Employment Practices: EPLI Providers Turn Up the Heat

By Michael Barrier May 1, 2002

HR Magazine, May 2002 As employment practices liability insurance premiums skyrocket, HR's risk-management role becomes more important.

Going without it is like “not buying fire insurance when you own a house,” the insurance executive says. “Your chances are very good you’ll never have a fire, but boy, are you going to be upset if you do.” That executive, Phil Norton of Arthur J. Gallagher & Co., a major brokerage based in Itasca, Ill., is talking about employment practices liability insurance (EPLI)—a form of coverage virtually unknown 10 years ago but increasingly vital to businesses of all sizes for protection against costly employment lawsuits.

Over the past decade, EPLI has become increasingly expensive for companies to carry—spurring the need for HR to help reduce the employment practices risks that EPLI covers.

While you would expect an insurance executive such as Norton to make statements promoting a product he sells, he does have data to support his claim. Jury awards started to skyrocket in the mid-1990s and haven’t fallen back down to earth, even as the number of employment-related claims before the Equal Employment Opportunity Commission (EEOC) has hovered at 80,000 a year since then. According to Jury Verdict Research in Horsham, Pa., the median compensatory jury award in an employment-practices case shot up from $151,000 in 1999 to $218,000 in 2000.

Jeffrey M. Tanenbaum, an attorney with the national employment law firm Littler Mendelson in San Francisco, says that large awards—in the millions of dollars—are rare, even rarer than jury trials (he estimates that 1 percent or fewer of all employee claims go before a jury). Still, he says, no matter how good you think your employment practices are, “there’s always the possibility that an employee may win the lottery.”

That’s why roughly 30 percent of the companies surveyed in 1999 by the Society for Human Resource Management (SHRM) and Jackson Lewis, a law firm specializing in employment issues, had some form of EPLI coverage.

But as the need for EPLI has become clearer, insurers have begun raising its premiums and deductibles while tightening the qualification process. The Betterley Report, an industry newsletter, reported late last year that many insurers serving small and medium-sized companies were planning premium increases ranging from 15 percent to 50 percent. Insurers that serve large customers—which they regard as tempting targets for class-action suits—were all planning major hikes.

Employer ignorance, rather than bad intentions, is leading to terminations that run afoul of the law, says Beth A. Schroeder, an attorney with Silver & Freedman in Los Angeles. “It has become a more complicated world for an employer” because of frequent changes in the employment laws, she says.

Median compensatory damages awarded by juries between 1994 and 2000:
Discrimination, overall$150,000
Constructive Discharge112,500
Hostile Work Environment155,000
Sexual Harassment100,000
Wrongful Termination (not based on discrimination)157,386
Employment Cases, overall150,000

Source: Jury Verdict Research

Even companies that try to keep up with the law can be blindsided by a claim. Says Norton, who is president of Gallagher’s professional liability division: “Many companies that I’ve talked to about employment practice law, who have the attitude that they don’t need it because they manage their practices so well, have been completely incorrect and correct at the same time. They did manage their practices very well, and they also had [for example] a $10 million-plus lawsuit that they lost.”

What such companies fail to realize, Norton explains, “is that there are so many events that they cannot manage. There’s catastrophic risk in employment practices law.”

Michael Maloney, vice president and worldwide manager of the EPLI group at the insurer Chubb & Son in Simsbury, Conn., singles out “aggressive behavior on the plaintiffs’ bar side” as the leading cause of the hardening market.

On the other hand, Norton argues that “the No. 1 cause for increased premiums is frequency of serious claims. Carriers miscalculated how many filings [with the EEOC] would become serious claims, so they miscalculated the cost. For instance, claims that they thought would be $10,000 were $20,000.” Similarly, Tanenbaum says, “It’s not the big cases that are killing the insurance providers. They’re getting nibbled to death by the quantity of small cases.”

But as companies feel the impact of employment law claims, he says, “there’s more and more interest in [EPLI], even though we’re seeing drastic changes in regard to pricing and retention [deductible] level,” says Darrell McCallin, assistant vice president of Rockwood Programs, a Wilmington, Del., agency that specializes in management-liability products for small companies.

Says Tanenbaum: “Employers are just going to have to get used to the fact that if they want EPLI, they’re going to pay more for it.”

Risk Management
While theories abound on what is driving the higher cost of EPLI coverage, insurance providers are eager to reduce their risk with more in-depth assessments of potential clients and pricing based on current employment practices. The task for HR is to help lower their companies’ long-term risk and, as a result, their costs.

Employers “are actually going to [have to] practice a little bit more risk management,” Norton says. “Half the claims may be completely beyond your control, and that’s why insurance is important for that 50 percent.” With the other half, he says, “loss prevention and loss management are very helpful. Loss prevention means that with certain practices and procedures you might avoid the claim entirely. With loss management, the claim is in, so let’s do something to minimize it.”

