Get the most from your EPLI dollar: despite the hard market, risk managers can still negotiate favorable language when purchasing employment practices liability insurance. But they need to be creative in their search for solutions. (Liability).

The need for employment practices liability insurance (EPLI) has never been greater, as more employees file more complaints and lawsuits claiming they were sexually harassed, wrongfully terminated, or subjected to race or sex discrimination by their employers. And it's not just individual employees who are complaining. Today, every major employer faces the possibility of getting hit with a class-action lawsuit that could reach into hundreds of millions of dollars.

Not surprisingly, EPLI has gotten much more expensive recently, and insurers have increased minimum retentions and tightened underwriting. While it's a tough situation for insurance buyers, they can take steps to secure the most appropriate coverage at the best price, while working with human resources professionals, attorneys, and insurance brokers to establish effective risk management policies.

The need for EPLI came about as the relationship between the employer and employee grew more adversarial and complex through the passage of laws such as The Civil Rights Act of 1964 (Title VII), The Civil Rights Act of 1991, and the Americans With Disabilities Act, all of which significantly expanded the number of plaintiffs who can sue and the remedies available to them.

Responding to burgeoning employee suits in the 1980 and 1990s, insurers developed and broadened the EPLI policy to its current form. Today, it addresses a plethora of employment-related issues including wrongful termination, sexual harassment, discrimination, retaliation, failure to employ or promote, deprivation of a career opportunity, negligent evaluation, defamation, and wrongful infliction of emotional distress. It covers costs stemming from proceedings (civil, arbitration, regulatory, and administrative), settlement agreements and trials including defense costs and judgments for charges brought by or on behalf of past, present, or prospective employees. If endorsed, the coverage can extend to third-party claims of discrimination or harassment by employees while they are representing the insured company.

The Market Hardens

But this broad coverage has resulted in rising claim payments. Now, changes in the EPLI market are being driven by several factors emerging simultaneously:

* A hardening market in general. Overcapacity, increased competition, pricing pressure, market saturation, and rising claims undermined profitability for many insurance carriers during the 1990s. But the soft market suddenly turned hard, and its effects are being felt throughout the insurance industry. Rising premiums, mergers, acquisitions, and carrier failures, along with more restrictive policies and conditions, impact all insurance buyers. On top of all this came the World Trade Center attack, which dramatically accelerated the hardening of the market.

* Greater risk for insurers. Carriers are well aware of huge class-action awards, such as the recent record-breaking $192.5 discrimination settlement by the Coca Cola Corp. Recently, some of Microsoft's minority employees filed suit, claiming discrimination and seeking $5 billion in damages. The potential for huge payoffs has attracted plaintiffs' attorneys, who are actively recruiting employees to file class-action suits against their employers. But while class actions attract press coverage, individual lawsuits are far more common and can be just as damaging. According to Jury Verdict Research, the median jury award in employment practices cases reached $218,000 in 2000 versus just $93,000 in 1994, with one-fifth of all awards topping $1 million.

Additionally, about 80,000 employees a year file complaints with the U.S. Equal Employment Opportunity Commission. EEOC settlements have risen sharply in the past few years and totaled almost $250 million for the fiscal year that ended in September 2001. Even union members, who have traditionally relied on arbitration agreements, are now filing EEOC claims.

* Recession. The slowing economy is causing mass layoffs at companies ranging from Merrill Lynch and Ford to small high-tech startups. More layoffs translate into more lawsuits, since the majority of employment practices liability suits are for wrongful termination.

* Mounting losses on small policies. Not long ago, a small company could pay a modest premium, say $10,000, for a policy with $1 million limits and a $5,000 deductible. With such deductibles, insurers began seeing high frequency and mounting losses.

Insurers Impose Restrictions

Today, most carriers say they're losing money on EPLI and are taking steps to protect themselves by increasing costs, lowering limits offered, and tightening underwriting. Underwriters are evaluating new and renewal accounts more closely than ever. Buyers now often have to answer more questions about their exposure and may find fewer carriers willing to insure them.

Additionally, buyers typically will be forced to accept higher retentions than in the past. For instance, while insurance policies traditionally have had only one retention, carriers like Chubb have begun imposing higher retentions for classaction suits than for single-party suits. Insurers are also using separate retentions for mass-action suits, which represent a smaller group than in a class action, but are filed by more than one employee. Other carriers are offering higher retentions for claims that arise in North America versus in other less litigious regions. Also, most carriers are now implementing coinsurance clauses that require the insured to share in up to 25 percent of the defense costs, settlements, and judgments. Until recently, there was either no coinsurance clause or a significantly smaller coinsurance clause.

