Working up a suit: as more people sue the company they work for, employment practices liability insurance is becoming standard coverage.

Key Points

* From 1999 through 2003, more than 403,000 charges were filed by employees under all statutes with the Equal Employment Opportunity Commission.

* The median compensatory jury award for employment practices liability cases rose 18% in 2003 to $250,000.

* About 75% of employee-generated claims are proven groundless, but they are expensive to defend.

The Plaza Hotel in New York is the object of a racial discrimination lawsuit brought by 10 Muslim workers. Warehouse club chain Costco faces a class-action suit accusing it of discriminating against women for store manager promotions. And Wal-Mart, the nation's largest retailer, is appealing a judge's ruling giving class-action status to a sex discrimination lawsuit involving 1.6 million current and former employees, making it the largest suit of its kind in U.S. history.

These high profile cases highlight a national trend: employee-generated lawsuits are increasing as workers accuse employers of misdeeds ranging from sexual harassment or wrongful termination to discrimination based on color, race, sex, religion, national origin, disability and age. From 1999 through 2003, more than 403,000 charges were filed under all statutes with the Equal Employment Opportunity Commission; claimants were awarded $1.2 billion. And that doesn't include complaints and awards filed in corresponding state agencies, or filed directly in state and federal courts. Nationwide, the median compensatory jury award for employment practices liability cases rose 18% in 2003 to $250,000, according to Jury Verdict Research, whose national database contains more than 239,000 plaintiff and defense verdicts, as well as settlements of personal injury claims.

The numbers could go even higher. A Chubb survey in May 2004 found that one in four privately held companies has been sued by an employee or former employee in recent years. Nearly half the firms also said it was likely they would see an employee lawsuit in 2004.

Although an estimated 75% of these claims are proven groundless, the cost to defend is significant. That's where employment practices liability insurance can help. "We're seeing EPL becoming a standard coverage that many companies--public or private, large or small--are feeling they have to have" because of the litigation picture, said Carrie Brodzinski, vice president, executive liability, St. Paul Travelers Bond.

Examining the Market

Brodzinski said the litigious climate coupled with market forces have pushed up prices for EPLI coverage. But Ann M. Longmore, EPL, product leader and senior vice president, Willis Executive Risks Practice, North America, sees prices stabilizing for most EPLI purchasers. She partly credits this to the additional capacity supplied by new players, notably Bermuda-based Max Re, that have recently entered the market.

Pricing an EPLI policy is unique to the individual risk, Brodzinski said. "You start off by looking at the number of employees because that's the universe of people who could sue you," she said. "Then, we take a look at their policies and procedures." St. Paul Travelers will check to see if the company's policies are proactive in telling employees how to handle such issues as sexual harassment complaints. Companies that have good policies and procedures in place, as well as a good claims history and solid financial footing are likely to obtain a better premium, Brodzinski said.

However, companies that don't have adequate policies and procedures in place or may be considering a downsizing may not see the same type of premium because their risk is perceived as higher, she said.

The larger the company, the greater the number of employees and the greater the potential for class-action litigation, Brodzinski said. "Also the brand issue becomes a far more important factor in a potential lawsuit" whether it's employment practices liability, directors and officers, or anything else, she said. "When you're a well-recognized, large company with a brand name at stake, this type of litigation is something that can be really damaging."

EPLI underwriters also take note when companies are undergoing a major transformation such as a merger, Longmore said. "If the company has announced it's going to do massive layoffs in North America, then the carrier would ask a slew of questions," she said. "But there would be no decreases going on. It would be a matter of trying to manage any increases or other limiting terms and conditions."

Major carriers now include separate questionnaires for downsizing and third-party coverage, Longmore said. "They're becoming more reluctant to actually provide that coverage," she said.

That's why she and colleagues have tangled with insurers during the past year, as Willis sought to maintain the third-party coverage it had obtained earlier for policyholders. "We have been largely successful, but that's because we've been creative in trying to respond to the carriers' concerns as well as challenging them for real-life examples of serious amounts that have been paid in that area," Longmore said.

As a broker, Longmore now has to pull more information out of her EPLI clients. In addition to requiring the completed questionnaires, carriers also may want to question the clients directly. "If they get an answer that strikes them as a bit odd, the carrier wants to follow up on it, and we have to make sure that the individuals are prepared," she said.

