As EPL Coverage Comes Of Age,

Mr. Robin termed the best risks what he called "mainstream businesses such as small manufacturers and insurance brokers."

Risks to be avoided include law firms, medical groups and entertainment enterprises involving the actual entertainers themselves, he added.

Tom Herendeen, vice president of specialty lines for the Philadelphia Insurance Companies, which also specializes in the small market, said the product is becoming more commonplace is his arena than it was several years ago.

In addition, these businesses are becoming better risks as owners and managers become more aware of the issues that cause losses in this line, he said.

"The smaller risks may not have the employee handbooks, per se, but they definitely have a greater awareness of the risks facing employers of all sizes and have at least the basic safeguards in place," Mr. Herendeen said. "Often they have the stability and management culture that makes them better risks than many of their larger counterparts."

Third-party issues, both in terms of coverage and claims, are coming on the radar screen increasingly. "It could be customers or handicapped access at a restaurant or something like that," Mr. Herendeen said.

Rick Betterley, president of Betterley Consultants in Sterling, Mass., agreed that small-company risks are improving. "When this line was being developed in the early days, everyone thought that companies without HR departments would be horrible risks," he said. "But as it turns out a lot of those companies are not being sued. There is just a formality in larger companies that makes it easier for someone who is aggrieved to say 'I will see you in court.'"

Richard Rupp, senior vice president of San Francisco-based Professional Indemnity Agency, a subsidiary of HCC Insurance Holdings Inc., said he has noticed other changes in the small-employer market over the past six years. "Initially they wanted to fight every claim and got emotionally involved," he said. "Today they give us a call and just say 'make the problem go away.'"

Usually small employers are not greatly concerned about setting a precedent that will generate claims from other employees, he added.

As insurance lines go, EPLI is relatively young–with the first policies being issued somewhere between 15- and 20 years ago. It has gained wide acceptance with large publicly held companies, but the 500-and-under market is only about 30 percent covered, said Mr. Rupp.

When U.S. Supreme Court nominee Clarence Thomas and his former aide Anita Hill riveted the nation in the fall of 1991 with their "he said/she said" allegations and denials of workplace sexual shenanigans, little did they know they would be sparking the development of a new line of insurance covering claims that had sometimes been covered under general liability policies.

In addition, as noted by Michael Maloney, EPLI Underwriting Manager for Chubb, in that same year The Civil Rights Act of 1991 for the first time allowed for jury trials and punitive damages for attorneys to recover costs for employment-related discrimination suits.

"Starting in the mid-90s there were a couple of big settlements and the plaintiffs' bar said there is money in this," he said. "That created some adverse experience, and so deductibles were raised and new restrictions were put on," he said.

Mr. Maloney also sees a lot of market potential for the under 200-employee market. While the market now garners about $1.5 billion in written premium, it could grow to nearly five-times that figure if all the businesses that needed coverage purchased it. That would make it larger than the directors and officers liability market, he said.

The most common claim today remains allegations of racial discrimination, Mr. Maloney said, basing his comment on Chubb's claims experience. (In contrast, a 2004 report by Horsham, Pa.-based Jury Verdict Research–"Employment Practices Liability: Jury Award Trends and Statistics"–lists sexual discrimination as the most prevalent type of EPL discrimination claim.)

Transportation and the retail sector remain the most challenging areas to underwrite, since–particularly in the latter–there has always been a strong male bias, according to Mr. Maloney.

One area in which there has been lots of lawsuits and publicity–but which are, for the most part, not covered by the EPLI policies–are allegations of misclassification of workers for overtime, and even some cases where employees are asked to continue working even though they have punched out, noted Mr. Maloney.

"What the underwriters are saying is: 'We don't know how to underwrite for that. If we did write it, there would be adverse selection and employers would not pay their people properly,'" Mr. Maloney said.

But Mr. Betterley pointed out there is some disagreement in the industry as to whether such wage-and-hour claims are covered in an EPLI policy. "They will often be covered if they are part of a complaint with more claims to which the insurer owes a defense," he said.

Mr. Rupp said his policies now contain an exclusion on such claims, but a defense will be provided if they are part of a larger claim involving either race or sex bias.

One firm that does provide such coverage is Deerfield, Ill.-based Shand Morahan, which writes on Evanston paper. Stan Zolna, EPLI product specialist, said the coverage is a big selling point, since most policies now exclude it, and he also agrees it is difficult to underwrite.

"Part of the problem is that the classifications used are more relevant for an industrial society than for a service economy," he said. "There has been some movement to change that, but it has been slow."

Mr. Zolna said his company created a sublimit that is half the policy limit in order to ensure that the claims it covered were the result of innocent mistakes and not any fundamental intention to pay employees improperly.

As for general EPLI pricing, Mr. Maloney has seen some tougher competition this year after the line underwent a hardening of pricing like most commercial coverages in the first three years of the decade. "Two years ago almost everyone was getting an increase," he said. "Today it depends on your individual underwriting situation."

According to the 2004 Betterley Report, Chubb's coverage for a 5,000-employee company with a $10 million limit and $100,000 deductible would entail a premium in the range of $165,000-to-$250,000. For CNA in Chicago, the comparable range would be $125,000-to-$500,000, while for Cincinnati Insurance Company it would be $85,000-to-$120,000.

Mr. Betterley said coverage limits have not changed much in the past year. "Carriers seem to have bitten the limits reduction bullet in 2002 and are satisfied that they have reduced their catastrophe exposure to a manageable level," he said.

While unwanted advances between co-workers can blossom into employment practices problems for employers of all sizes, small employers are increasingly better protected, as insurers pitch these attractive risks with lower rates.

"When this line was being developed in the early days, everyone thought that companies without HR departments would be horrible risks, but as it turns out a lot of those companies are not being sued."

Rick Betterley, President

Betterley Consultants

"Initially [small employers] wanted to fight every claim and got emotionally involved. Today they give us a call and just say 'make the problem go away.'"

Richard Rupp, Senior V.P.

Professional Indemnity Agency

"Two years ago almost everyone was getting an increase. Today it depends on your individual underwriting situation."

Michael Maloney, EPLI Underwriting Manager

Chubb