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On behalf of the Professional Background Screening Association (thepbsa.org) Nicholas Auletta, President of TruView BSI, LLC recently interviewed Scott Paler, Partner, DeWitt LLP and Michael Burke, Director Background Screening and Technology Insurance, Rooney Insurance Agency, Inc. together to get their insights on one of critical issues for background screening providers. Background screening is a highly litigious area of business and having the right insurance coverage in place will not only help you sleep better at night, but also help protect your business.
The number of lawsuits brought under the Fair Credit Reporting Act (FCRA) was the highest on record at the close of 2019. FCRA litigation increased by 8.7 percent year-over-year, with 4,163 claims filed through October 2019, according to data-tracking firm WebRecon LLC.
According to Good Jobs First, a 22-year old non-profit based in Washington DC focusing on government and corporate accountability over the last decade, employers and background check companies have shelled out more than $325 million to settle related litigation.
Attorney Paler: Mistakes happen. And we all know that screening companies can be sued even when it appears that they did not make any mistake whatsoever. An Errors and Omissions policy provides a critical “backstop” for a screening company. If the policy wording is “right,” it can cover all or nearly all damages, settlement amounts, and attorney fees in an actual or threatened lawsuit. A good E & O policy can mean the difference between continued existence or bankruptcy, or at least the difference between a profitable year and a highly unprofitable year.
Mr. Burke: Error and Omissions, also called Miscellaneous Professional Liability is the most important line of coverage for screening companies. The definition is, “what you do as a Professional Service in return for a fee”. In the screening world, it is where you find coverage for The FCRA and similar State and Local laws. Well written policies will also cover Governmental fines, fee’s, penalties and investigations and give you a bodily injury carve-back for mental anguish and emotional and emotional distress. This policy should be a stand-alone policy and not combined by endorsement in a General Liability Policy.
Attorney Paler: Most insurance agents know little to nothing about the background screening industry. As a result, they typically have no idea what policy language may be useful and favorable to screening companies and what policy language may compromise coverage entirely. Accordingly, we believe it’s important for screening companies to work with agents (like Rooney) that have some familiarity with the screening industry. We also believe it’s worthwhile for screening companies to work closely with their legal counsel on insurance policy language. For most screening companies, the insurance policy is the single most important contract that they have.
Mr. Burke: I agree 100% with Attorney Paler as somewhere around 75-80% of the policies we see are lacking in important coverages. It is not that they are all bad insurance agents but they just do not understand the risks, laws, and government entities involved. I spent 15 years in the CRA world and I take the time to ask the right questions to understand each client’s business and their specific needs. This helps me explain the risk to the underwriters so they provide the right coverage for the best premium.
Attorney Paler: The exclusions (i.e., a description of the types of lawsuits that will not be covered by the insurance policy). Too many Errors & Omissions policies contain exclusions that preclude coverage for the most significant background screening claims. For example, many policies exclude coverage for Fair Credit Reporting Act claims, even though these claims are the most likely type that a screening company will face. Where the exclusions are problematic, a screening company is essentially paying good money for nothing.
Mr. Burke: The exclusions in the policy are items that are not covered and would be the first place to look, but you also need to look at the endorsements. As you are reading these parts, it is imperative that you look at the bold words, as those will have definitions. Insurance Policies are not easy to read so that is why at The Rooney Agency we review every policy we sell. It is also a good idea to run it by your legal counsel for their input.
Attorney Paler: There are a number of them. However, the following tend to concern us the most: (1) FCRA claim exclusion, (2) consumer protection claim exclusion, (3) privacy claim exclusion, (4) federal and state law violation exclusion. These types of exclusions, in particular, signal a lack of meaningful coverage.
Mr. Burke: Definitely excluding the Fair Credit Reporting Act or any similar State or local laws is the big one. In certain case’s it is ok to exclude Consumer Financial Protection Statutes as long as they carve back the FCRA. It is not the carrier’s intent to cover some of the other laws. We have recently seen how important it is to cover investigations, fines, fees, and penalties from the CFPB or the FTC. Most E&O policies completely exclude bodily injury but it crucial to get mental anguish and emotional distress carved back. Excluding privacy claims would also be less than ideal.
Attorney Paler: The professional service description matters because any lawsuit related to activities that fall outside of the professional service description likely will not be covered. For example, if a professional services description indicates that a background screening company will solely perform “pre-employment screening,” then lawsuits related to screening on active employees, prospective tenants, volunteers, and others may not be covered. Aside from the professional services description, we tend to carefully scrutinize the deductible (i.e., how much the insured pays on a claim before coverage kicks in), the limits (i.e. the maximum amount of coverage), the insured’s ability to select its own counsel, and whether attorney fees on a lawsuit will deplete the policy limits.
Mr. Burke: As Attorney Paler mentions the Professional Services definition is especially important and it needs to be broad, not specific but also needs to accurately describe what your business does. In my humble opinion, having the correct Attorney on the case is mission critical. You can have FCRA Attorney’s that are familiar with the fair Credit Reporting Act but they really need to have Background Screening experience. Many carriers will not offer defense outside the limits but our premium policy designed specifically for CRA’s does include this feature. We believe it is very important and gives you a lot more coverage. Lastly, I would say to go through all of the endorsements in the policy.
