Lawsuits by workers charging employers with discrimination and harassment have become a major bogeyman stalking Corporate America. And until recently, employment practices liability insurance (EPLI) offered companies little real protection. Premiums were high, capacities low, and the products in the market were so riddled with restrictions that corporate coverage seemed pointless.
But there's been a revolution in the market of late, on both the supply and demand sides. And companies have been the winners.
For its part, the insurance industry has cut away the bindings formerly in place on employment practices coverage, and turned extremely competitive both in pricing EPLI and in designing new products to help companies reduce their exposure to the litigiousness of disgruntled workers. From just 3 carriers underwriting EPLI as a stand-alone product in 1992, the number has grown to 51, says Peter C. Foster, a vice president at J&H Marsh & McLennan. The sudden popularity hasn't yet been diminished by the sharp premium cuts that competition has produced. In the last six months of 1997, Rick Betterley, president of Betterley Risk Consultants Inc., a risk management consulting firm in Sterling, Massachusetts, saw some premium offerings drop 40 to 50 percent. "It's been a pretty ferocious price battle," he says.
Companies have responded warmly to the emergence of cheaper, more-useful coverage. Total premium payments for the line doubled from about $150 million to $300 million in 1997, according to Jeff Klenk, employment practices liability product manager for Executive Risk Inc., an insurance carrier in Simsbury, Connecticut. For companies looking to protect themselves from workplace suits, "it had been a tire-kicking product up until last year, but now it looks like companies are no longer window-shopping," Betterley observes.
Today, in fact, 20 percent to 25 percent of all public companies carry some kind of EPLI, up from only about 8 percent three years ago, estimates Phillip Norton, managing director of Sedgwick Financial Risk Specialists, in Chicago. And Foster of J&H Marsh & McLennan expects that half of all companies will have signed up for EPLI by the year 2000.
"It's becoming a mainstream coverage," says Scott Lange, director of risk management at Microsoft Corp. "I think it's finally gotten to the point where it's meaningful coverage."
Gone are the restrictions of old, when punitive damages generally were excluded, for example, along with acts committed prior to the effective date of the policy. And often included in today's policies are the once-uninsured lawsuits stemming from "intentional acts" and downsizing. "If you think about it, the things covered by employment practices insurance--discrimination, sexual harassment, termination--all have an element of intent. So there would be virtually no coverage under the insurance policy," Klenk explains. "You won't find that exclusion on any of the policies today."
The sheer need for protection among companies, aided in no small measure by a soft insurance market that has vendors chasing new opportunities, may explain much of the growth in EPLI. "The coverage is becoming more attractive every year because more companies are being sued every year," suggests Julianna Ryan, a partner with the New York law firm Kaufman, Borgeest & Ryan. Foster estimates that one out of every five cases in civil litigation in the United States involves employment.
Passage of the Civil Rights Act of 1991 also gave demand an enormous boost. While workers always could expect some back pay if they won employment practices grievances, Congress allowed compensatory damages and punitive damages to be tacked onto awards. "A $300,000 claim was suddenly worth $3 million," Sedgwick's Norton says. "If you have 1,000 employees, you can expect at least one claim every year," he reasons, and adds that one of every 20 claims results in an award of more than $1 million.
A PICTURE OF EXPOSURE
The risk to companies has become so great, in fact, that some shareholders have sued corporate officers for failing to buy EPLI. "They're attacking the executives for not doing what they need to do to prevent a claim, but also for not having financial safeguards in place to protect the share price," says attorney Ryan.
Developments on the carriers' side, too--especially the availability of better data about exposures--have led to attractive products. "Over time, we've gotten more comfortable with our exposure in this area. We can better determine our dollar exposure now," says Executive Risk's Klenk. The Equal Employment Opportunity Commission statistics, for example, now compiles data on cases filed and dollar amounts awarded.
Insurers have also snipped out much of the red tape once associated with EPLI policies. "You had to submit to an HR audit as a prerequisite to underwriting," notes Microsoft's Lange. "If the auditors saw something they didn't like, it would be excluded from the policy, or the policy would be denied." Now, getting coverage is nearly automatic, says Lange.
