Bad Economy Hurts, But Doesn't Sink EPLI Market

Experts agree on one of the main drivers of the recent claims surge–the economy. "A-year-and-a-half ago, when you could get fired on a Monday and have a better job on Wednesday, you didn't worry about getting an attorney," Mr. Taffae said. "Now, people are out of work for two or three months. Times are tough. They've got to get an attorney," he added, citing mass layoffs at major companies as part of the problem.

But why is this a surprise to carriers? Didnt they expect that a change in the economy would eventually come and that it would prompt EPL claims?

"For a long time, the people that [wrote EPLI] were directors and officers liability underwriters," Mr. Taffae said. "If D&O underwriters get one claim every 10 years from their insureds, it's a seven or eight-digit claim. They're not used to frequency," he added, noting that EPLI is only a 10-year-old coverage.

Michael Maloney, vice president and EPLI manager for Chubb Specialty Insurance in Simsbury, Conn., offers a different view. The surprise, he said, is that in addition to a tough economy, other factors came together at once.

Providing a bit of history, he noted that in 1991, Congress amended Title VII of the Civil Rights Act of 1964, adding that three of the 1991 amendments are now very relevant. One allowed employees to seek a jury trial, another allowed them to seek punitive damages, and a third allowed the attorneys to recover their costs.

In addition to a worsening economy and the heightened awareness of discrimination rights that the Clarence Thomas hearings and other events created in recent years, he said that the economics of the 1991 amendments now work for plaintiffs and, most especially, for their attorneys.

Plaintiffs attorneys specializing in EPL "were sort of a cottage industry in the early 1990s," he said. "But today, a lot more firms that were focused on securities, product liability or even personal injury litigation are now dabbling in–and maybe even jumping into–the employment area."

"You bring all those factors together and that's where the surprise comes in," Mr. Maloney said. "History hasn't been a very good reflector of the future," he added, noting that a big part of underwriting for most lines of insurance is to look at the past loss experience of any one client. "If you think about any of the companies you've read about in the papers, it's not like [the same firms] have been hit over and over" with EPL claims.

The experts also agree that while EPL was always thought of as a severity coverage, the "speed of severity" is also news.

Mr. Maloney has expressed particular concern, on several occasions, about a "legal extortion" trend that is speeding EPL settlements. (See NU, Nov. 26, 2001, page 11, for example.) 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. Companies with strong brands to protect agree to eight-figure settlements even if they have the facts to successfully defend such cases, he said.

EPL suits, on average, settled within 22 months over a year ago–"and now it's down around 18 months," noted Ann Longmore, the national EPL practice leader for Willis in New York. "Thats amazing, to have that as your duration for multimillion-dollar settlements."

Mr. Taffae also noted that in addition to settlements, jury verdicts now "are big-ticket items," referring to a $30 million verdict in a class-action discrimination case handed down by a San Diego jury in April against Ralph's grocery stores.

With California becoming a legal "hot spot"–Los Angeles County, in particular–one EPLI pioneer has altered its strategy with respect to new business. Letha Heaton, vice president of sales and marketing for Shand Morahan & Company in Deerfield, Ill., confirmed that the company, which is underwriting manager for Evanston Insurance, is not accepting new business in California and is not writing prior-acts coverage. "We have put in an additional request to get increased rates in California, and if thats approved, then well again begin to write new business and prior acts," she said.

In addition to putting the brakes on new business, the firm has also already increased rates in California more than in other parts of the country. Ms. Heaton explained that the already-approved California hikes, amounting to roughly 30 percent, are tied to unemployment rates. "Its our belief that when unemployment goes up, our case experience is probably going to get a little bit more severe and more frequent," she said.

While "you have to look at California, and think, perhaps, youve got the precursor for a national movement," Ms. Heaton emphasized that Shand hasnt experienced frequency or severity issues for the rest of the country. Outside California, she said, "frequency and severity have stayed about the same," allowing the insurer to maintain the profitability it has experienced since 1991, with rate hikes of only about 10 percent.

