When employees sue: covered for employment practices liability?(INSURANCE)

ARE YOU GOING BARE against employee discrimination lawsuits? Better buy that employment practices liability coverage, or increase coverage if you have a minimal amount. Discrimination claims for a raft of reasons are going up in these tough economic times.

"It hardly seems that a day goes by where there isn't an employment claim," says Ron Jordan, executive vice president, Gibson Insurance Group, South Bend. "It's definitely a result of what's going on in the economy." Claims come from the elimination of jobs, including the result of mergers and acquisitions, he says, bur also from the reduction in benefits, such as medical and 401(k). Even though the liability for benefit claims moves into the fiduciary liability area, there are employment claims that arise from elimination of benefits, he says. '%0, it's really a combination of both, workforce reductions and elimination of benefits that are causing problems." He notes that there's also an up-tick in workers' comp claims during a sour economy.

"Anybody can sue," says Vicki Leininger, vice president, Hylant Group, Fort Wayne. "Anybody can claim damages." But win or lose, in every case you're going to incur defense costs, she says. "So when we are selling this to someone who perhaps has not had this type of coverage in the past, we talk a lot about defense costs."

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A Chubb survey released in July 2008 revealed that companies were less concerned about the potential financial damage from lawsuits filed for wrongful termination, discrimination or sexual harassment than they were in a survey two years prior. But it also reported that claims filed with the EEOC were the highest since 2002, and had increased in every category by double digits. The average total cost of an employment practices liability-related event, including judgments, settlements, tines and legal fees is more than $63,000, according to the survey. Smaller companies are hit hardest by the costs it said, yet only 37 percent of companies with 50 to 249 employees purchase the policies, compared to 51 percent of those with 250 or more employees.

Leininger's clients are mainly middle-market companies, manufacturers and companies with more than 50 employees. About 75 percent of them have EPL policies. "I think people understand the exposure," she says. "The soft market helped in suppressing the pricing so people could afford to buy it." But that may change in the future, she adds, as some insurance companies make a shift toward underwriting for a profit because they're not making any money on investments.

There's no rating manual for this type of coverage, she says, but insurers may look at the number of employees, past history, the type of workforce--skilled or unskilled, and the industry. Recently, she sold a policy to a manufacturer with 200 employees for $4,000 with a $2 million limit. "Smaller companies can get in for $2,000."

Dan Suiters, account executive with Tobias Insurance Group, Indianapolis, also serves primarily clients in the middle-market, about $40 million to $50 million in revenue, and says 30 to 50 percent of them have EPL coverage. That increases to 60 to 75 percent with larger companies. Policy limits typically range from $1 million to $5 million, he says. "A lot of the larger clients will buy these with large retentions or deductibles. They're looking for protection from the big hit."

To encourage smaller companies to get their feet wet on coverage, some insurance companies are providing EPL "light," says Suiters, by adding a single endorsement to a company's overall liability policy that shares the policy limits. That can be bought for about $250 to $500 extra.

Suiters' clients have had relatively few claims in the last few years, but in addition to typical claims for harassment and failure to promote, be says he's seen a couple cases of failure to provide a safe workplace. These have occurred when an employee went to management complaining about abuse by another employee, nothing was done, and eventually violence occurred. The lesson here is to take complaints seriously and follow-up.

Although it's rare to see a successful EPL claim, says Suiters, money has to be spent on defense. "We see a lot of them just go away. If you have someone defending them, the claimant more than likely does not want to waste time or spend rime."

Employee lawsuits are a real exposure no matter how small your firm is, says Gerry O'Connor, senior vice president, Old National Insurance, Indianapolis. But the good news is that coverage is more affordable than it was when it was first introduced and there are a lot more insurers out there competing for the business. A policy can be purchased for as little as $750 to $1,000 for typically $1 million worth of coverage, he says, usually with a $2,500 deductible. It's important to note that EPL policies have a deductible, he says, unlike general liability policies, so employers have some "skin in the game."

Employees are wiser today about how they are being treated, says O'Connor, and have a heightened awareness of lawsuits. "They wouldn't hesitate to address it if they felt they were being wrongly treated." The lawsuits get large, he adds, when it becomes a pattern and when employers don't have policies in place. So whether a company buys the insurance coverage or not, he encourages them to adopt policies and procedures and consistently apply them. Adopt an employee handbook, communicate its provisions and get a written acknowledgement that the employee received it, he says. "With good risk management practices, you lessen the exposure and then you also build yourself a defense, whether it's true or not, that will allow you to fight that potential claim or suit against you."

Jordan offers some advice and caution about buying the right EPL policy. Check to make sure it covers complaints against third parties, due to the increase in outsourcing and interaction between employees of the company and the third party. The same can be true of contacts with independent contractors. But perhaps most importantly, check for any exclusions, he says. "One exclusion that I look for in policies as I audit them for prospective clients is reduction in force, for example. There are some employment practice liability policies out there that wouldn't cover that. Well, in today's economy that wouldn't help an employer very much because a lot of complaints are going to come out of reduction in force."

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