More to Come

Marjorie Young, vice president of broker E.G. Bowman Co. Inc., New York, thinks that a great many EPL claims are still in the Equal Employment Opportunity Commission pipeline. As more employee complaints and litigation come to light, she expects to see increases in pricing. While she has detected little change in underwriting requirements, she has seen the imposition of higher deductibles on EPLI policies. "The insurance companies are really hedging it in their favor not to get into what they consider low-level claims," Young said. "But what they consider low level and what the insured considers low level are always two different things?

Kate Armfield, co-chair of the RiskProNet management liability practice and principal of Armfield, Harrison & Thomas Inc., with offices in Virginia and Washington, D.C., finds that public and private companies differ in their need for EPL coverage.

On the private side, the market is softening, Armfield said. One benefit is that more of her firm's private clients are purchasing management liability, which typically includes directors and officers, employment practices liability and fiduciary liability in one policy, she said.

It used to be that D&O exposure was the overriding concern in buying management liability, but now the driver is often employment practices liability, Armfield said. "That's where they're seeing their claims; that's where they have identified that they really have the most exposure," she said.

Typically, public companies do not buy D&O in conjunction with a broad EPLI policy, so EPLI policies have to be purchased separately. "Usually, they purchase what we would call a monoline employment practices liability policy," Armfield said.

Public companies tend to have more employees so their EPLI deductible would be higher, she added. "Truth be told, if you're a public company or a private company, you have employees and your exposure is really the same," Armfield said. "Perhaps you might have a larger exposure to some kind of class-action situation if you're a large public company with a lot of employees. But that day-to-day wrongful termination, sexual harassment, failure to promote, that sort of thing, it's not too terribly different from private to public."

Jeffrey C. O'Shaughnessy, assistant vice president of Hartford Steam Boiler Inspection and Insurance Co., which recently began offering EPL coverage, worked as an EPLI under-writer for primary companies for eight years. He said it was sometimes difficult then to sell a $1 million policy to an employer with 1,000 employees. Today, it seems that EPLI remains a hard sell to small businesses, O'Shaughnessy said. But contacts with employment attorneys have taught him that employment practices liability lawsuits can be brutal. A $40,000 or $50,000 loss can put any small-business owner out of business, he noted.

Still, some businesses tend to refuse this coverage because they're fighting for every dollar of income, Young said. "If they think they can get away with not purchasing insurance, they generally try to do that," she said. "They're probably the first ones to make an EPL mistake."

Young of E.G. Bowman said she still hears of many "imprudent comments being made and stupid moves carried out in hiring and dismissal practices" that could come back to haunt companies if employees and former employees decide to take action. "The things that people get fired for may have nothing to do with the work that they are supposed to be doing," Young said. "All you need is one serious person, especially in an economy when finding a replacement job may be difficult."

The EPLI market is seeing more wrongful termination claims these days, especially based on age, said Phil Marsh, co-chair of the RiskProNet management liability practice and senior vice president of Wick Pilcher Insurance Inc., Phoenix. Also, more wage and hour claims are arising under provisions of the Fair Labor Standards Act, he said. Insurers have amended forms to exclude claims if companies fail to pay overtime, and it's difficult to find that coverage, Marsh said. "I'm aware of one carrier providing some coverage, but only for defense costs," Marsh said. "Most insurers are excluding that because it's too hard to monitor." Many carriers offering broader coverage are requiring policyholders to choose from a select list of employment attorneys, he added.

A Look Ahead

Longmore finds it more challenging to place EPLI these days because carriers are slicing and dicing the numbers to analyze the risk and determine what locales are better breeding grounds for litigation. "If our client falls into the more challenging profile, we really have to work quite hard to find offsetting characteristics, hoping that they actually exist," she said.

When EPL insurance appeared more than a decade ago, it was very restrictive, "horribly expensive" and few companies were buying it, Armfield said. "People are much more aware of the coverage than they were 10 years ago," she said. "Now everybody's talking about it and everybody sees the value. Here we are today and it's a lot less expensive with a lot broader coverage."

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Chubb Group of Insurance Cos. A.M. Best Company # 00012

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Hartford Steam Boiler Inspection and Insurance Co. A.M. Best Company # 00465

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