legislation: Companies Increase Protection Against Employee Suits

Waste industry firms, no less than companies in other lines of business, are experiencing a sharp rise in employee discrimination suits. As a result, companies that need help with litigation costs are turning to an arcane form of insurance policy - employment-practices liability coverage.

This policy protects companies from gigantic legal bills and damage awards where workers have filed lawsuits alleging discrimination or wrongful discharge based on race, gender, age or physical disability.

For now, mostly small- and medium-sized companies are seeking coverage. Policy limits up to $1 million are available at a premium of about $7,500 a year. Industry analysts estimate that perhaps 10,000 midsize firms have bought the policies.

The largest corporations - Texaco and Mitsubishi Motors, for example - have tended not to buy such policies. They figure that their sizable assets make it easier to pay the huge litigation costs. But insurance industry sources anticipate a change.

Fueling the trend is the extraordinary publicity that discrimination suits generate. And insurers are taking steps to improve the ins and outs of coverage and to offer policy limits as high as $100 million.

Currently, premiums for employment-practices insurance total about $100 million a year. However, insurance industry watchers predict that sales for this coverage could reach $1 billion by the year 2000 and $2 billion by 2007.

Although coverage was available in the mid-1980s through Lloyd's of London, major U.S. carriers didn't begin selling employment practices coverage until four or five years ago. Today, employers can get proposals from nearly 20 insurance companies that sell such coverage in one form or another.

When the policies were first introduced in the United States, not more than $5 million in protection was available. As risk-sharing between brokers grew, policy limits increased accordingly. Higher policy limits reportedly will be attractive to the largest employers.

However, risk management officers worry about large exposure stemming from discrimination lawsuits. "If pricing and terms are reasonable, we're likely to participate in this market," said Scott Lang, director of risk management for Microsoft, Redman, Wash.

For their part, brokers say that the policies still are difficult to sell. One reason is because company attorneys fear the loss of control over handling discrimination suits if an insurer is paying the defense costs.

Shopping for policies can be exhausting because the coverages vary greatly. Some insurers won't pay claims stemming from reorganizations, layoffs and closures. Others won't cover punitive damages, and almost all policies exclude coverage for intentional acts. To further confuse matters, the definition of "intentional" or "willful" varies from policy to policy. The insurance companies say they are merely responding to state laws that ban coverage for intentional wrongdoing. Policies also differ on how and when an insurer can force an employer to ratify an out-of-court settlement.

Some observers think that insurance policies will simply generate more litigation. Others, however, believe that the coverage will spur improvements in corporate behavior. For example, a policyholder that takes advantage of one insurer's loss-prevention program can reduce its premiums and better its chances of staying out of court. Such services, which have been available to larger companies, are now being offered to medium-size firms. As a result, more employers can benefit from self-audit materials, reduced-price compliance seminars and toll-free telephone consultations with experts in employment practices.