Hidden EPL, Fiduciary Claims Trends Cited

Chicago

The messages delivered at three separate sessions of this years Professional Liability Underwriting Society meeting had a single theme–severe claims are on the rise.

But while medical liability experts described all-too-familiar claims trends, employment practices liability experts revealed a hidden one, and fiduciary liability experts warned of a new one just starting to emerge.

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

Tort reform has “not only stopped, but it has turned around,” he said, pointing to another factor. He said the biggest jury award in 1997 would not even make it onto a list of the top 12 medical awards in 2000, where awards ranged from $22 million to $269 million.

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

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

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

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

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

“I have been through that situation 10 times,” said Gerald Maatman, senior partner and chair of Baker & McKenzies global labor, employment and employee benefits practice group in Chicago. “These are the cases under the radar screen that you wont see in the 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 liability class actions, Rhonda Prussack, a vice president for National Union in New York, said later.

There will be ERISA 510 allegations, she said, referring to a specific section of the 1974 Employee Retirement Income Security Act. In such cases, employees allege they were let go as part of a companys 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 resources personnel are included in the layoffs.

Predicting another type of case, she said, older employees that are encouraged to take sweetened early retirement packages might accept lump-sum pensions, but then take figures to “forensic accountants.” Using different interest rates and life expectancies, the accountants might come to higher sums, providing a basis for class 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 Chicago explained the basics of this “brand new area.”

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

The company first becomes the target of a securities class action brought by shareholders, perhaps alleging accounting impropriety that inflated the price before it tanked. With no admission of liability, the company enters into a multimillion-dollar settlement.

While a portion of the settlement proceeds will compensate participants of the qualified plan who “purchased” employer stock during the class period, what about the people who had plan accounts with employers stock that just held their shares? They didnt get compensated in the settlement, he said, explaining one motivation for an ERISA class action.

ERISA law focuses on the process fiduciaries go through in making investment decisions, said John Rafferty, first vice president based in the Chicago office of Hartford Financial Products. Explaining the conflicts that plan fiduciaries who are company officers can face, he asked: “If you are a fiduciary for a 401(k) and recommend sale of the companys stock, whats that going to 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 this presentation, maybe we wont have that same lack of attention” on the 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Hidden EPL, Fiduciary Claims Trends Cited

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