The dark days of the pandemic are finally easing for the healthcare industry, bringing much needed insurance capacity back for directors and officers (D&O) and employment practices liability insurance (EPLI) coverage after underwriters effectively shut down to new business or for renewals, significantly restricted their terms, conditions and limit capacity two years ago.
Healthcare entities have always faced great exposure to contagions and epidemics, but market fears and uncertainty over how the COVID-19 pandemic would impact claims frequency and severity dramatically changed the way underwriters treated and priced the risk for the last couple of years.
Starting in March 2020, COVID questionnaires on a healthcare organization’s COVID-19 protocols — including safety and disease containment plans, and procedures to mitigate ongoing risk — were required on all renewal applications and new business. These questionnaires were used as part of the underwriting process throughout 2020 and into 2021.
Some underwriters also began adding “absolute communicable disease/COVID-19” exclusions to policies in an attempt to preclude coverage for any developing claim trends related to the pandemic.
Pricing, already impacted by social inflation, was also seriously affected, with D&O rates up an average of nearly 20% by the end of 2020 and program pricing up by more than 28%.
Thankfully, the onslaught of COVID-related claims carriers feared didn’t materialize, in part because of EPLI and D&O policy exclusions already in place. EPLI policies typically exclude claims related to OSHA or the Fair Labor Standards Act, including those alleging an unsafe work environment, failure to provide adequate safety equipment, or failure to pay emergency sick leave or paid family leave. Under D&O policies, bodily injury claims related to sickness, disease or death are excluded.
Underwriters are closely watching claims related to vaccination requirements, i.e., failure to appropriately offer and review medical and religious exemptions, resulting in claims for discrimination and wrongful termination. To date, Centers from Medicare & Medicaid Services (CMS) COVID-related regulations and requirements for healthcare organizations have been recognized in defending healthcare management decisions.
Even though initial underwriter fears have subsided, and the questionnaires have gone away, the pandemic’s effect on the healthcare D&O and EPLI markets is far from over.
As this market looks to recover and move forward, underwriters are watching and already responding to several issues that agents and brokers need to be aware of.
CARES Act Funding Audits
More than $175 billion was appropriated to hospitals and healthcare providers throughout the pandemic thanks to several initiatives passed by Congress and signed into law, including the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, the Paycheck Protection Program and the Healthcare Enhancement Act.
As is the case when providers receive any government funding, the CMS audits healthcare organizations to determine “whether providers that received payment complied with certain Federal requirements, and the terms and conditions for reporting and expending [Provider Relief Fund] funds.” In other words, CMS may begin looking to see if healthcare organizations committed fraud or abuse in their use of COVID relief.
The federal government stepped up its healthcare fraud investigations over the last 10 or so years, and for good reason. According to the National Conference of State Legislatures, fraud and abuse are widespread “in both the public and private health care sectors,” accounting for about 3% to 10% of Medicaid payments.
Of course, outright fraud or abuse is excluded on D&O policies, but D&O coverage typically includes a sublimit for governmental action that picks up defense of such allegations. Underwriters are closely watching how CARES Act audits play out over the next several years and if there’s a rise in allegations of misuse or misapplication of funds that creates additional exposure.
Underwriting Changes and Potential Claims
Other evolving claims trends have cropped up since COVID-19’s early days. As mentioned, healthcare underwriters are monitoring EPLI and D&O litigation over employee safety claims and discrimination or wrongful termination claims related to vaccination mandates.
While there have been some claims or class action lawsuits, the litigation hasn’t impacted rates so far because CMS’s COVID regulation requirements for healthcare organizations have held up in court and mitigated claim outcomes. Most of D&O and EPLI claims filed to date have been dismissed or settled for minimal amounts
Healthcare employee whistleblower claims have been up substantially in the last couple of years, with OSHA reporting nearly 8,900 “pandemic safety related” complaints from when the agency started tracking COVID data in February 2020 through the beginning of 2022.
EPLI policies typically include a carve-back clause that allows coverage for whistleblower or retaliation claims, but the coverage varies from policy to policy.
Agents and brokers should pay close attention to ensure coverage isn’t excluded going forward and negotiate more favorable coverage terms and conditions for their clients.
From a D&O perspective, the pandemic placed a serious financial burden on healthcare entities, particularly because of added staffing costs. Carriers are scrutinizing the financial performance of healthcare organizations and implementing a strict range of underwriting acceptability for financial and operating ratios as a result.
The biggest threat to the healthcare D&O and EPLI markets post-COVID is actually the same as pre-COVID — social inflation. This trend is affecting most commercial lines and is driving higher severity claims and higher insurer losses.
Carriers continue to be conservative in offering policy limits for most risks, resulting in the need to layer coverage for healthcare entities to obtain adequate limits. This layering creates additional challenges to ensure continuity of coverage and eliminate potential gaps in protection.
What Can Agents Do?
It is important for agents to start working with their healthcare clients on policy submissions as early as possible because today’s thorough underwriting process takes more time to complete.
Agents should ensure applications are complete and contain detailed information on the insured as required.submission should include seven to 10 years of loss history on current insurer loss runs. If an organization has experienced large claims, those details should be included along with actions taken to prevent similar incidents from occurring in the future.
Agents should advise their clients to take advantage of the many risk control services offered by carriers, especially in the EPLI arena. Underwriters will recognize if an insured is proactively engaging with them on risk control and will factor that into their policy decisions.
By being aware of the challenges and risk trends, agents can help their clients structure an effective and efficient D&O/EPL program in the post-COVID environment.
WRITTEN BY Judson L. Hobby