EPLI AWARDS ON THE RISE

Tight market expected to last for some time

By Phil Zinkewicz

It was less than a decade ago that the property and casualty insurance industry developed employment practices liability insurance (EPLI). The industry created the product in response to the Civil Rights Act of 1991, which, among other things, gave employees who sued their employers the right to demand a jury trial. The need for a stand-alone EPLI product became evident, and insurers rose to the occasion. However, insurers began offering the product during soft insurance market conditions and, with no claims history upon which to base their pricing of the product, premiums were extremely low. In their rush to compete aggressively for market share during the '90s, many insurers didn't take time to analyze the various regulatory schemes that employees could tap into to institute EPLI lawsuits.

Richard Ollis, of the Springfield, Missouri-based Ollis & Co., whose insurance agency specializes in advising clients on how to protect themselves against EPLI lawsuits and also provides EPLI insurance markets for them, says: "There are so many employment practices exposures that it boggles the mind. There are myriad rules and regulations to consider, such as the Americans with Disabilities Act, COBRA, the Family and Medical Leave Act of 1993, the Equal Opportunity Employment Commission, and a host of others."

Today, broad interpretations by the courts as to what constitutes bad employment practices and generous jury awards in employment practices liability cases have exacerbated the situation and left insurers with significant losses. For example, in 2000, an Ohio jury returned a $31 million verdict against a health services organization for age discrimination. A major television network settled a sex discrimination lawsuit for $8 million in that same year.

According to Jury Verdict Research (JVR) in Horsham, Pennsylvania, the median award for an EPLI lawsuit rose to $218,000 in 2000, from $151,000 a year earlier. A fifth of all verdicts top $1 million, according to JVR. Insurers are now paying dearly for underpricing EPLI insurance during the last decade and, as is usually the case, they are passing that price on to buyers of the product. Premiums are rising drastically in the EPLI market and, in some cases, insurers are withdrawing from the line altogether. In terms of pricing, some insurers are raising their rates to double or triple the previous premiums.

Michael J. Maloney, an executive with The Chubb Group, one of the industry's largest providers of EPLI, says: "We are not making money on this coverage line and have not been for some time. If carriers don't change the behavior of the last few years, it won't be a viable product for the future."

Of course, this scenario is not a new one for the insurance industry. In the late '60s and early '70s, insurers offered product liability insurance as part of commercial lines insurance packages. They were practically giving it away as an add-on. They began to see profit potential in breaking the coverage away from the commercial package and offering it as a stand-alone product. Again, with no history of claims up to that time, they priced the product badly and by the late '70s, product liability lawsuits began to soar--as did jury awards. Product liability became a loss leader. The same thing appears to be happening with EPLI today.

"There is no question that there is currently a great deal of tightening in certain segments of the EPLI market," says Tonya Hollederer, an EPLI expert with Russell Bond & Co., a wholesale broker based in Buffalo, New York. "We're seeing it a lot in the health care industry and we're not only seeing it in pricing but in higher retentions. In this sector, retentions now range from between $25,000 per incident to $75,000. We're seeing premium increases of about 15% for clean accounts and about 25% for accounts where there has been some claims activity. We're seeing companies such as Employers Re, which was a large writer of EPLI, pulling out of the market altogether."

Hollederer says that losses in the EPLI market have been "horrendous," with new EPLI exposures being uncovered every day. "One of the reasons is that standard insurance companies began jumping into the market about five years ago and they didn't anticipate or know how to handle claims in the area. Now, those standard companies are pulling out of the market and capacity is shrinking, so the market is hardening."

Heather Fox, assistant general counsel for National Union Fire & Casualty Co. of Pittsburgh, a subsidiary of American International Group, agrees with that scenario. "We are definitely seeing rates on the rise and--more important--retentions on the rise," she says. "Higher retentions take carriers out of the frequency issue. Some large companies are co-insuring their exposures. Third-party coverage, a feature that was thrown in during the soft market, is being separated."

Fox says that National Union is in a good position in the hardening market because it held the line on rates and conditions when other insurers were competing aggressively during the 1990s. "The innocent capacity that brought about market distortions in the last decade is now exiting the market and leaving the business to the professional underwriters," she says. Fox says that exposures in the EPLI market have increased significantly. She pointed to a recent case where the Supreme Court ruled that a federal anti-discriminatory agency can step in to win back pay or other help for workers who have signed away the right to sue their employers.

In this particular case, the 6-3 ruling held that the Equal Employment Opportunity Commission (EEOC) may sue for money in federal court on behalf of a short-order cook who was fired after he had a seizure at work. The cook had agreed when he was hired that any on-the-job dispute would be resolved by arbitrators, but now the EEOC can ignore that agreement, wrote Justice John Paul Stevens in the majority opinion.

The court's decision means that, in some cases, the EEOC can circumvent an arbitration agreement to do for an individual wronged worker what the worker is unable or perhaps unwilling to do for himself or herself. Justice Clarence Thomas, who once headed the EEOC, dissented from Justice Stevens' opinion, saying: "I cannot agree that the EEOC may do on behalf of an employee that which an employee has agreed not to do for himself. Nevertheless, the decision is in favor of the EEOC."

"That decision alone is going to affect the EPLI market," says Fox. All of these elements--liberal court decisions, increasing frequency of loss, and an industry seeking to recoup some of its losses during soft market years--will undoubtedly mean a tight market for EPLI for some time to come. *