Some EPLI Innovations Are Now History

"That sounds worse than it is," he continued. "I could argue that third-party [claims] probably are better covered under another policy," he said, suggesting that such claims are really a commercial general liability policy-type of exposure.

Ann Longmore, the national EPL practice leader for Willis in New York, noted that some of her clients have had CGL carriers pay such claims. But even those clients still want the extra protection of EPLI third-party endorsements, she said.

Reporting her conversations with first-time EPL buyers, she said they reveal that they want their CGL carriers to continue to pay such claims in the future, but wont agree to discard the coverage from EPLI policies to bargain for a price discount. These clients reason that while their GL carriers may have not balked at paying a $15,000 or $20,000 claim "here or there," the GL insurers "have never been faced with a class action."

Carriers, she said, are "pulling back on the [third-party] coverage, particularly for financial institutions." Financial firms are finding the endorsement "very, very difficult to get" because carriers are concerned about redlining and economic discrimination issues, she said. Working around the concerns, the broker asks carriers to put in exclusions for those specific types of activities, but not to remove the third-party coverage entirely. "Clients are not purchasing EPL coverage with the idea that they are getting redlining coverage," she asserted.

Mr. Taffae said that the push back on the part of EPL carriers doesnt seem to be a reaction to any particularly big influx of third-party claims. "While they might have been hit more in certain industries, this is just a product of the general tightening of the market," he said.

Michael Maloney, vice president and EPLI manager for Chubb Specialty Insurance in Simsbury, Conn., said, "nobody in the industry is talking about huge claim payouts or multimillion-dollar verdicts in this area just yet."

"But I do think there is more evidence of civil rights-type cases coming from vendors and customers, [and] I think it is something that everybody is a little bit more concerned about," he said.

As a result, Chubb reviews the possibility of providing third-party coverage on a case-by-case basis, he said. "We look at what protection we want to provide, at what limits, what charge we should make for it, and what employers are doing to control the exposure."

Beyond that, he said, some carriers are questioning whether buyers and insurers wouldnt be better off if they took third party out of EPLI entirely and created a distinct coverage–"underwrote it, priced for it and provided protection for it separately.Its not there yet. And maybe its notsustainable enough to become its own product just yet. But there is some acknowledgement that that may make sense over the longer term."

Mr. Maloney does not anticipate any further expansions of EPL coverage in the near future. "Mostly, what you'll see is carriers clarifyingwhat they intend to cover and what they dont," he said, noting, for example, that policy language now makes it clearer that EPLI policies "were absolutely not intended to cover wage-and-hour claims." He explained that a wage-and-hour claim could be one from an employee alleging that his position was misclassified and that he wasn't paid appropriate wages or overtime.

"Almost all EPL policies have Fair Labor Standards Act exclusions in them," which exclude such cases filed under FLSA or similar state laws, he said. With a spike in this type of litigation on the West Coast, in particular, "carriers are trying to make it abundantly clear that they don't intend to cover those suits."

Ms. Longmore sees the need for that type of clarity on a global scale. "Im becoming concerned about human rights cases that have come up around the world," she said. "When do human rights violations become civil rights violations?" she asked, noting that EPL policies are generally thought to "essentially cover civil rights in an employment context."

"When you get a suit that a large multinational company enslaved workers in some South American country, forcing them to build a petroleum refinery, is that harassment, discrimination or violation of a civil right in an employment context?" she said. "I dont see a slavery or human rights exclusion. Its not clear to me that the EPL policy might not morph into something that would surprise all of us."

The two experts said that EPL carriers are still quite willing to provide coverage for punitive damage claims in the United States or outside of its borders. "I still havent heard any [insurer] say it paid a punitive EPL verdict. Most things settle," Mr. Maloney said.

Ms. Longmore said carriers arent changing past decisions to offer punitive damage coverage expansions through "most favorable venue" language or separate Bermuda policies. (Most favorable venue language broadens traditional language that says punitives are covered "where insurable," allowing insurers to afford such coverage if they can find insurability in any state that has a substantial relationship to the insurer, the insured or the claim.)

EPL carriers, however, are changing provisions related to choice of defense counsel. "We really feel [customers] have to have the appropriate attorneys" in class-action cases, Mr. Maloney said. In the past, "we were willing to accommodate customer choices of counsel. If they took significant deductibles, wed allow them to choose the law firms they wanted to defend themselves," he said.

Today, in addition to requiring substantial deductibles for class actions and multiple-claim cases, he said, "we want to have that control over the choice of lawyer," noting that Chubb believes there is only a handful of firms–and maybe even attorneys–qualified to handle class actions. "Were willing to work with our clients in picking from that very narrow band of firms, but we really feel its imperative that the right defense counsel are involved in those potentially volatile cases."

Ms. Longmore said that a "revolving door" that once allowed insureds to get their counsel choices included on pre-approved lists is now closed. With respect to such lists, sometimes referred to as "panel counsel," she said: "Some carriers have told us that they are done, the store is closed, they will not be tinkering with these. Read them and weep if you have to."

While she said that carriers might still consider "one-off situations"–granting special approval for a specific claim, they are no longer willing to grant clients the flexibility of reviewing their panel counsel lists to suggest additional firms to add in advance of a claim.

Not only is that option not going to be available anymore, but some carriers have said that they may kick off some of the boutique firms that insureds might have on their policies now. They might not be available on renewals, she said.

Mr. Maloney said that another change in the EPL market is the willingness of carriers to allow "threshold reporting." Explaining the concept, he said some carriers used to allow clients with sizable deductible on their policies to withhold claim reports until their claims reached a certain size. (For Chubb, the threshold used to be 50 percent of the deductible, he said in an interview in 2000.)

Now, "I think carriers want to know a lot sooner than ever before," he said. "That was an option that was usually available only to the most sophisticated, largest customers in the first place."

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.