Hidden danger: unacceptable, even criminal employee behavior hurts co-workers, businesses--and insurers.

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Starting in 1987, Charles Cullen worked as a nurse at numerous New Jersey and Pennsylvania until his arrest in December 2003. Ultimately he pleaded guilty to murdering 29 patients by administering stolen medications or turning off their ventilators. Though he was fired from, or forced out of, at least six of the hospitals for a variety of improper actions, including stealing drugs, he was always able to get new jobs at other hospitals, according to published reports.

This past February, five hospitals reached a confidential settlement of four-year-old wrongful-death lawsuits brought by the families of 22 of Cullen's victims. (Lawsuits brought by other families continue.) In late 2007, a N.J. Superior Court judge found that the hospitals opened themselves up to civil liability by not reporting Cullen's improper conduct to authorities. In the settlement, the hospitals did not admit wrongdoing. Cullen, meanwhile, is serving a life sentence at New Jersey State Prison in Trenton.

The Cullen case stands out as an egregious example of the liabilities employers face when they fail to identify and/or respond to unacceptable employee behavior, a growing risk for employers of all kinds.

"I'm not sure there are higher incidences or whether people are becoming more in tune and sensitive to the conduct of people that has been allowed to happen that was not acceptable all along, but people are finally saying that it's not going to be allowed to continue," said Heather Boshak, an attorney with the law firm Fox Rothschild LLP in Roseland, N.J. She represents management in employment and labor matters.

Employers have legal obligations to provide a safe workplace environment and to prevent discrimination and harassment of all kinds. The Occupational Safety and Health Administration and the Equal Employment Opportunity Commission have jurisdiction in many of these areas.

But, Boshak said, employers need to be attentive to workplace problems "above and beyond" statutory responsibilities to ensure that employees are not subjected to inappropriate and unacceptable behaviors.

Employee Damage

As the Cullen case illustrates, there is financial jeopardy for employers that fail to prevent and stop such behavior. Aside from the costs of lawsuits and settlements, employers who fail to address behavioral problems are likely to experience higher turnover, higher absenteeism and lower productivity. They also can feel the pain of damage to service quality, reputation and the bottom line.

Common problematic employee behaviors include sexual harassment, verbal or physical bullying, sabotage of company resources and shootings or other forms of lethal violence. And insurance companies that have failed to provide risk management services may find themselves paying claims. That's especially true when insuring smaller companies that haven't yet been hit with a lawsuit, Boshak said.

"Midsize or smaller companies don't always see the value of investing [in risk management] up front," she said. "That's where an insurance company can come in and really have an influence." Agents and brokers can play a big role, too, she said.

Sometimes employee matters may fall into a gray area. One is the kind of information employers should provide when asked for references on former employees.

"Employers in general have resorted to name, rank and serial number in references because they don't want to get hit with defamation lawsuits," said Boshak.

That stance, by employers in the Cullen case, led to New Jersey's Healthcare Professional Responsibility and Reporting Enhancement Act, which Boshak said requires certain people in health care to provide information when a reference is requested. The act also provides protection from liability for providing damaging information about a former employee, so long as it's done in good faith and without malicious intent, she said. But the legislation does not apply broadly to all kinds of employers, she said.

One clear lesson from the Cullen case. however, is that every employer should perform due diligence in checking the backgrounds of people seeking employment.

"That's what's been potentially cited as a problem in Cullen--that people didn't necessarily look deeply enough into his background," said Boshak. "That's where an employer can wind up in trouble."

The determination of liability then becomes a matter or foreseeability--of whether an employer had reason to believe that the new employee could cause problems.

"If you could show you did a thorough background check and kept all of that documentation, even if someone didn't return your calls, you're in a better position to argue that something was not foreseeable ... just something you could not ever imagine would have happened," she said.

Managing the Risks

Employers can take steps to manage the risks of inappropriate employee behavior. Large companies--those with at least 10,000 employees--have the resources to create specific corporate policies and practices written by senior management, directors and officers, said Ellis Wilkerson, an account executive at E.G. Bowman, a New York-based risk management consulting firm.

Human resources departments also should be involved in creating these guidelines and should maintain comprehensive employee files, he said. E.G. Bowman offers complimentary loss-control services to help clients look at an organization's entire employee-risk profile, Wilkerson said. And, of course, companies at least should have employment practices liability insurance.

Wilkerson also recommended an executive-protection umbrella package that would cover the entire employment-liability tort area: directors and officers; fiduciary liability; miscellaneous professional liability; crime, kidnap ransom and extortion; and workplace violence expense.

The latter may prompt a broker and/or insurer to ask questions about whether the insured is contemplating layoffs, firings, staff reductions or facility closings, and whether the company is associated with any unstable or potentially violent people, Wilkerson said.

