New protection against: employee action suits.

Employees have new legal weapons these days requiring new types of insurance

As a result of the Civil Rights Act of 1991, employers' liabilities in regard to employees have sharply increased. The act provides new categories of damages, including punitive and compensatory, and enlarges the fight of jury trial to include any aggrieved person in a protected class -- which means just about everybody. What's more, juries have historically tended to be more generous than judges in awarding damages.

This is of particular relevance to health care enterprises such as nursing homes. With their generally high rate of employee turnover, diverse ethnic mix of workers, and often less rigidly structured management, nursing homes are particularly vulnerable to employment practices claims, such as wrongful termination or sexual harassment. The cost to an employer of litigating these suits can be upwards of $100,000, and expanded liability combined with the "jackpot" of potentially greater awards has increased the incentive for attorneys to accept such cases.

These factors have contributed to the development of a new form of insurance called employment practices liability insurance (EPLI). It is designed specifically to address the needs of employers facing financial exposure from employment-practices claims. Many employers, though, continue to rely on their traditional insurance programs to protect them. The key question nursing home operators need to ask themselves is, "Do my existing insurance policies provide adequate coverage against employment-practices claims?" You must be able to answer with absolute certainty, "Yes."

Beyond this, however, you must choose among the types of insurance policies available.

Commercial General Liability Insurance

CGL policies typically provide coverage for damages arising from bodily injury, property damage, and personal injury. The Civil Rights Act of 1991's introduction of compensatory damages as an additional remedy in employment litigation raises the question of whether such an award of damages to a plaintiff worker is covered under an employer's CGL policy. The answer hinges in some degree on whether or not the damages being sought satisfy the policy's definitions for bodily injury, property damage, or personal injury.

For example, while most CGL policies include emotional distress within their definition of bodily injury, the majority of state courts have ruled that emotional distress without physical cause or injury is not covered under a CGL policy. Thus an employment-related award for purely emotional distress probably would fall outside CGL coverage.

Moreover, it is the rare employment liability case that would present a claim involving physical injury without assault and battery being involved. And, in those circumstances, the CGL policy again would not apply because criminal acts are excluded from coverage.

CGL policies commonly define personal injury as any of a series of specifically identified offenses: e.g. libel, slander, or defamation; false arrest, detention, or imprisonment; malicious prosecution; and wrongful entry or eviction or other invasions of the private rights of occupancy. Because CGL insurance policy forms introduced between 1986 and 1988 removed the term "discrimination" from the enumerated list of covered offenses, there are few employment-related suits that will find coverage under the personal injury section of a CGL policy.

If an insured party seeks to invoke coverage under a CGL policy in an employment liability case, several additional hurdles must be overcome. In most instances, the employment claim will arise from intentional conduct by an individual--the employer or employer's representative--in hiring, firing, promoting, failing to promote, or sexually harassing someone. It is critical to understand, therefore, that CGL policies exclude claims arising from intentional conduct, and some courts have held that certain conduct is always intentional, even if the plaintiff has not alleged that it was.

CGL policies usually contain an exclusion for claims involving bodily injury to an employee when the injury in question is sustained in the course of the worker's employment.

Perhaps the biggest obstacle to finding coverage under the CGL policy is the increasing use by insurance companies of employment practices liability exclusions. These are written expressly to exclude coverage for employment-related claims.

Workers Compensation Insurance

A WC policy may provide some limited coverage in a suit where employment liability is involved, but the operative word here is limited. For instance, an employee's claim of emotional distress may be compensable under a WC policy, but only at the state's prescribed weekly benefit rate. WC coverage rarely replaces the employee's full salary and other benefits, and it will not cover the additional, compensatory damages now permitted under federal law. Nor will WC benefits pay the economic damages we touched on in our discussion of CGL insurance, since neither property damage nor personal injury is covered under either the worker's compensation or the employer's liability portions of the WC policy.

A particular hazard facing the employer who relies on WC protection is that most state laws provide that WC is not the sole remedy if an employee alleges that he or she is a victim of intentional conduct. Typically, employees who charge intentional conduct can proceed with both a worker's compensation claim and a separate liability lawsuit against the employer.

