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LONDON-Employment practices liability is becoming a more significant risk management issue in Europe amid changes in European Union legislation and an increase in employee lawsuits.

High profile cases include last year's $13 million settlement of a sex discrimination suit by former British Gas P.L.C. female employees (BI, June 24, 1996) and earlier this year a settlement by Ford Motor Co. with employees who claimed the company discriminated against minorities.

Employment practices, such as sexual discrimination, harassment and treating workers unfairly, "is a real risk management issue that companies should be addressing," said Nick Foord-Kelcey, U.K. technical director in London at Sedgwick U.K. Risk Services Ltd.

Employers must become increasingly aware of employment practice issues such as discrimination, agreed Matt Dean, a senior assistant in the employment department of London law firm Simmonds & Simmonds.

Discrimination "is a risk management issue and an area which is becoming increasingly important," Mr. Dean added.

E.U. legislation is the "main motor for change in employment law," particularly in sexual discrimination cases, he said.

For example, currently awaiting passage before the European Commission is a proposal for a directive that would reverse the burden of proof in cases of sexual discrimination. This would place the onus on employers to provide conclusive evidence that the treatment was not illegal, giving employees the benefit of "any doubt concerning the exact interpretation of the facts."

The directive "will make life more difficult for employers to defend" sexual discrimination cases, said Sarah Winter, an associate partner specializing in employment law for the Birmingham office of London law firm Eversheds.

During the past five years, Ms. Winter has noticed a "massive increase in (employment) claims against employers."

Stricter anti-discrimination laws across Europe, which would take precedence over weaker E.C. regulations, and a marked increase in employees' awareness have led to more claims in many areas of employment, such as racial and sexual discrimination, maternity rights and terms for involuntary layoff of employees, lawyers say.

As a result, many companies, even small businesses, are turning to lawyers to help draw up watertight employment policies and procedures, Ms. Winter noted.

The European Court of Justice also increasingly is being asked to rule on discrimination cases. Among the lawsuits that the court has recently ruled on is a German case relating to a job advertisement that specified that a female was required. The European Court of Justice ruled that when E.U. member nations implement the directive on equal opportunities for men and women in gaining employment, they must apply sanctions sufficient to prevent discrimination between the sexes. The court ruled that a ceiling of three months' salary in compensation laid down by German law, and a total of six months' salary in aggregate compensation, "did not represent an appreciable and dissuasive financial burden." The court noted that other German labor laws do not provide for similar caps on fines for violations.

Meanwhile, the European Commission has begun to draft a policy on sexual harassment in the workplace. A second round of consultations between E.U. member countries recently has begun, because current rules in most member states "are aimed at condemning or remedying serious cases of sexual harassment and do little to prevent the problem from occurring," according to an E.C. report. The European Commission estimates that at least 30% of women in the workforce have been subjected to harassment.

This heightened focus on employment practices liability could lead to greater interest in insurance coverage for these risks, insurers say. Insurance is available in Europe either as a stand-alone EPL policy or through endorsements to directors and officers coverage, according to Sedgwick's Mr. Foord-Kelcey.

In Europe, the most common approach is to extend D&O policies to provide coverage for discrimination and other employment-related disputes, he said. But he added that many of these extensions cover only individuals, whereas most claims brought in Europe are against companies.

Mr. Foord-Kelcey said that many companies are uninsured for such risks, regarding employment disputes as a "cost of business." However, high-profile U.S. cases have alerted companies to the potential of catastrophic losses, he said.

In 1996, Texaco Inc. paid $176.1 million to settle race discrimination claims with a group of employees, while the Equal Employment Opportunity Commission filed sexual harassment charges against Mitsubishi Motor Manufacturing Co. of America on behalf of at least 500 claimants (BI, Dec. 23, 1996).

Bermuda-based X.L. Insurance Co. Ltd., which last year launched a stand-alone policy offering employers up to $100 million against employee lawsuits relating to such offenses as job discrimination, sexual harassment and wrongful dismissal, is getting some interest from European corporations, said Jim Ansaldi, senior vp-professional lines.

Mr. Ansaldi spoke to risk managers about the product at a seminar in Dublin last month.

Although he acknowledged that the issue has been largely confined to U.S. exposures to date, changing legislation throughout the world-including Europe, Japan, Israel and Australia-will increase the need for multinational operations to cover their exposures outside the United States.

Employment practices liability insurance is "a viable product to be sold in Europe," said Mr. Ansaldi, who predicted that in the next three to five years European discrimination law will be overhauled.

AIG Europe (UK) Ltd. two months ago launched stand-alone coverage for employment practice liability as well as D&O extension coverage for both individuals and corporate entities, said Alexander Baugh, a senior vp.

Most of the interest in AIG Europe's stand-alone coverage so far has come from European companies with U.S. exposures, Mr. Baugh said. However, many of those companies are buying the coverage on a global basis and not just for U.S. subsidiaries.

Class-action suits are not as common in Europe as in the United States, but publicity about increasing discrimination compensation awards is making European companies more concerned about the issue, he said.

Lloyd's of London underwriter Ian West also is seeing an increasing number of European companies asking for employment practices coverage as an extension for their D&O coverage. Mr. West, who is the professional and financial lines underwriter for syndicate 702, says that companies are looking for the coverage for exposures outside the United States as well as U.S. exposures.

Syndicate 702, which is managed by Octavian Syndicates Management Ltd., also provides employment practices insurance through its commercial legal proceedings insurance, which is underwritten by legal expense underwriter Terry Mason.