Increasing Employment Practices Litigation
Spurs New Insurance Product


By Richard V. Rupp, CPCU
Vice -President, Risk Management
Calco Insurance Brokers & Agents, Inc.

The 90s have seen a dramatic upswing in the number of allegations, investigations and litigation in the area of employment practices. Initially, the cases were limited to wrongful termination, sexual harassment and discrimination suits, but recently have been expanded to such things as wrongful demotion, failure to hire, and retaliation.

The increase is cases began with the efforts by federal and state legislatures to institute universal "workplace diversity" and the passage of various forms of "equal opportunity" and "affirmative action" legislation designed to modify the structure and management of United States corporations to include more minorities and women. The responsibility to implement this government initiated social reform has been, by inference, passed on to employers with trial lawyers as the principal enforcement agents. As the result of this legislative and recent large court awards from employement related suits a new industry has been formed - the employment practices litigation industry.

Accordingly, the adverse effect of these cases on business also increased, resulting in businesses seeking avenues to limit exposure from associated legal costs and ever-increasing jury awards. Traditional insurance policies such as Workers’ Compensation, Commercial General Liability and Umbrella Liability insurance that at one time provided some coverage for employment-related claims, today almost universally exclude coverage for the defense and settlement of these types of claims.

All Size Employers Are Targets

Media coverage of employment practices litigation focuses attention on the treat to "deep pocket" entities with precedent setting awards, such as the $132 million settlement paid by Shony’s Restaurant in a race bias suit; last year’s highly-publicized racial discrimination lawsuit against Texaco; a $150 million lawsuit against Mitsubishi Motor Manufacturing of America Inc; and the $66 million pregnancy discrimination suit filed against AT&T. However, as our Employment Practice Liability policyholders have proven the small- or medium-sized businesses are also targets. Of our current sixty-two policyholders the largest has 400 employees; the smallest has thirteen and in the past two years they have had nineteen employment practices claims. The largest claim settlement to date has been in excess of $250,000. Four out of five pending lawsuits targets small- or medium-sized businesses, who are more vulnerable to the economic damage from this type of suit.

A Burden On The Economy

Reflecting the threat of economic vulnerabilities, one of every five California business has restricted hiring because of such onerous suits, according to a survey commissioned by The Association for California Tort Reform. Nearly half of the businesses surveyed blamed California’s employment termination laws for the rising cost of employee litigation, which places a major drain on the state’s economy.

Research compiled by the Jury Verdict Research Series indicates that the average wrongful termination compensatory loss is $532,016; sexual harassment compensatory loss average $120,702 and work-related gender discrimination is averaging $501,622. These amounts do not include legal fees which historically have ranged from $200,000 to $1 million per claim. Plus the cost of managements time, which can be extensive!

There are three principal classes of legal action within the category of Employment Practices Liability: 1)Wrongful termination -- the discharge of an employee for invalid reasons; 2)Discrimination -- denial of equal treatment for prejudicial reasons and; 3)Sexual Harassment -- Subjection of unwanted sexual advances, obscene or offensive remarks, lewd behavior and the failure to intervene and stop such behavior. The definitions of these principal classes are being expanded daily to include such things as failure to hire, failure to promote, retaliation, etc.

Employment Practices Liability Insurance (EPLI) Coverage

EPLI policies initially just covered the three principal classes of legal action indicated above with lots of exclusions and were expensive. Within the past six months a number of the policies have been expanded to include almost all types of personal injury claims that could be brought by an employee against an employer and the cost has been significantly reduced. It is estimated that EPLI premiums were less than $30 million in 1994, jumped to $70 million in 1995, to $125 million in 1996 and are expected to exceed $300 million in 1997.

The current EPLI policies vary considerably in the coverage they provide and each needs to be reviewed carefully to determine if it suits a particular employers needs. They are not intended to protect companies or their employees against willful or intentional violations of the law, but most will provide a defense for such a claims until a court has determined that a specific individuals action was intentional. At the point this is determined the policy no longer applies.

The policies typically cover the corporation and past and current officers, directors, partners, and managers. Some policies provide coverage for all employees. Coverage is provided for the cost to defend a claim and any settlement or judgement subject to a deductible that can range from $2,500 to $1 million for a very large corporation. Many employment related suits result in punitive damages awards which can be far in excess of the compensatory damages. Some policies include coverage for punitive damages, but this is meaningless to California employers as punitive damages are not insurable by law in California.

Companies seeking EPLI coverage must complete an extensive application which has opened the eyes of many in senior management to the need for attention to their current internal human resources practices and the high cost of past employment practices litigation. As underwriters are unwilling to pick up known claims companies seeking EPLI coverage must divulge any current or likely claims against them.

Insurers in their underwriting process take steps to avoid high-risk companies and individual executives with poor track records and cavalier attitudes when it comes to understanding their employees and following the law on employment-related issues. Underwriting is based on three primary criteria 1) number of employees, 2) annual turnover rate, 3) through evaluation of the human resources practices.

Brokers can assist policyholders in becoming more knowledgeable employers from the standpoint of their employment practices liability exposures. For example, Calco reviews a company’s current human resources practices and makes recommendations on how procedures and documentation can be improved. When shopping for EPLI coverage, look for a broker that provides ongoing risk management services, such as Calco’s Risk Management program, which includes annual seminars, a Risk Management guide, Employment Law video library, human resources assistance and compliance audits by expert attorneys.

EPLI Claims Lessons

Insurance companies are going though a learning process as respects EPLI claims and this appears to be to the benefit of employers who had previously relied totally on law firms to respond to such suits. Prior to EPLI, attorney’s often oriented their defense to "the employer has done no wrong," and the employee cannot afford prolonged litigation. The problem with this today is that the employee who could only obtain an attorney on a retainer basis can now find a law firm that will take the case on a contingency fee basis and can’t wait to take the case before a jury. It is reported by a number of labor law firms that if an employment-related claim does go to trial the employer will lose 60% of the time.

Our experience with insured claims has led to the following concepts, 1) Early intervention is critical - according to trial attorneys 90% of these types of claims can be settled with an apology or with minor employment environmental changes; 2) There is a right and wrong way to handle these claims - The wrong way is to let emotion get involved - ego, anger and frustration have no place in this type of claim, they must be approached from a business standpoint; 3) Work toward an early settlement if their is any validity to the claim - lengthy litigation will only increase its value.

Some company’s still believe that you must litigate all EPLI claims because they may set a precedence or set your company up as an easy mark. This is a fallacy according to trial attorneys. It is more imagined than what happens in reality. This is particularly true when a "confidential settlement" is used.

Risk Management

Nothing guarantees the avoidance of employment practices claims, however, a carefully worded employee handbook or manual is a necessary first step for employers to protect themselves from litigation. The handbook can be one way to meet an employer’s legal obligation to inform employees about various personnel issues, such as standards of conduct, vacation and absenteeism. Employers with such policies in practice are in a better position with the Equal Employment Opportunity Commission (EEOC) should an allegation be made.

An effective employee handbook should be written in a language level that is understandable to all employees; not be discriminatory and reflect the company’s actual policy; be prepared an/or reviewed by appropriate legal counsel; require employees to acknowledge in writing they received and understood the information contained within the handbook.

Human resources areas should be reviewed regularly and revised as laws in the workplace change to protect the company against employment practices litigation. Such areas include job applications; interviewing and testing; employee contracts; employee performance evaluation checklists; and disciplinary procedures.

Virtually any company can find itself faced with defending an employment-practices lawsuit, but insurers say organizations without solid human resources procedures and documentation are better positioned to successfully defend such suits.

Return to RiskINFO home page         EPLI Discussion Group