According to Ryan, the wide variety of coverages being offered by insurers makes it imperative for companies to shop smart. "One EPLI policy can be radically different from another," she says. Nevertheless, some general observations can be made about what's in the market now:
- * EPLI policies usually run for one year. The industry may be more comfortable with risks underwritten by the policies, but not comfortable enough to underwrite them for more than one year at a time. (Indeed, Louis Drapeau, risk manager at The Budd Co., a supplier to the auto industry, in Troy, Michigan, suggests that "if the insurance market tightens up and premiums increase 1,000 percent like they did in the last tight market, this may be a coverage corporations forgo again.")
- * Policies all include retentions, as deductibles are known. Factors helping determine the retention include the policy's size, number of employees covered, and their wage levels.
- * Premiums, too, are subject to numerous risk variables, often associated with the covered company's industry. "Some people sue and some people don't," Betterley explains. "Those that do, usually tend to have good access to the judicial system. People who work for the minimum wage are not the type that go to lawyers. Plus, the dollar value of what they're suing for may be fairly nominal, so it's not worth a lawyer's time."
- * Capacities, the top limit of insurability, can range up to $100 million, depending on the insurer, with a large-company policy averaging about $25 million. "[These] companies are looking at this as a catastrophic exposure, and they're taking a $1 million deductible while looking at coverages from $25 million to $100 million," Peter Foster says. "Midsized companies--with revenues under a billion dollars and from 250 to 4,000 employees--are looking at the coverage more as a cost of doing business. A million-dollar loss to a midsized company could be 10 to 20 percent of its bottom line."
- * Most, but not all, EPLI policies now cover prior acts. "If you don't have prior-act coverage, the policy isn't worth buying," Foster says. "If I ever recommended a policy to a client without prior-act coverage, I'd be opening myself up to an errors-and-omission lawsuit."
Punitive-damage coverage is also a valuable element to include, especially since punitive awards frequently exceed other damages. In a sexual-harassment lawsuit decided against United Parcel Service in February, a jury awarded a female worker $500,000 in compensatory damages and $80.2 million in punitive damages. Shelling out for a policy that covers punitive damages won't always help, because, in some states, it is illegal for insurance carriers to pay punitive damages. In the case of covered companies doing business across state lines, a "choice of venue" clause should be written into policies. That clause allows a company to choose the most favorable venue for a claim, regardless of where a judgment is rendered.
Companies shopping for the low premiums are likely to have a field day, given the EPLI competition these days. One of Betterley's clients--a 250-employee company with a moderate amount of risk-- recently sought to buy a $1 million EPLI policy with a $25,000 retention. One insurer was willing to underwrite the risk for $27,000; another, for $14,000. Sedgwick's Phillip Norton says his firm has worked on EPLI policies with premiums as low as $15,000 and as high as $500,000. "That's a huge range, but that's because we're dealing with companies of as few as 100 employees to as many as 100,000," he explains.
As competition among carriers heats up, though, some of the differences in their offerings will begin to disappear. That will make the so-called value-added services that are packaged with policies a key factor in evaluating their worth. These services are already important to many midsized companies lacking in the human resources and legal muscle of large-cap concerns. "Some of the services are pretty good, but the insureds don't seem too impressed with them," Betterley says. Microsoft's Lange adds, "Those services have less value for large corporations, which know what they're doing in this area."
At Executive Risk, the EPLI package includes a program called CheckMate, which offers a toll-free hotline policyholders can call for free legal advice. There's also a newsletter and a manual explaining how to comply with employment laws. And, if a company wants its employment practices submitted to an audit, the carrier will arrange for an auditing firm to perform the service for a discount.
J&H Marsh & McLennan also bundles risk-management services with an employment practices product called Leaders Preferred. Under that program, a company must submit to an employment practices audit. But the payoff is broader coverage--not only for lawsuits resulting from prior acts, and punitive-damage awards, but also for suits by third-party vendors, clients, customers, and independent contractors. The risk-management portion of the program has two free hours of legal consultation, periodic employment-law alerts through E-mail, and training materials prepared by Littler Mendelson PC, a national law firm specializing in employment and labor law.
But even as insurers fan the flames of interest in employment-practices coverage, they're hardly giving it away--as the restaurant industry seems to illustrate. "We looked at it a few months ago and passed on it," says Robert Merritt, CFO of Outback Steakhouse Inc., based in Tampa. "The limits on the coverage were so low it didn't make sense for us. Our industry is a risky one for insurance companies. It has a lot of claims relating to sexual harassment, and the management ranks don't have a lot of minorities in them."
John P. Mello Jr. is a contributing editor of CFO.