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A CLOSER LOOK AT SPECIALTY RISKS: ENVIRONMENTAL & PROFESSIONAL LIABILITY

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Risk managers who have been skeptical about employment practices liability insurance might want to take a second look.

Now five years old, the EPL market is much more mature than it was even a year ago.

Since the beginning of the year, new insurers have entered the market, and many that have been in the market have broadened coverage.

Not only are premiums down, but many standard exclusions also are gone. As a result, more insurers are covering punitive damages and claims arising from company downsizing, intentional acts and retaliatory actions.

Greater awareness of employment practices risks, more loss data and growing case law have led underwriters to offer enhanced EPL coverage.

Today, risk managers can buy as much as $200 million in excess EPL coverage. Risk managers also can buy an EPL policy that includes coverage for discrimination and harassment claims brought by clients or customers. In addition, many EPL insurers now offer a host of loss control services as a value-added benefit with the purchase of the policy.

"It's night and day in terms of coverage compared to a year ago," said Gerald L. Maatman, a labor attorney with Baker & McKenzie in Chicago.

Phillip N. Norton, managing director for Sedgwick Financial Risk Specialists in Chicago, said last year he couldn't even recommend an EPL policy to clients because the coverage was inadequate.

"Insurers are presenting a much better product with a better price and, with another year of adverse trend, it's a triple combination," he said. "I feel good about selling it today."

This is good news for risk managers, considering the fast pace of employment practice liability litigation occurring nationwide. One need only mention the name Texaco Inc. to remember the $176.1 million it paid to settle a class-action race-discrimination suit late last year.

According to the Equal Employment Opportunity Commission, 77,990 complaints were filed with the federal agency in fiscal year 1996. Of the total, race discrimination complaints represent the largest portion, with 26,287 complaints filed in fiscal 1996.

Because employment-related lawsuits tend to be high-frequency and high-severity cases, and because EPL coverage is now broader and cheaper, it is only a matter of time before more risk managers jump on the EPL bandwagon, experts say.

"Risk managers are more willing in 1997 to actually explore the coverage with management and involve human resources and general counsel in the process," noted Bob Redman, managing director with J&H

Marsh & McLennan Inc. in New York.

"In the past, I always knew (EPL) was out there, but it was expensive and didn't buy you much," said Lisa Dickson, vp-risk and loss control for restaurant holding company Brinker International Inc. in Dallas.

"The main drawback was always the limits," she said. "I'm mainly concerned with class actions, so I need more than $5 million to $10 million."

Over the past year, companies have taken another look at EPL because the market is changing so quickly, she said. But while the coverage has moved to Ms. Dickson's list of annual policy reviews from review every three years, "we're still not there yet" in terms of buying, she said.

Said Jeffrey W. Pettegrew, vp-risk management and insurance for Western Staff Services Inc. in Walnut Creek, Calif.: "We're taking a look at (EPL) coverage forms because it seems to be dropping in price. But we've not made a decision yet."

EPL experts say that unlike other insurance policies, there is no standard employment practices liability policy. While all the policies cover liability for employment discrimination, harassment and wrongful termination, other named perils and other value-added services provided vary among insurers.

Overall, "insurers are becoming more willing to be creative in the way they write the policies. They are more responsive to the need of the customers," noted Mr. Maatman of Baker & McKenzie.

For many retail clients that want coverage for claims arising from customers or clients, National Union Fire Insurance Co. of Pittsburgh, Pa., has the answer. The New York-based unit of American International Group Inc. enhanced its EPL policy in April. Among many of the new features is coverage for discrimination and sexual harassment claims brought by third parties other than employees.

"This exposure to customers or clients is a growing exposure for corporate America," said Ty R. Sagalow, senior vp and chief underwriting officer of the management liability division of National Union.

While previously National Union's coverage applied to the company; directors and officers; and employees, including part-time workers, this new policy also covers leased individuals and independent contractors.

The policy covers retaliation claims in connection with strikes and lockouts, and punitive damages, where insurable, by endorsement.

National Union writes primary EPL coverage with a $50 million limit. Premiums vary, and deductibles begin at $25,000.

National Union also developed a host of new loss control and risk management services to help employers reduce the risk of employment practice problems. While its sister company, AIG unit Lexington Insurance Co., has yet to change its EPL policy, it also is offering the same type of loss control services.

"We are looking to provide value-added services to our insureds," said Karen A. Callanan, director of risk management employment practices for Boston-based Lexington.

