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Multimillion-dollar discrimination settlements, a softening insurance market and concern about lurking liabilities have piqued risk managers' interest in protecting themselves against employment practices liability exposures.

Despite the heightened interest, though, employment practices issues still remain lower on many risk managers' radar screens than concerns with other forms of what basically are business malpractice issues, such as directors and officers liability, say risk management consultants.

Part of the reason is lack of understanding of how EPL insurance works and what it covers, consultants say. In other cases, they add, the lack of interest reflects the fact that such matters often are handled outside the risk management department.

"I think there is heightened interest. But I think people aren't sure quite how to proceed with it. The question we get asked most often right now is how much coverage to buy if we can buy coverage, and what is the biggest foreseeable loss?" said Lisa Chanzit, a consulting actuary in Tillinghast-Towers Perrin's Boston office.

"People are also asking us-which probably should come first-to 'Do an assessment or an audit of our human resource operations and procedures and tell us what we're doing right and wrong to prevent these potential losses,' " Ms. Chanzit added.

"It's a concern to me when you simply look at the proliferation of litigation," said Millicent Workman, risk manager of Mueller Industries Inc. in Memphis, Tenn.

"There's a lot of publicity on the big cases, such as the Texaco case. But what's also out there that you're not seeing are settlements against smaller companies," according to Ms. Workman, who said Mueller Industries carries employment practices liability insurance.

"I think you'll see risk managers taking more of an interest in it, such as maybe buying coverage for the first time or increasing their limits if they have coverage," she predicted.

Risk management consultants agree that a series of high-profile, high-settlement employment practices cases have caused clients to pay greater attention to what they need to do to minimize and mitigate their exposure.

"Two things started it: the Americans with Disabilities Act and the Clarence Thomas/Anita Hill hearings," said Ed Pouzar, senior manager and risk management practice leader in Deloitte & Touche L.L.P.'s New York office.

"And it's just been gaining momentum. Texaco is just the most recent example of this type of settlement. Every major corporation today has these types of allegations on the table," said Mr. Pouzar.

Texaco Inc. offered late last year to pay more than $176 million to settle a racial discrimination suit brought against it by African-American employees (BI, Dec. 23/30, 1996). Earlier this month, the class of 1,342 African-American employees who sued Texaco Inc. for racial discrimination accepted the company's $115 million settlement offer, declining to sue to company separately. The rest of the $176.1 million total settlement will be used for pay increases for African-American employees and for the establishment of an equality and tolerance task force.

"The dollar amount has been the attention-grabber. It's out there and it's being visibly litigated," agreed Mark Charron, a partner in Deloitte & Touche's Hartford, Conn., office.

Because the employment practices exposure is a relatively new one for many risk managers, their questions run the gamut from the most basic to the extremely sophisticated, say consultants.

"It's primarily the confusion of 'A, whether we should buy the insurance and B, if so, from whom?' There's been an incredible proliferation of sources of EPL. Everybody and his brother is in this market now," said Richard S. Betterley, president of Betterley Risk Consultants Inc. of Sterling, Mass.

The proliferation of underwriters, and an accompanying liberalization of terms and conditions, is a far cry from the situation when standalone EPL products first appeared in the early 1990s.

"I think many consultants have changed their outlook in respect to EPL insurance," said Stephen A. Coombs, president of Risk Resources in Westchester, Ill.

The first policies offered low limits and restrictive terms, Mr. Coombs pointed out. While the products piqued risk managers' curiosity, it did not cause them to open their checkbooks.

"There was a lot of interest, but not many quotations stuck, because frankly, it was not a good buy," he said.

But now, "it's becoming a part of an organization's P/C portfolio," said Mr. Coombs.

In fact, the market for EPL has, like the markets for most other professional liability products, become one in which the buyer can get just about anything he or she wants.

Limits of $100 million or more are available (BI, July 29, 1996). In some cases, coverage is available for punitive damages as well as actual damages. Although there is no standard form, policies generally are written on a claims-made basis and include defense costs within the limits.

Coverage usually can be triggered by a variety of circumstances: a lawsuit; a written demand for damages or written allegation of discrimination, sexual harassment or wrongful termination; and an administrative proceeding with a government regulator, such as a filing with the Equal Employment Opportunity Commission.

Nevertheless, "clients don't typically understand what it covers. There's a fairly strong feeling out there that it doesn't provide as much coverage as it seems," said Mr. Betterley.

"There're still a lot of firms that are well-managed companies but don't see the need for this coverage," said Peter Sinnott, a consultant with Watson Wyatt Worldwide in Chicago. The senior management of many companies views the Texaco settlement as a fluke, he said.

One reason for this is that some companies apparently don't want to know how wide their exposure is, said several consultants.

Mr. Betterley said that sometimes it is "really difficult" to find out what a client's loss experience really is. The matter often lies outside the risk manager's traditional area, and the information isn't tracked, he said.

"The biggest role that we play is that of a facilitator" bringing parties together to assess risks, said Risk Resources' Mr. Coombs. In large companies, internal human resources departments may assess the risk rather than risk management, he said.

Another problem in determining exposure is a lack of data, said Tillinghast Towers-Perrin's Ms. Chanzit. "People are reluctant to share it with people in the company, much less outside the company," she said.

Risk managers often are not aware of the allegations, which is why a lot of companies haven't bought this type of insurance, said Deloitte & Touche's Mr. Pouzar. "Risk mangers are becoming increasingly aware that this is an uninsured risk," he said.

Mr. Coombs said that only a tiny portion of companies, perhaps less than 10%, carry EPL coverage. He said the situation is comparable to the early days of D&O insurance. "Just like D&O is a form of malpractice insurance, so is employment practices," he said.

"We see this issue come up in discussions of D&O liability," said Paul Van Zuiden, a consultant in Watson Wyatt's Chicago office. At issue is whether EPL coverage should be on the D&O policy or a separate policy, he said, adding that some of the new D&O policies do not include EPL coverage.

Another factor driving corporate interest in employment practices issues is consolidation, said Deloitte & Touche's Mr. Pouzar.

"Anyone doing a due diligence" in preparation for a merger or acquisition has to look at the liability, he said. Often, the person performing the due diligence finds that the company either doesn't have reserves set up or doesn't have insurance, he said.

"So senior management is looking at ways to risk manage this liability," he said.

Corporations also are looking beyond insurance to mitigate their exposure, noted several consultants.

"Organizations are taking internal steps" to cut their exposures through promulgating very firm policy statements regarding non-discrimination and inappropriate behaviors, said Mr. Charron.

Tillinghast-Towers Perrin's Ms. Chanzit noted that even if an incident occurs, a company can help mitigate the situation by moving quickly to deal with it.

"People still have a tendency of avoidance," she said. A supervisor hears of an occurrence that could lead to trouble but doesn't want to get involved and does nothing instead of reporting or documenting the incident.

That's the wrong approach, she said. Instead, the company needs to respond aggressively, even though doing so might cause problems.

"By having a little pain up front you can avoid big pain later," she said.