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One of the biggest stories of 1998 was a familiar one: the big getting bigger.

Merger and acquisition activity accounted for three of the top 5 risk management stories of 1998 (see stories, beginning on page 12).

Not all of the top stories of the year, however, revolved around consolidation. Rounding out the top 10 stories were new risk financing options, developments that increase the liability of businesses, a court ruling that expands liability coverage, as well as an expansion of the risk management community's largest organization.

Coming in at No. 6 was a series of events that demonstrate increased activity in the capital markets and growing convergence between the capital markets and risk financing.

Throughout the year, numerous insurers and reinsurers developed risk financing programs with the use of capital markets instruments, or investment.

In May, Reliance National Insurance Co. offered a new twist on risk securitization by purchasing an option to issue multiperil-linked insurance notes, thus providing the insurer with a guaranteed reinsurance cost without giving up the potential to obtain further savings in the soft reinsurance market.

Reliance National was not alone in looking for new ways to accomplish long-term goals, either.

In late August, Swiss Reinsurance Co. entered into an unusual reinsurance arrangement with an unnamed reinsurer involving a basis swap for U.S. windstorm damage.

A few weeks earlier, Robert R. Lusardi, executive vp and chief financial officer of EXEL Ltd., announced that a $200 million retrocessional reinsurance program was put together more quickly by capital markets and alternative market reinsurers than the traditional reinsurance market. The deal covered hurricane and windstorm risks of EXEL subsidiary X.L. Mid Ocean Reinsurance Co.

The capital markets also scored in Germany, where insurer Albingia Versicherungs A.G. is exploring the use of risk securitization to provide roughly 25% of the multibillion-dollar insurance program for future World Cup soccer tournaments.

Many reinsurance companies in 1998 launched special capital markets units, which is seen as a sign that the companies expect non-traditional financial instruments to play a prominent role in future insurance and reinsurance transactions.

According to Peter A. Gentile, president and chief executive officer of Gerling Global Financial Products Inc. in New York, the risk securitization developments are a natural extension of the ongoing convergence of banking and insurance.

"This is not a process that occurred only over two or three years," he said. "This is a process that occurred over 10 or 15 years. Each year the two groups get closer and closer to each other."

A non-traditional use of product liability laws ranked as the year's No. 7 story, as New Orleans filed a lawsuit against handgun manufacturers under state product liability laws.

In its Oct. 30 lawsuit, New Orleans sought to recover the costs of handgun violence in the city by seeking an undetermined amount of money -- estimated by observers to be in the tens of millions of dollars -- from gunmakers for allegedly producing "unreasonably dangerous" products. The city contends that gunmakers have the technical know-how to disable guns that get into the hands of unauthorized people, such as children, but have failed to implement such safety precautions.

Other cities are considering following New Orleans' strategy, though variations among state product liability laws make it impossible for carbon copy suits to be filed against gunmakers in every jurisdiction. Chicago and Cook County, Ill., for example, quickly filed their own suit against gunmakers, but charged the defendants with representing a "public nuisance" by flooding the market with handguns rather than with violating product liability laws.

The year's No. 8 story also involves a courtroom battle -- this one in the nation's highest court. In early March, the U.S. Supreme Court ruled in Joseph Oncale vs. Sundowner Offshore Services Inc. that Title VII of the Civil Rights Act of 1964 applies to same-sex sexual harassment as well as opposite-sex sexual harassment

Mr. Oncale, a worker on an offshore oil rug, had suffered repeated sexual harassment, including threats of homosexual rape, from co-workers. He quit his job and sued the coworkers and his employer under Title VII, which makes it illegal for an employer "to discriminate against an individual with respect to his compensation terms, conditions, or privileges of employment, because of such individual's race, color, sex or national origin." But lower courts said Mr. Oncale had no recourse under the act, because he and his alleged harassers were all men. The unanimous Supreme Court disagreed with the lower courts, and sent the case back for reconsideration.

Employment law experts said that the decision probably would not mean significantly increased employment liability for businesses.

"This case involves an area of sexual harassment that has not

been particularly problematic. It happens; there are cases out there, but that's not where the majority of claims against employers have arisen," said Stephen A. Bokat, executive vp of the Washington-based National Chamber Litigation Center Inc.

However, the high court revisited Title VII on the last day of its 1997-98 term, issuing two additional decisions that do broaden the grounds for sexual harassment lawsuits against employers. In Beth Ann Faragher vs. the City of Boca Raton, the justices ruled 7-to-2 that a former lifeguard could sue her employer for allowing the creation of "sexually hostile atmosphere" even though she never complained while working for the city and despite the fact that the city had a written policy against harassment. In Burlington Industries Inc. vs. Kimberly B. Ellerth, the justices ruled by the same 7-to-2 margin that a former Burlington employee could pursue a suit alleging "quid pro quo" harassment -- in which an employee is pressured to submit to a superior's sexual advances to avoid retaliation -- even if she had not complained and had not suffered any retaliation when she rebuffed the unwanted advances.

The courtroom also was the setting for the year's No. 9 story. The Washington Supreme Court on Oct. 1 ruled that the personal injury liability provisions of general liability insurance policies can cover environmental losses.

The decision in Kitsap County vs. Allstate Insurance Co. et al. marked the first time that a state supreme court had ruled that the personal injury portion of the CGL policy covered environmental liabilities. Experts said the ruling could help policyholders skirt pollution exclusions in their liability policies and allow them to tap insurance policies to cover the cost of government-ordered cleanups.

The case revolved around the question of whether pollution-related trespassing and nuisance claims filed by property owners against Kitsap County, Wash., amounted to covered personal injuries under the primary and excess general liability policies that 19 insurers had written for the county over 30 years. The Washington high court ruled that they did, but insurers can still raise other defenses at a future coverage trial.

The only other state supreme court that has dealt with the question, the New York Court of Appeals, ruled in 1994 that personal injury endorsements did not cover pollution-related property damage claims. But two U.S. Circuit Courts of Appeal ruled earlier in the decade that environmental liability claims could indeed be covered by the personal injury provisions.

The year's No. 10 story is the Risk & Insurance Management Society Inc.'s decision to expand its membership beyond risk managers to include insurers, brokers, consultants and other professionals in a new membership category called Associates of the Society. The new membership category, which was established in October, allows associates to enjoy most of the benefits of membership, though they cannot hold office or chair society committees.

In creating the new category, RIMS followed the example set by many other professional societies. Associates will pay annual dues of $400 -- $100 more than the annual dues charged full members. But like full members, they will receive discounts on the society's annual conference registration fee and other offerings.

"Looking to the 21st century, I think this is a tacit acknowledgment that risk managers will be working with an ever-expanding group of professionals with different backgrounds and different areas of expertise," said Linda Lamel, RIMS executive director.

The move came as the society's membership increased by 26 to 4,313 in 1997 from 4,287 a year earlier, ending a period of decline.