EPLI squeeze higher costs, lesser coverage: employment practices liability coverage is becoming scarcer and more costly, so risk managers may need to shop around and identify potential gaps. (Insurance).

Like many insurance markets, the employment practices liability insurance (EPLI) marketplace is getting tougher. Companies are seeing increasing rates and retentions, declining availability of limits and tighter policy terms and conditions -- all of which can take a bite out of profits.

That's significant, because in just a few decades, EPLI -- which generally covers employers for worker-generated actions over issues such as harassment or age discrimination -- has evolved from a relatively unknown product to an essential component of a company's insurance portfolio, reflecting the growing impact of employment practices litigation on corporate America's bottom line.

As one consultant observes: "Even the suggestion of legal action can immediately create risk for a company. The EPLI exposure and response is now a problem every company CFO has to deal with. They need to keep this on their radar screen."

And insurers are getting increasingly skittish. "Many EPLI carriers are dissatisfied with loss results. They are entering and leaving markets based on a perceived lack of success," says Pam Ritz, president of Austin, Texas-based Specialty Risk Management. Ritz identified a number of trends driving changes in the EPU marketplace.

Specifically, she pointed to emerging exposures, including a significant rise in the numbers of "retaliation" claims, which are now rivaling discrimination and sexual harassment allegations. EPLI carriers, she continued, are also making concerted efforts to avoid states where they perceive tort reforms are lacking.

Moreover, she notes, about 55 percent of employers lose EPLI lawsuits -- a trend that is understandably unsettling to many carriers. The result: EPLI insurance is becoming decidedly more difficult to acquire, particularly by employers in industries with historically high EPLI claims activities, or that are located in venues deemed by carriers as being favorable to plaintiffs.

Among the carriers mentioned as active in the area: Ace, Chubb, CNA, St. Paul, Travelers, Zurich, XL, Swiss Re, Fireman's Fund, Great American, Hartford, Kemper, Lloyd's, Zurich and two subsidiaries of AIG, Lexington and National Union.

Ritz adds that only a few years ago, EPLI coverage was often -- and relatively easily -- obtained through purchase of a combined liability product; now, however, those opportunities are diminishing. Risk managers, she notes, will not only have to shop the coverage separately, but will be held to stricter underwriting criteria during the application process.

Richard S. Betterley, president of Sterling, Mass.-based Betterley Risk Consultants, agrees that weak EPLI returns are a key factor in driving current marketplace changes. "Most carriers report plans to increase rates and, in particular, retentions. This is a result of general unprofitability in the line, particularly frequency, as well as an insurance environment that is more willing to charge higher rates," he says.

Betterley, who is also publisher of the annual Employment Practices Liability Insurance Market Survey, noted in the 2002 report that larger employer EPLI carriers anticipate their competitors will raise rates as much as 50 to 100 percent or more.

"Insureds have had more covered claims than expected. While there have been some noteworthy major losses for larger employers, the continuing frequency of relatively smaller claims -- and the increasing cost of defense -- can drain carrier's profitability," Betterley adds.

In fact, Betterley reports, a number of carriers focusing on large employers plan to hike their minimum retentions fully 100 percent, and expect that competitors will do the same. With retentions for Fortune 250 companies previously averaging $500,000 per EPLI claim, an increase to $1 million per claim "potentially places most, if not all of a company's EPLI claims on their books -- going directly to a company's expenses," Betterley says. Likewise, the growing tendency of EPLI carriers to require co-insurance ranging from 10 to 25 percent is racking up higher corporate costs.

Actions by many EPLI carriers to sharply reduce available limits have likewise increased companies' potential financial exposure. This has been prompted by a number of trends, including high jury awards and the increasing cost of securing additional reinsurance protection, Betterley says. Available limits have been reduced in some instances by carriers from as much as $100 million to $25 million and $50 million to $25 million.

As a result, corporate risk managers are likely to have to arrange excess insurance. While the EPLI carrier may arrange reinsurance to help secure higher limits, the more likely scenario is that corporate risk managers will end up shopping the EPLI marketplace for added coverage. The result: a climate ripe for unaddressed and potentially costly coverage gaps and logistical problems arising from dealing with multiple carriers.

Experts point out other troubling trends. "EPLI underwriters are looking much more closely at [a company's] past claims history. If a company has had any claims, even minor, it is becoming very hard and very expensive to obtain coverage," notes Rachel McKinney, president of Rachel McKinney Insurance Services, a Los Angeles-based consulting company.

Additionally, McKinney notes the harsh reality of the legal environment. Just a few years ago, the average sexual harassment charge could be settled out of court for $25,000 to $50,000; today, that same case would rarely be settled for less than six figures, she says. And even a $1 jury award can easily generate defense expenses exceeding $200,000.

McKinney also cites a significant change to EPLI policy forms that could signal problems to the insured. Specifically, many insurers have switched from a strictly "claims made" form to a "claims made and reported" form. This latter form enables the carrier to deny a claim reported after the policy period or extension, without having to show any prejudice.

The growth of high-volume and often highly publicized employment practices litigation also represents an "increasingly common type of corporate crisis," according to Gerald L. Mattman Jr., a partner at Seyfarth Shaw, Chicago, and Steven J. Lewengrub, assistant general counsel at Spherion Corp. in Fort Lauderdale, Fla. In a recent report, they write:

"Allegations of discrimination in EPL litigation may hamper a corporation's ability to function and impact its market share and bottom line, thereby invariably undermining its most valued asset -- the corporation's reputation... and even the successful defense of the class action involves staggering costs."

Mattman also notes that employees, aided by the Internet, are becoming much more knowledgeable about their legal options. It is not rare, he adds, to see mass actions that attract plaintiffs from different corporate offices in many regions, alleging that company-wide policies and procedures impacted employees like themselves. Whether or not a company decides to settle or to take its chances in court, a serious financial exposure exists.

These days, experts advise, companies must be even more diligent when evaluating EPLI coverage options to ensure that the maximum protection exists and that potential coverage gaps have been addressed. Additionally, experts stress the importance of retaining an attorney knowledgable in employment practices law. Strict enforcement and ongoing reevaluation of company-wide employment practices standards can also go a long way towards reducing EPLI exposure, while strengthening a company's defense should an allegation eventually become a lawsuit.

Factors Causing EPLI Scarcity

* Higher number of smaller claims

* More retaliation claims

* Higher jury awards

* Higher legal costs

* Veneus deemed sympathetic to plaintiffs

* Rising cost of reinsurance

Barbara A. Morris is a freelance writer in Oakland, N.J., specializing in insurance and risk management subjects. She can be reached at [e-mail].