Not all the news is bleak on the employment practices liabilityfront for employers and insurers, but in a down economy, there aremore dim forecasts than bright spots ahead, experts say.

Still, whileconventional wisdom and statistical evidence suggest a deluge ofEPL claims contained in the gathering clouds of increasing economicpressures and worker terminations, there may be some hidden silverlinings, they say.

“The good news, in my opinion, is that employers can effectivelymanage a critical component of [their] exposure,” said CathyPadalino, vice president and EPL product manager for Chubb &Son in Warren, N.J., who identified layoffs or reductions-in-forceas that critical component.

There has definitely been an increase in single-plaintifflawsuit activity, she said, explaining that workers laid off intoday's economy are finding it much tougher to find new jobs thanthose in similar straits in past economic downturns of recentdecades–situations prompting them to turn to legal remedies tocushion the economic impact of job losses in the meantime.

Other insurance and legal experts, however, provided a list ofreasons to suggest those single-plaintiff cases may not be severefrom a cost perspective, including the fact that potential jurorswork for companies that are similarly impacted by economicpressures as defendant employers.

In addition, Ms. Padalino noted that midsize and largeemployers, by effectively managing layoff processes, are loweringthe potential for class or mass actions by groups of employees.Termination activity “is a facet of employment that an employer canactually control upfront,” she said.

“Having [an insurance] customer appropriately manage a workforcereduction with outside counsel is something that really has animpact on the loss experience,” she said. “So there's good newsthere, because obviously layoff statistics are at unprecedentedlevels.”

Phil Norton, vice chairman for the Midwest region of A.J.Gallagher & Company in Chicago, Ill., reviewed the history ofEPL insurance, noting that carriers have developed and fine-tunedservice offerings to help employers handle employment events overthe past decade.

“Now a reduction-in-force comes, and they [employers] have a lotof defensive measures in place–everything from how they've beenrunning employee reviews and [providing] feedback and documentation[to] how they handle the actual layoff, including having someonetalk to each employee prior to the layoff.”

Mr. Norton said some reductions have been “handled extremelywell” to the point where “not only are the employees not concernedabout suing their employers, but they're actually departing on goodterms.” Some even express a desire to return to their employerswhen the economy recovers because they admire how their employershave handled this tough issue, he reported.

“I am impressed with the enhanced risk management I see acrossthe client base,” he said, noting that Gallagher services accountsof all sizes in all industries, and has special expertise in 20industry classes.

NUMBERS REVEAL BAD NEWS

Good processes, however, don't erase the fact that sheer numbersare working against employers. Unemployment is at record levels,and experts say terminations are the major trigger of EPLlawsuits.

Melissa Mattioli, vice president and EPL product manager forLiberty International Underwriters, a unit of Boston-based LibertyMutual, noted that 99 percent of the EPL insurance applicantscurrently have either had a reduction-in-force or are planningone.

Mr. Norton noted thata study of a large collection of EPL claims that he worked on someyears ago with a New York City law firm, revealed that 55 percentof all EPL claims were driven by a termination. “What wasinteresting was when we looked inside the 55 percent, a very smallnumber were alleging wrongful termination. Most allegeddiscrimination, harassment and retaliation,” he explained.

Admitting his interpretation of the results was somewhatcynical, he said that “we found it fascinating that theseindividuals” were not aware of any of these issues when they wereworking. But when an individual got terminated, he or she wouldsuddenly realize, “'I've been discriminated against the last fewyears,' or [would say], 'I never really thought about it until Iwas fired, but I've been harassed the last 12 months.'”

Charges of age discrimination in particular are rising quickly,Ms. Mattioli pointed out. She said charge statistics for 2008released by the U.S. Equal Employment Opportunity Commissionearlier this year show that age discrimination charges grew morethan any other category, jumping nearly 30 percent to over24,000.

“With age discrimination, once you're over the age of 40, it's aprotected class,” she said. “It's much harder to prove sex or race”discrimination, she said. “So it's not shocking to see [the] spikein age claims.”

“We call it the baby boomer generational issue as weunderwrite,” said Chubb's Ms. Padalino, noting that a rise inclaims from aging baby boomers would be a factor for EPL insuers todeal with even absent current economic conditions.

In today's economy, “just simply based upon the demographicmakeup of the baby boomer generation, the odds are higher andhigher as the clock ticks that someone [losing his or her job] isgoing to be of [that] protected class,” she said. “And juries arevery sympathetic to age” issues, she said.