Domestic carriers are generally no longer offering multiyear policies with guaranteed rates. They are choosing to reserve their right to underwrite and reprice their accounts annually as the prices head upward on this line.

Finally, it has become more difficult to obtain coverage extensions on policies.

Finding Creative Solutions

Facing a hard market, risk managers and their brokers need to be creative in their search for solutions.

* Buy catastrophic coverage. The first principle is that most companies should look toward EPLI for catastrophic coverage. Low retentions are no longer available. Most large companies should consider at least a $1 million retention. Any money saved with a larger self-insured retention can go toward buying higher limits. Today, larger employers should consider $25 million as a minimum limit.

* Consider offshore carriers. Bermuda-based carriers often offer better pricing, higher limits, and broader coverage for companies willing take high retentions. Since offshore insurers are geared toward larger accounts, small and medium-sized employers usually must rely on domestic carriers.

* Consider a multiyear program to lock in pricing. When available, a three-year insurance program locks in costs and simplifies program administration. Because the policy doesn't have to be underwritten and renewed annually, the risk manager has more time to work on difficult-to-place exposures that must be renewed annually. The downside is that a three-year policy only provides a single aggregate for three years. That is, instead of having three annual insurance policies with three separate aggregates, the risk has only a single policy with a single aggregate.

But if additional limits are required, the policy can either be canceled during the yearly renewal period or additional limits can be purchased.

* Protect yourself from a fluctuating market. Despite the hard market, risk managers, especially those representing large companies, can still negotiate more favorable policy language. Buyers should also seek key coverage extensions, which may not cost anything. For example, a liberalization clause says that if during the policy year, the employment practices form changes and coverages are broadened, you can opt to use the new wording of the amended policy.

Additionally, a rating change endorsement lets you cancel your policy pro rata without a short-rate cancellation fee if the carrier's financial rating declines. This endorsement can be helpful in protecting the buyer against changes in the insurer's solvency. This endorsement is particularly helpful in a multiyear deal, and has become more important in light of the deteriorating financial health of a number of insurers.

* Remember to insure for punitive damages. Punitive damages wraparound coverage is a key extension for companies doing business nationally because punitive damages--which can be enormous--are uninsurable in 21 states. Domestic carriers include "most favorable venue" language in their policies. But if a case is brought against an insured in a jurisdiction where punitive damages are uninsurable, there is no guarantee that insureds can move to a more favorable venue where punitives are insurable.

Offshore carriers are not subject to U.S. law and offer full punitive damages coverage. The only catch is that using offshore carriers may not be as easy as accessing domestic carriers since you have to select a domestic broker who knows how to access international markets. Also, if insureds want to meet their underwriters, they must plan a trip abroad.

When offshore carriers provide coverages that are uninsurable in the United States, the law does not permit them to conduct business in the United States. Punitive damages wraparound policies typically add 15 percent to 30 percent to your base premium whereas primary offshore policies, which include punitive damages, are often less expensive than domestic policies with "most favorable venue" language.

* Seek key coverage extensions. Despite its name, EPLI can even provide coverage for suits filed by nonemployees who claim sexual harassment or discrimination based upon age, gender, race color, national origin, religion, sexual orientation or preference, or pregnancy. Adding a third-party liability endorsement is a good idea for most companies--and is especially crucial for companies with retail operations.

For example, suppose a customer tries on lingerie at a store and a male employee leers and makes remarks that offend her. If she sues the store for its employee's act of sexual harassment, the endorsement would provide coverage. Vendors and contractors, too, can sue a company, asserting they didn't get contracts because they were discriminated against because of race, sex, religion, etc. Domestic carriers will generally charge up to 25 percent of the base EPLI premium to add this coverage, while offshore carriers generally charge around 15 percent.

* Use loss control. No matter what kind of EPLI coverage you're buying, you'll be in a much better position if you have a proactive loss control program in place and communicate your policies to your employees. Sensitivity training, legal audits, diversity counselors, and access to lawyers who are expert in handling employee terminations can all help reduce your risk. Insurers recognize the effectiveness of these programs and often give credits to companies that have adopted them. You can garner these services either from you carrier or your broker.

The effort will pay off because employment practices liability insurance has become as critical an insurance as any in protecting your company's assets. There are no perfect solutions to the hard EPLI market, but persistence and creativity will produce strategies that work.

Jacqueline Forster is vice president with E.G. Bowman Company Inc., a full-service commercial lines brokerage and risk-management firm in New York, and a leading writer of EPLI. She oversees the company's employment practices liability program and can be reached at [e-mail].