In terms of geography, California stands out as significantly worse than the rest of the country. There is some debate within the industry about whether it is an issue primarily for California-based employers or also for employers based elsewhere which have some locations or staff in California.

Clearly underwriters differentiate pricing and self-insured retentions based on geography with the higher levels focused on California and other tougher states such as Texas, New Jersey, West Virginia, Alabama and Michigan. Underwriters also highlight tougher industries such as retail, restaurants and financial institutions, particularly stockbrokers.

Regarding underwriting, rate increases for 2003 likely will be differentiated by employee size, industry, geography and human resource/employment policies and practices. Smaller risks in better states and industries could see some modest rate increases.

Mid-sized risks with any image or class-action potential are a much larger concern and could see significant rate increases similar to large employers. Self-insured retentions will be reviewed for loss trends and may continue to rise on a risk-by-risk basis.

Further, mid-sized and larger employers are seeing seven- and eight-figure self-insured retentions for multiple claimant and class-action claims. Coinsurance can be an attractive tool for accounts whose image might lead them to desire a quick settlement in the face of a high profile, negative discrimination or harassment case. There is comfort to be found in some financial alignment over and above the level of the self-insured retention.

As for the actual underwriting drill down, this continues to be a tough line to underwrite as it is easy to accuse almost any employer of a discriminatory bias. Then the employer must show that it has taken reasonable and effective actions, under its well-designed policies and practices. This sometimes must be done in the face of a negative publicity attack.

As a result, EPL insurers will seek employers (1) with proactive employment policies in place; (2) that are aware of their diversity picture and that are taking steps to continuously improve it; and (3) that have the stomach to defend themselves when they have a good case but that are responsible enough to correct adverse employment situations when they become apparent.

Thus, mid-sized and larger employers with class potential or public image profiles, even on a local level, should expect more in-depth questions from their EPL underwriters. These questions will focus on diversity awareness, diversity monitoring and improvement initiatives, and anti-discrimination and anti-harassment policies and practices. Employers of all sizes should expect a significant focus on their discrimination and harassment complaint resolution process.

With respect to available capacity, many carriers have become more conservative. Most will not offer more than $25 million in limit and some will not lead with more than $5-15 million. There is also a greater reluctance to blend EPL limits with other professional lines. The result is more employers are buying separate EPL limits and perhaps ending up with less capacity, but at least it is 100 percent dedicated to employment matters.

Policy language is being updated to remove some of the insane extras of the late 1990s, such as disappearing deductibles, settlement credits and automatic acquisition coverage.

However, EPL forms today continue to support their original purpose and are quite broad in treating typical discrimination, harassment and wrongful termination claims. Carriers are taking the opportunity with new forms to reinforce areas they never intended to cover, as well as solidify the duty-to-defend nature of this coverage.

A bright spot is that there has been an upsurge in the use of EPL loss prevention. While it is hard to prove a negativethat a claim did not occur because loss prevention was usedthere is great value in EPL loss prevention.

Reinsurers continue to support the product, but they, too, are concerned with severity and also with aggregation of limits. Just as insurers are clarifying their own underwriting focus, so, too, are their reinsurance partners.

On the whole, the industry is working hard to identify and monitor the evolving issues that face EPL as a line of coverage. EPL has been around for about 11 years now, so some growing pains should be expected.

It is a line that will continue to be subject to evolving legislation, case law and litigation tactics. Therefore, it is an arena, which demands underwriting diligence and discipline. However, with continued attention, it is a coverage line that can stand the test of time.

Michael J. Maloney is vice president, EPL underwriting manager,

Chubb Group of Insurance Companies in Warren, N.J.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 26, 2003. Copyright 2003 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.