Attorney Paler: Yes!!! This is the biggest misconception in the industry. Insurance policies are not one-size-fits-all, are not “standard,” and are not “off the shelf.” Often, screening companies can obtain a much better policy by negotiating. And if the insurance company won’t negotiate on issues that really matter, screening companies are well advised to consider other policy options.
Mr. Burke: This depends on many factors and some of the most well-known carriers do not like to write this risk. The first thing they will look at is loss runs. If a company has had several claims or a large claim, it will greatly reduce the ability to negotiate. In addition, it is extremely important that the Agent and or Broker understands the industry so they will know what to ask the carrier to consider. The size of the company is also a factor they will look at and the controls they have in place to avoid litigation.
Attorney Paler: I hate to provide a classic lawyer answer, but I can’t help it. It depends! It depends on the volume of checks that the screening company runs, whether the screening company has a large client base in high risk areas like California and New York, whether the screening company makes reporting judgment calls conservatively or aggressively, and the screening company’s asset portfolio. In general, we like to see coverage limits of at least $2,000,000 on the low end and at least $5,000,000 for medium-large or large screening companies, but the “right” amount of coverage varies.
Mr. Burke: The rule of thumb in the industry is as much as you can comfortably afford. Limits of 2 million and 5 million are probably good for medium sized companies. Once you get to the larger companies with revenues approaching, or in excess of 10 million, we see limits of 7.5 million, 10 million, 15 million and beyond.
Attorney Paler: The deductible is the amount of money that an insured must pay before the insurance company begins footing the bill for a lawsuit. They can vary substantially from policy to policy. We have seen deductibles as low as $1,000 and as high as $150,000. This number matters. For example, if a company has a $75,000, 100,000, or $150,000, they will likely be handling single plaintiff cases without much help from the insurance company. If the deductible is only $1,000, the company may be paying higher premiums than necessary. We tend to prefer a deductible in the $10,000 to $20,000 range for most of our clients.
Mr. Burke: Companies with high claim activity can see deductibles or retentions as high as $150,000 and sometimes we will see a separate deductible for class actions. Ours typically run between $2,500 and $25,000. Most are $2,500 to $10,000.
Attorney Paler: Most policies will state that insureds need to use “panel counsel” (i.e. law firms pre-selected and approved by the insurance company). The problem is that most “panel counsel” know little to nothing about background screening claims, require the screening companies to spend lots of time educating them, and take far too long to cogently assess the value of a case. Smart screening companies are pushing back on the “panel counsel” requirement and either seeking permission to select counsel of their choosing or getting their own counsel pre-approved.
Mr. Burke: It is always best to have “choice of counsel” but for carriers that will not offer choice, which is the vast majority, many will agree to have a specific Attorney endorsed on the policy. We have seen carriers that have good FCRA Attorneys already on their panel such as Attorney Paler.
Attorney Paler: Often, they do not cover emotional distress damages. This is a problem because in many single-plaintiff cases the emotional distress “damages” greatly exceed the amount of lost income or conventional monetary damages. It’s worthwhile for screening companies to seek out an acceptable policy that has some amount of emotional distress damage coverage.
Mr. Burke: We ask for this on every E&O policy we sell to CRA’s. In most cases it is not a problem for us to have it added.
Attorney Paler: Maybe, maybe not. A policy is a form of a contract. If the policy states that it covers ABC parent company but makes no mention of XYZ subsidiary, then the insurance company may retain the ability to say that the policy does not cover a claim involving XYZ subsidiary. If a medium-size or large claim comes in, the insurance company may very well decline coverage. Accordingly, we think it’s important to make sure that the insurance policy identifies all covered entities by name.
Mr. Burke: If the policy is written correctly, it should not be a problem. It is our practice to send out a “Description of Operations” document when we send out the applications to every new client.
Attorney Paler: One situation sticks out the most. A few years ago a screening company found out at the worst possible time not only that it had been sued in an FCRA class action but that its insurance policy excluded coverage for claims based on “federal or state law violations.” The combination of these two problems drove the company out of business. We have been “shouting from the roof tops” for the industry to seek out better insurance coverage ever since.
Mr. Burke: A number of companies have come to us after being denied coverage or fearing they might be. The only time we’ve seen an issue with one of our policies arise was when the plaintiff attorney mistakenly sued the CRA for Bodily Injury (3rd party death claim) when they should have sued alleging FCRA law violations instead. In this particular instance, we were able to find coverage in the General Liability policy that provided for our client’s defense. Had the plaintiff attorney sued correctly, our client’s E & O policy would have responded.
Attorney Paler: Screening companies may wish to consider a variety of options. However, two types of policies are gaining popularity in the industry: (1) data breach/cyber liability policies and (2) employment practices liability policies. We believe both are worthy of consideration.
Mr. Burke: As a base line for smaller companies, I believe at a minimum, E&O, Cyber Liability, and General Liability are an absolute necessity. As the company grows, the next lines would probably be Employment Practices, Crime, Directors and Officers, and Fiduciary if they have a 401 K plan.
Disclaimer: Nothing about this interview should be construed as legal advice. All readers should consult with their own counsel and carefully analyze their own situation before making any insurance-related decision.
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About the Interviewees:
Michael Burke, a 15-year veteran of the background screening industry and FCRA insurance expert.
Rooney Insurance Agency, Inc. has been in business since 1960.
Director – Background Screening and Technology Insurance
Rooney Insurance Agency, Inc.
Chair of the Background Screening Practice Group
Past-Chair of the Employment Relations Practice Group
Attorney & Partner