Median compensatory damages for all settlements collected between 1994 and 2000:
Discrimination, overall$60,000
Constructive Discharge32,000
Hostile Work Environment60,000
Wrongful Termination44,000
Employment Cases, overall62,000

Source: Jury Verdict Research​

Maloney says employers must ask themselves these HR-related questions: “Who’s going to investigate these [employee] complaints? What training do they have? How are they going to [ensure that the handling of complaints is] consistent and fair? What is the employer doing to make sure that the employees feel that they are not going to be retaliated against for filing a complaint?”

If a company can’t answer such questions satisfactorily, “I’m not inclined to provide them with the insurance,” he says.

When companies seek EPLI coverage, says Ronald Adler, president of Laurdan Associates, a Potomac, Md., HR consulting firm, “the process forces them to do things they knew they should have done but never got around to. The insurer will require, for example, [that the company have] an EEO policy and a sexual harassment policy and an updated handbook. It will want to see some training going on.”

Indeed, training is vitally important, Schroeder says, “because training is really the only way that the employees know that [a company policy] exists.”

But just having a policy and conducting the training sometimes isn’t enough for insurance providers. “It’s the effectiveness of communicating and implementing the policy” that matters, says Adler, who also is president of the SHRM Employment Committee. “And from the insurance standpoint, that’s where things begin to break down. That’s why some insurers require an HR audit or assessment.” In particular, insurers look for strong policies against sexual harassment and other forms of discrimination, good employee handbooks, good procedures for investigating complaints, and training for managers and employees that instills awareness of company policy.

HR should take advantage of the ways insurance carriers help employers lower their risk. “Most of the EPLI carriers offer a wide range of value-added services”—free phone time with a lawyer, for instance—but “most employers don’t take advantage of them,” says Adler, “which means, of course, that they’re not protecting themselves. For many business executives, particularly when times are tight,” the potential savings from risk management are not as attractive as the immediate savings from not spending money on it. ·

But employers who deal directly with the issues that give rise to litigation “really do defuse these lawsuits,” Schroeder says. “Just putting a termination in detailed writing can sometimes prevent a lawsuit. Lawyers get to read the other side of the story before they ever sign the client up. That’s where you win your war—not in the courtroom. Even unemployed plaintiffs’ lawyers have better ways to use their time than taking on a case they know is a loser.

Read the Fine Print
Often, HR is responsible for administering EPLI, but ideally, an HR representative should be involved in the purchase of EPLI, Adler says. “One of the critical issues is notifying the insurer when a claim occurs. If the HR people don’t know that, or don’t know what a claim is, the whole relationship between the insurer and the insured can break down.”

It’s important for HR to be knowledgeable about its policy’s terms as more employers are aggressively negotiating the fine print. “Not all EPL policies are alike,” Schroeder cautions. “A lot of people used to not pay attention to the exclusions, but you’re going to see carriers hanging their hat on them more and more in settlement negotiations. Employers really have to pay attention now because the carrier may say, ‘Hey, this was an intentional act, we want you to pick up half the settlement.’”

Other provisions in EPLI policies are potential booby traps. “Employers often don’t want to settle claims as quickly as insurers,” Adler says, “and what we’re hearing from employers is that something called the ‘hammer clause’ may be triggered more quickly. The ‘hammer clause’ says that the insurer gets to say when we’re going to settle. And if you want to keep going, as an employer, anything above where the insurer decides is the place to settle you pick up on your own.”

A lot of companies had taken the “hammer clause” out of their contracts, says McCallin. “But now we’re starting to see that come back because costs have risen so much. These carriers can’t afford to defend [lawsuits] when it really doesn’t make sense to do that.”

The “hammer clause” is particularly significant because the interests of employer and insurer may diverge in settlement negotiations with an employee.

“In the employment context, if you settle a case that really shouldn’t be settled,” Tanenbaum says, “what you do is set a precedent for other cases to be filed by other employees or former employees on the same or a very similar basis. You can nip those cases in the bud if you defeat the first claim. So the employer wants to win that first case, while the insurer may want to settle it as long as the insurer doesn’t pay anything or [pays] very little. That’s an economically sensible decision for the insurer, in that one case, and not a sensible decision at all for the employer, if it’s going to set a bad precedent.”

On the other hand, sometimes a company may want to settle faster than the insurer does, perhaps when there’s potential group litigation and the resulting media exposure could be damaging. The company may not be willing to defend itself even when it can. “That’s where it gets really interesting,” Maloney says.

The trick for HR is to align the interests of the employer and the insurer as closely as possible when the policy is being written. Saving insurance for the catastrophic cases may be the best way to do that. “You really do want the higher deductible in many cases,” Norton argues. “If you’ve got a good legal department, let them handle the smaller stuff and save insurance for the big stuff. The higher deductible is OK if you get a proper premium discount for taking on that additional risk up front.” 

Michael Barrier is a former senior editor of Nation’s Business and former senior legal editor for American Lawyer Media. He holds a J.D. from the University of Chicago. He served as a legislative aide to two members of Congress and as assistant attorney general in Arkansas.  

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