Jack McCalmon, a partner with the law firm of Titus, Hillis,Reynolds, Love, Dickman & McCalmon, PLC in Tulsa, Okla., saidthat “typically, when [companies] lay off, they want to cut salaryand overhead costs,” noting that older employees make more moneyand typically have higher benefit costs. “They're going to cut thepeople who are the most costly,” and even though it's illegal to doso, “that tends to be older workers,” he said.

Ms. Padalino added that while most of the talk in the EPLinsurance industry is about layoffs, “the other real challenge ison the hiring side. [Employers] have a tremendous qualifiedapplicant pool, but that leads to a lot of challenges” andincreased potential for age and other discrimination suits, asresources of financially sound companies are stretched to “gothrough stacks and stacks of resumes, as opposed to the handfulthey got a couple of years ago.”

SEVERITY TEMPERED

Beyond the increased likelihood of claims in a recessionaryeconomy, employers face continued threats of retaliation claims,wage-and-hour class actions, and emerging exposures from anexpanded Americans With Disabilities Act and a changing politicallandscape. (For more on these topics, see related article in theJune edition of NU's monthly e-newsletter,E&S/Specialty Lines Extra.)

“I know a lot of people are running for the hills and saying,'The sky is falling,' but there are a lot of mitigating mattersthat people need to take a pause on and really evaluate,” said Mr.McCalmon, who noted that more claims do not necessarily mean biggerverdicts or large settlement numbers, summing up the thoughts ofseveral insurance company experts.

Carrie Brodzinski,EPL product manager for Beazley Group in Farmington, Conn., notedthat at this stage of the economic cycle, insurers start seeing EPLclaims a little bit earlier. Claims they might not have brought atall, or might have brought later on, are going to be brought andbrought earlier when people are worried about losing their jobs,she said.

When people bring their claims a little prematurely, what theymay really be seeking is to get a settlement that pays them whilethey look for other jobs, she said. Therefore, “I think theseverity sometimes tends to not be quite what it would have been iftimes were better.”

She also noted that while people who sit on juries typicallyhave a great deal of empathy for plaintiffs in employment cases,“when times are bad, people are a little less likely to awardreally big amounts of dollars.” She reasoned that “everybody'sfeeling it,” referring to economic pressures.

Mr. McCalmon agreed. “The general rule is a carrier is at itsgreatest risk at the time of termination. But that's in a normaleconomy.” In a recessionary economy, a person who is laid off “isjust one of many.” In a good economy, when you're laid off, “youhave the mentality that you've been picked on or singled out.”

Mr. McCalmon said “another huge mitigating factor is theextension of unemployment benefits,” noting that the benefits takeaway some of the financial fear that can drive lawsuits.

In addition, Mr. McCalmon and Ms. Padalino said the use ofseverance agreements or releases is more prevalent in these times,especially from larger, more sophisticated employers, furthermitigating exposure to EPL claims for their insurers.

Ms. Padalino explained that employees who are part of avoluntary or involuntary termination are asked to sign legalreleases stating that they waive their rights to bring anemployment-related lawsuits in order to get their severance pay orsome other consideration (such as an extension of benefits beyondthose they're already entitled to receive).

It's “a good best practice tip” to get such releases, “and it'ssomething that we always advise our customers to utilize,” shesaid.

Even where such agreements aren't in place, employers areeffectively handling one-off situations as they arise, Mr. McCalmonsaid. He said in his legal practice he sees charges brought byindividuals “being settled pretty quickly,” usually for amountsthat would be contained in a typical severance agreement.

The employee will bring a charge with the EEOC, Mr. McCalmonexplained, the situation will go into mediation, and the employermay say, “It's a bad economic situation, but I'm willing to giveyou two months for each year of service if you'll settle thisclaim.”

“So it gets settled early, but it's still a charge” in the EEOCstatistics, he said. So while soaring charges are creating anxietyamong EPL carriers, “it is a very different animal right now,” hesaid.

Another mitigating factor, Mr. McCalmon said, is the fact that“there are only so many plaintiff attorneys and so many EEOCpeople” to handle grievances. “There is a push [by] many attorneysjust to settle this–not to make big, huge class actions out ofthem,” he said.

Tempering claims severity is the fact that a lot of companieslaying people off are financially in distress. “If you take on abig class action as a plaintiffs' attorney, you're pouring a lot ofyour own money in, and you cannot afford to be just anothercreditor in a bankruptcy,” Mr. McCalmon said. “They have to reallythink about it–will their own class action send [the defendantcompany] into bankruptcy?”