Employers should be especially on the lookout for negative employee behavior during economic downturns, said Wilkerson. Historically, employers can expect to see more EPL-types of claims if employees suspect they may lose their jobs and have to face personal financial hardship. But very often such employees will instead file workers' compensation claims.

"It allows for a quicker payout for employees," he said. "On the EPL side, the payout to employees is not immediate. It's a long-tail item. In order for an employee to collect for sexual harassment or some type of wrongful termination, there are lawsuits involved, you have to hire an attorney, and there are periods involved with time in court."

Since they are in the risk business, insurers may be better able to handle the problems their own employees might create. One advantage is the enterprise risk management programs that rating agencies and regulators are pushing insurers to implement, said Howard Mills, chief adviser of the Insurance Industry Group at Deloitte Services LP.

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"An ERM program would hopefully include the type of risk that an unstable, destructive employee would pose," Mills said.

These risks aren't insignificant for insurers, he said. An incompetent employee writing some bad business could lead to major exposure, for example. Risks can be very high in the distribution channel. Inappropriate sales of complex life insurance or annuity products to senior citizens can become "politically sensitive," he said. Aside from penalties, these sales also can harm the firm's reputation.

Information technology is another area that calls for special attention because bad-apple employees can do considerable damage to highly sensitive information, Mills said.

Insurers also may face special risks from the pool of prospects from which they may hire. Mills said the industry faces a talent crisis, a lack of people with the skills and training to do things that are critical to the support of the business. Add to that the sense that young people don't see insurance as a glamorous career path; and that the insurance work force is aging, he said.

One solution that insurers find intriguing: the prospect of going after more experienced, older employees, perhaps even retirees. Many may have retired at an early age with a good retirement plan in place and may miss the world of work.

"If you go with an older employee with years in the work force, skills and a great work ethic, you're presumably avoiding that unstable employee," he said.

According to Boshak, both employers and insurers are paying more attention to the risks of employee misconduct. But, she said, insurers should push the issue more by becoming more involved in assessing these risks during underwriting, and determining if an employer has effective internal policies.

"And to say that for us to insure you, we need you to implement this," she said. "Insurance companies can play a big role, especially with smaller companies that haven't been hit with a lawsuit yet."

Wilkerson said that the insurance industry's ability to offer clients EPL loss limits in the hundreds of millions of dollars is evidence that the principles of risk management are well understood.

Added Mills: "The insurance industry is known for leading the way in risk management."

* The Issue: Aggressive or unstable employees present an ever-growing threat to businesses, workers and insurers.

* The Significance: Smaller companies are less likely to have addressed employee risks, particularly if they haven't yet been adversely affected.

* What's Next: Commercial insurers, using their risk management expertise, can help employers identify bad-apple workers before trouble strikes.

Mitigating Inappropriate Employee Behavior

Create and update corporate policies and practices on employment practices liability to serve as a guidebook for the entire organization.

Involve both management and human resources in creating these policies.

Maintain comprehensive employee files. Include performance evaluations, promotions, raises, incidents, and frequency and severity of unusual emotional states. Work with brokers or insurers on risk management.

Provide training to managers and human-resource employees on interpersonal relationships, better communication and conflict resolution.

If a complaint is filed, treat it respectfully and investigate it.

Follow up with the person who made the complaint. Employees unaware that their complaints have been addressed may assume nothing has been done and may file lawsuits.

Limit access to computer files to those needed by employees to do their jobs. This can limit the. chances that an angry or fired employee will try to destroy data.

Do not embarrass employees when terminating them, such as having security guards escort them out of the building in the middle of a work day in front of their colleagues.

Sources: Ellis Wilkerson, E.G. Bowman; Heather Boshak, Fox Rothschild LLP

Watch Out for Bullying

Bullying is defined as reported mistreatment showing up as verbal abuse, threatening, humiliating or intimidating conduct or sabotage that interferes with work, or some combination of the three.

37% of workers have been bullied Bullying is four times more prevalent than illegal harassment

62% of employers ignore the problem

Bullying can cost employers because of:

* Absenteeism/lost productivity

* Workers' compensation claims

* Disability insurance claims

* Difficult recruitment and retention

Bullying Report

Only 3% of bullying victims sue.

Did Not Tell                  40%
Informal Internal Complaint   38%
Formal Internal               15%
Formal EEO Complaint           4%
Lawsuit                        3%

Source: Workplace Bullying Institute

Note: Table made from pie chart.

Charges Filed with EEOC, 1992-2006

The number of filings tends to correlate with economic downturns.
(Thousands)

1992   72.3
1993   78.9
1994   91.2
1995   87.5
1996   78.0
1997   80.7
1998   79.6
1999   77.4
2000   79.9
2001   80.8
2002   84.4
2003   81.3
2004   79.4
2005   75.4
2006   75.8

Source: Equal Employment Opportunity Commission

Note: Table made from line graph.