Directors and Officers Liability Insurance

D&O policies provide coverage for some portions of employment liability lawsuits, but it is rare that an employment practices claim is paid under a D&O policy. Why? Because D&O protects only a corporation's directors and officers and not the corporation itself unless that corporation is a not-for-profit entity. In most employment-related suits, the corporation is included as a named defendant. Indeed, it may be the only defendant named. In other cases, the plaintiff may sue employees of the corporation who are neither directors nor officers, and therefore not insured under the D&O policy.

When the corporation itself is not insured under the D&O policy, the insurance carrier will require that payment of both the expense of defense and any settlement or judgment be allocated among the insured and uninsured defendants. Moreover, since a corporation almost always indemnifies directors and officers for whatever payments they have to make, a larger deductible or self-insured retention kicks in and is applied solely to the insured directors' or officers' share of the allocated defense expense and settlement/judgement.

In most instances, employment practices lawsuits are resolved for an amount below the point at which the D&O policy would make any contribution. The corporation is then left on the hook to satisfy whatever financial remedies are imposed.

Employment Practices Liability Insurance

EPLI has been developed specifically to fill the gaps in coverage of traditional business insurance when it comes to employment-related claims. It has evolved to cover claims arising out of wrongful employment termination, sexual harassment, and discrimination.

Many, if not most, employers, and that includes nursing homes. have not purchased EPLI -- often because they perceive it as too pricey. The premium for a policy with a million dollar limit and $10,000 deductible per case can run anywhere from $15,000 to $50,000. depending on size of the company. Also there is a commonly held belief that claims don't happen very often, and that if they do, they won't be very large. This stems from the fact that many areas of the country have yet to feel the full affect of the changing legal climate regarding employment law. On top of that many believe that Equal Employment Opportunity Commission (EEOC) actions are all they have to worry about. When you win, EEOC actions can be relatively innocuous.

TABLE 1

Compensatory Awards for Wrongful Termination (Percent of Total)

Up to $9,999                         5%
$10,000 - $24,999                    9%
$25,000 - $99,999                   23%
$100,000 - $249,999                 24%
$250,000 - $499,999                 23%
$500,000 and Greater                11%

To get an even better picture of the liability, let's take a look at the size
of loss based on the type of claim as reported in that same study.

Work-Related Sexual Discrimination Including Sexual Harassment

Midpoint Verdict                    $59,835
Probability Range                   $67,000 - $200,000
Verdict Range                       $1 - $15,000,000
Average Verdict                     $501,622

Age Discrimination

Midpoint Verdict                    $145,620
Probability Range                   $62,000 - $250,000
Verdict Range                       $1,500 - $1,803,547
Average Verdict                     $358,956

Wrongful Termination - General

Midpoint Verdict                    $100,000
Probability Range                   $30,300 - $304,934
Verdict Range                       $1 - $46,402,891
Average Verdict                     $532,016

Wrongful Termination Based on Age Discrimination

Midpoint Verdict                    $200,000
Probability Range                   $62,000 - $250,000
Verdict Range                       $1,500  $1,500,000
Average Verdict                     $270,665

[Midpoint is the median value and provides the most accurate gauge of a
"normal" claim. Probability Range identifies the middle 50 percent of all
verdicts (plus or minus 25 percent from the midpoint). Verdict Range is the
smallest and largest claim awarded. Average Verdict is the numerical
average.]

Lawsuits, though, with their far higher defense costs, are another matter. The last thing an employer wants to do is end up in court.

Data compiled in California (often an early indicator of trends) for a recent five-year period indicates that employers lose over 70% of the time when an employment practices case goes before a jury. This has become a critical point, with the Civil Rights Act of 1991 allowing jury trials for all employment cases.

How large can losses be to employers? A nationwide study done by the Jury Verdict Research Series produced the estimates shown in Table 1, based on verdicts in 1992.

These figures do not include expenses or punitive damages amounts. In many cases the legal cost for this type of litigation can exceed the amount of the compensatory damages.

It's clear, in sum, that nursing homes and other employers are faced with an increasingly volatile legal climate when it comes to employment practices claims. The high cost of defense against lawsuits and the size of loss resulting from an unfavorable verdict are taking nursing home operators past the "sticker shock" of EPLI price to the realization that this insurance is fast becoming a necessary business expense.

David D. King, MBA, CPCU (Chartered Property Casualty Underwriter), ARM (Associate in Risk Management), is a Managing Partner at Westport Reinsurance Management. Previously he was Vice President at Reliance National in the Excess & Surplus Lines Division. There he developed the EPLI product, alternative workers compensation products and other non-traditional programs.