Included in the new services is a toll-free number that Lexington clients can call with questions on risk management issues. The insurer also is offering employment practice audits, which analyze policies and procedures, identify deficiencies and provide recommendations. It is offering a coordinated national defense counsel to help policyholders with multiparty class-action suits and educational seminars.

Clients also get HR/COMPLY, a comprehensive electronic reference library designed to help employers perform self-audits to identify exposures. It also provides overviews of all employment, workplace and discrimination laws.

While National Union and Lexington offer the same services, Lexington has not changed its policy, which is written on a non-admitted basis.

"Lexington is contemplating some changes to its EPL policies," Ms. Callanan said. "It's our goal by July to have all changes completed and formalized." The surplus lines insurer's current policy has limits of $50 million. The minimum premium is $25,000, and the minimum deductible is $5,000.

Chubb & Son Inc. recently enhanced its EPL policy form, said Jack Kuhn, a vp with the Warren, N.J.-based insurer.

Chubb deleted its financial impairment exclusion, which had denied coverage if a company went into bankruptcy for any EPL claims that arose due to the bankruptcy, Mr. Kuhn said.

In addition, Chubb deleted its "purposeful violation" exclusion, which excluded coverage for violations of statutes such as the Americans with Disabilities Act.

Chubb also deleted an exclusion for mental anguish and now will cover claims arising from mental anguish, emotional distress and humiliation.

The insurer has narrowed the scope of a variety of other exclusions found in its prior policy.

The policy covers retaliatory actions and can be endorsed to cover punitive damages in states where they are insurable, Mr. Kuhn said.

Chubb will write EPL coverage worldwide with up to $50 million in limits. The minimum deductible is $25,000; premiums vary.

For risk managers seeking high excess coverage, Hamilton, Bermuda-based X.L. Insurance Co. Ltd. in April introduced additional EPL policy limits.

Because punitive damages are such a large concern, "some of the larger corporations have requested larger limits," said Jim Ansaldi, senior vp.

X.L.'s standard EPL policy offers up to $100 million in limits excess of $1 million. While premiums vary, Mr. Ansaldi said he has yet to write a $100 million policy for less than $250,000.

If the client has purchased X.L.'s EPL coverage and has purchased X.L.'s umbrella liability policy, X.L. will write an endorsement for an additional $100 million in EPL coverage as a rider on the umbrella program, Mr. Ansaldi explained. That brings the EPL limits to $200 million.

The Bermuda-based insurer also has "taken a little more aggressive posture in pricing the product," he said.

X.L. has lowered the ratio on its premium formula for non-U.S. employees. For multinational companies with employees overseas, that means lower premiums.

X.L.'s worldwide policy will cover punitive damages and claims arising

from acquisitions and downsizing. The policy does not cover intentional acts made by an individual, but it will cover the corporation.

"We are inundated with meetings with corporations to discuss the coverage," Mr. Ansaldi said. EPL is "certainly on the tips of tongues of many risk managers."

While many insurers are enhancing their existing policies, other insurers are entering the EPL arena for the first time. Two of the largest new entrants are Kemper Insurance Cos. and Travelers Property Casualty Corp.

Kemper last month unveiled its EPL policy, which is now available in 38 states. Forms are pending in the other states. Kemper is targeting employers with fewer than 100 employees but will talk to larger employers, said Bill Sobolak, product development consultant the Long Grove, Ill.-based insurer. The claims-made policy has limits up to $5 million, with a $5,000 deductible. The minimum premium is $400 for $100,000 in limits for employers with fewer than 24 employees, he said.

Kemper is offering 30 minutes of free legal advice and newsletters on employment practices with the purchase of its EPL policy, Mr. Sobolak said. Seminars also are available for a fee. The policy covers a broad spectrum of discrimination and harassment claims, including those due to prior arrest records, military service and immigration status. The policy excludes punitive damages.

Travelers hopes to begin underwriting its new stand-alone EPL policy by mid-June, said Susan Drake, senior vp of Travelers' bond operation in Hartford, Conn.

The claims-made policy has aggregate limits of up to $25 million. The minimum premium is $2,500, and the minimum deductible is $5,000.

The policy targets employers with 100 to 2,000 employees.

Travelers' policy covers claims arising from intentional acts and claims arising from downsizing. The policy will cover punitive damages in states where permitted.

Travelers also is providing EPL clients with a quarterly newsletter and a package of information to conduct their own training and to educate themselves to identify incorrect workplace practices.