Hidden EPL, Fiduciary Claims Trends Cited

Chicago

The messages delivered at three separate sessions of this yearsProfessional Liability Underwriting Society meeting had a singletheme–severe claims are on the rise.

But while medical liability experts described all-too-familiarclaims trends, employment practices liability experts revealed ahidden one, and fiduciary liability experts warned of a new onejust starting to emerge.

“The single biggest problem were facing is how to get our armsaround severity,” said Joseph Moody, a vice president for The St.Paul Companies. Speaking at an early session of the annual meetingof Minneapolis-based PLUS, Mr. Moody blamed the rising cost ofmedical malpractice claims on the double-digit inflation in U.Shealthcare costs and other factors.

Tort reform has “not only stopped, but it has turned around,” hesaid, pointing to another factor. He said the biggest jury award in1997 would not even make it onto a list of the top 12 medicalawards in 2000, where awards ranged from $22 million to $269million.

“The real question is, where is the flattening out of severity?Have we reached a new plateau?” said James Hurley, a consultingactuary and principal for Tillinghast-Towers Perrin in Atlanta.

EPL claims arent showing any signs of leveling, experts said ata later session. The number of EPL settlements and verdicts greaterthan $15 million jumped 300 percent between 1997 and 1999,according to Michael Maloney, an EPL underwriting manager for ChubbSpecialty Insurance in Simsbury, Conn. He also said that the numberover $100 million jumped 240 percent in that time.

“Many companies believe they are not exposed like Coke andTexaco” were, he said, referring to landmark EPL settlements bythose companies. But more class actions are coming, he said,referring to remarks made by a lawyer involved in bringing thosecases (at a prior PLUS meeting) revealing his mission of “socialreform”–a plan to go out and find “really good cases.”

Mr. Maloney is equally concerned about “legal extortion” casesthat arent good at all. In such cases, a lawyer says he representsa group of employees alleging discrimination and threatens a“high-profile nationwide case” unless the company agrees to a largesettlement.

Even though one of Chubbs clients agreed it had the facts tosuccessfully defend such a case (in all likelihood, incurring $3million to $5 million in defense costs), they feared the publicityand settled for eight-figures, he said.

“I have been through that situation 10 times,” said GeraldMaatman, senior partner and chair of Baker & McKenzies globallabor, employment and employee benefits practice group in Chicago.“These are the cases under the radar screen that you wont see inthe statistics.”

The EPL experts called claims severity the “second gorilla”facing EPL insurers. The first is “changing economic conditions”that will prompt more workforce reductions and, correspondingly,more employment litigation.

Economic conditions will also spur more fiduciary liabilityclass actions, Rhonda Prussack, a vice president for National Unionin New York, said later.

There will be ERISA 510 allegations, she said, referring to aspecific section of the 1974 Employee Retirement Income SecurityAct. In such cases, employees allege they were let go as part of acompanys attempt to interfere with their rights to get benefits.Others will allege that plan distributions werent timely, she said,noting that some will indeed be delayed because human resourcespersonnel are included in the layoffs.

Predicting another type of case, she said, older employees thatare encouraged to take sweetened early retirement packages mightaccept lump-sum pensions, but then take figures to “forensicaccountants.” Using different interest rates and life expectancies,the accountants might come to higher sums, providing a basis forclass actions, she said.

Other experts warned of a fiduciary liability claims “explosion”of “follow-on” suits to multimillion-dollar securities lawsuits.Larry Davidson, an attorney with Duane, Morris, Hecksher in Chicagoexplained the basics of this “brand new area.”

Say a public company has a qualified plan–a 401(k) or ESOP; anemployer stock fund is one investment option; certain executiveofficers of the company exercise fiduciary duties of the plan; andthe employer stock fund experiences a prolonged decline in value,he said.

The company first becomes the target of a securities classaction brought by shareholders, perhaps alleging accountingimpropriety that inflated the price before it tanked. With noadmission of liability, the company enters into amultimillion-dollar settlement.

While a portion of the settlement proceeds will compensateparticipants of the qualified plan who “purchased” employer stockduring the class period, what about the people who had planaccounts with employers stock that just held their shares? Theydidnt get compensated in the settlement, he said, explaining onemotivation for an ERISA class action.

ERISA law focuses on the process fiduciaries go through inmaking investment decisions, said John Rafferty, first vicepresident based in the Chicago office of Hartford FinancialProducts. Explaining the conflicts that plan fiduciaries who arecompany officers can face, he asked: “If you are a fiduciary for a401(k) and recommend sale of the companys stock, whats that goingto tell the market? Whats it going to do to the price of the stock?Whats it going to do to morale?”

Noting that fiduciary liability is often written as a “throw-in”on a directors and officers liability policy, “after thispresentation, maybe we wont have that same lack of attention” onthe part of insurance underwriters, Mr. Davidson said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, November 26, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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