Unlike Chubb, which writes risks of all sizes, Shands largest production area is companies that have between five and 70 employees, she said.

As for the L.A. problem, Ms. Heaton echoed the others. "There are a lot of lawyers. And big churns in the dot-com industry and the overall economy make it a hot spot," she said.

Other than Shands action in California, experts said that changes in the market were mostly among "fringe" players, and that there had been a handful of more notable ones. Among those mentioned were the replacement of Legion (now in rehabilitation), the downfall of a London facility that had offered full defense outside limits, and the replacement of Reliance by The Hartford.

As for remarks by Chubb Chairman Dean OHare during investor conferences, suggesting that Chubb is exiting EPL for large public companies, Mr. Maloney said: "I think his message is, we'll only write them where we think we can make money at it."

"Because most of them do have a brand image" and employee counts in the tens or hundreds-of-thousands, they attract the plaintiffs bar, he said, adding that as a result, "we tend to put out proposals that include significant deductibles [and coinsurance]. And, frankly, we're trying to fund more severity by charging more premium."

Both Mr. Maloney and Ms. Longmore noted that some insureds consider the retention and rate changes being proposed to be the equivalent of a nonrenewal. From Chubbs perspective, however, "if we can't get a program on our terms, we're willing to walk away," Mr. Maloney said.

He said that Chubbs terms will often include having different deductibles for multi-claimant (class-action) exposures and for single-claimant exposures.

A Fortune 1000 firm with tens-of-thousands of workers would probably get a proposed class-action deductible in the $5-to-$20 million range, he said. Two years ago, "it might have been $500,000- to-$5 million," he noted. A firm with 15,000 employees might be looking at a $5 million deductible today, he added.

Across the industry, "big deductibles [are] the next big news event," behind claims trends, in EPL insurance, Mr. Taffae said. "Deductibles are quadrupling" from last year, he noted, giving examples for companies with far fewer employees than Mr. Maloney cited.

Unlike Mr. Taffae, Ms. Longmore contends that carriers like Chubb started "stair-stepping retentions" up in 2000, rather than doubling or quadrupling them in a single year. But everyone agrees that insureds now buying policies with bigger retentions–and coinsurance, in some cases–dont get any premium break for taking the extra risk.

Mr. Maloney said small employers outside California are facing increases in the 10-to-20 percent range from Chubb; mid-sized companies, 15-to-30 percent; and large employers, 50 percent or more.

For California, "whether it's a California-domiciled company, or one with a facility, plant or sales location" in the state, "we need to adjust for that in terms of our pricing," he said, noting that California risks need to add another 20-to-30 percent on top of the rate hikes he cited.

The willingness to accept a coinsurance option or retention increase "actually just mitigates other increases," he said. "In a lot of cases, if we didn't get the deductible increase done" on those companies with severe class-action potential, or some coinsurance participation, "we would charge even more than the rate increases I suggested," he said.

Whether coinsurance will be included in a proposal "is a judgment call–and it's predominately to deal with the issue of a public image," he said. If plaintiffs are "going to try to use the issue of image as a lever to get a settlement, we want to make sure that we're aligned financially with our client," he said, noting that coinsurance ranges from 10-to-25 percent.

Ms. Longmore indicated that she has seen less of a push for coinsurance in the EPL than in the D&O market. "Where Im seeing a great deal of shift and some coinsurance is on the not-for-profit and privately-owned" firms, she said, noting that often such outfits have combination D&O-fiduciary liability-EPL programs.

She also said that average EPLI rate hikes are lower than for D&O, citing average increases of 30-to-40 percent for EPL, that come together with retention increases. But, "for the most part, its not 200 percent, which may be approximating a norm on the D&O side."

"On the general liability side," she added, "Ive yet to see someone renew the EPL extension that they may have put into a CGL policy or an umbrella or excess program." As a result, insureds that had such extensions are being forced into the stand-alone EPL market to get the coverage, she said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 20, 2002. Copyright 2002 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.