial institutions should consider EPL insurance

As we move through 2022, we expect more EPL claims of all types to be brought against financial institutions outside of the US, especially as diversity and inclusion initiatives continue to dovetail with social movements such as #Metoo and #BlackLivesMatter.

When we couple this heightened social awareness with the continued economic disruption caused by both the pandemic and accelerated digitalisation in the financial institutions sector, the need for EPL insurance for financial institutions becomes clear.

Against this backdrop, insurers will be closely monitoring EPL claims trends:

  • Our data shows that EPL claims notified by financial institutions increased by 23% last year and early signs are that this trend will only continue.
  • The size of the awards in recent cases outside the United States should sound alarm bells regarding whether the quantum attributable to EPL notifications may be significantly on the rise.
  • EPL claims proceedings can be drawn out and the associated legal costs tend to increase with time due to social inflation.

Currently, there is limited appetite in the London market to write standalone EPL insurance for financial institutions. However, many insurers are willing to consider writing EPL as an ancillary line when they already write other financial lines for an insured, such as directors and officers (D&O), professional indemnity, or crime.

If you have questions about the best EPL insurance strategy for your financial institution, please reach out to your Marsh adviser.

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