For smaller companies, captives usually cover “stochastic” risks. These are infrequent events that are more expensive than the average claim. Employment lawsuits are a good example, as shown by several studies.

U.S.-based small and medium sized businesses face an almost 12% chance that they it will be hit with an employment claim, with their chances much higher in certain states.

A new study of employee charge trends by specialty insurer Hiscox found New Mexico, Washington, D.C., Nevada, Alabama and California as the top states for employee lawsuit risk in the U.S. Employers in these markets with at least 10 employees face a substantially higher risk of being sued by their employees when compared to the national average.

According to the study, U.S.-based companies have at least an 11.7% chance of having an employment charge filed against them.

Not only are these events more common then you’d like, they’re also expensive.

Hiscox claims data for small and mid-sized businesses (under 500 employees) indicate that one in five will face employment charges with an average cost to defend of $125,000, which includes expenses such as attorney’s fees and settlement costs. For those that did have insurance coverage, the average deductible cost was only $35,000, compared to the $90,000 balance paid out by their insurance company.

The median judgment for cases that go to trial is approximately $200,000 for employment lawsuits adjudicated by the courts, while one-in-four cases resulted in a judgment of $500,000 or more, according to the study.

These figures are confirmed for by other sources:

A representative study of 446 closed claims reported by small- to medium-sized enterprises (SMEs) with fewer than 500 employees showed that 19% of employment charges resulted in defense and settlement costs averaging a total of $125,000. On average, those matters took 275 days to resolve.

Due to the unpredictability of costs and fairly high claims history, this is a perfect coverage for a captive insurer.