Cushioning Employer Liability

Owners of waste management firms now, more than ever, are able to buy separate insurance coverage for employment practices liability (EPLI). Many insurance companies still include employment coverage with standard directors' and officers' policies or with commercial general liability. However, driven by a soaring number of claims and greater employer exposure, some insurers are providing stand-alone EPLI policies with broader coverage.

Employers are demanding wider coverage because the limits of exposure are unpredictable and the legal costs of defending employment claims are rising.

The profitability (for carriers) and pricing (for employers) of EPLI policies depend on the ability to assess the risk and to implement appropriate loss-control methods. Sad to say, employment law is an uncertain and changeable area where predicting exposure and risk nearly is impossible.

Applying traditional risk-analysis methods - conducting onsite inspections, interviewing officers and managers, and reviewing an employer's claims history - is not enough. As long as the law remains in flux, a carrier will have difficulty identifying the types of claims that could arise. For example, the law varies from state to state on whether and to what extent an employee may sue for damages arising from emotional distress. Meanwhile, the courts may begin to allow novel and unprecedented claims for recovery that may not be expressly covered by an EPLI policy. As a result, a coverage dispute may arise between a carrier and an insured.

Employment claims do not have the same extensive history as general liability claims. Data and information simply do not exist in quality and quantity sufficient to allow actuaries and other claims professionals to calculate risks and exposures. Adding to the confusion and uncertainty are "nuisance" and marginal claims that are settled merely to avoid skyrocketing defense costs and overly sympathetic juries.

Besides problems in sizing up the risk, nearly all employment law claims allege intentional conduct by the employer. Traditionally, insurers do not provide coverage for willful or deliberate actions.

Defending employment claims is becoming more expensive because employers now need highly trained, specialized legal experts. Except for relatively mundane wrongful discharge lawsuits, general practitioners increasingly are unwilling to dabble in employment practices claims. These days, it takes lawyers with well-honed skills and knowledge to manage workplace-related claims and suits. These experts don't come cheap.

As part of industry-wide cost control measures, however, insurance companies often select outside defense attorneys who agree to work at artificially low rates, which produces adequate representation for the insurer (and policyholder) but, for the most part, does not always engage the "best and brightest" among employment law specialists. Employers should ask insurance companies to furnish information on the background and experience of the law firms that will be defending claims, and should pass along such information to their corporate counsel.

Settling an employment claim depends on a variety of circumstances besides financial considerations. The issues tend to be highly personal and emotional, and a trial displays the inner workings of the employer's organization in a somewhat less than favorable light. The personalities and work styles of individuals who are accused of workplace discrimination undergo blistering scrutiny. Supervisors and managers whose behavior and decisions are at issue often feel stigmatized unless a jury fully exonerates the employer.

Employment cases usually have two goals: reinstatement and back pay. EPLI provides a defense and reimbursement for the monetary portion of the claims. The employer has a say on other issues. Coverage and payments on behalf of the employer may be jeopardized when the employer and its insurance company cannot agree on the content and wording of settlement stipulations. Sometimes the carrier will view such a situation as a breach of the insured's standard obligation under such policies to cooperate with the company in defending and settling the claim.

Remember, the insurance company will do or won't do what it thinks will produce a cost-effective result.