EPL Boom Not Just U.S. Phenomenon

The increase of employment practices liability cases is not just an American phenomenon, according to insurance market experts, who say the United Kingdom and some countries on the Continent are seeing increasing litigation, as are European companies with U.S. operations.

The trends are more frequency and more severity, both in Europe and in the United States, said Brian Vosloh, EPL product manager for Europe with Chubb Insurance Company of Europe. Mr. Vosloh works in the companys Amsterdam office.

The United Kingdom is seeing a litigation boom involving employment practices liability, said Gary Freer, partner and head of employment law for Barlow Lyde & Gilbert, a London-based law firm.

There not only is a growing U.K. exposure, but the explosion of EPL claims from the United States continues, which is of concern to European insureds with U.S. subsidiaries or branches, said Mr. Vosloh.

The EPL boom is no longer a phenomenon that affects just large employers, said Mr. Vosloh. “We used to say that only large employers saw the big claims. Now were starting to see small-to-medium sized employers get hit with substantial claims,” he said. “Thats something that I think is clearly a new trend for U.S. exposure.”

“That means a medium-sized European company with say, a small-to-medium sized operation in the U.S., is clearly exposed,” he said.

Mr. Vosloh emphasized that U.S. EPL exposure is not out of controlthat clearly the underwriters have control over it. “But I hear from underwriters in the marketplace that the soft market is definitely over and people are looking at trying to deal with the frequency and severity that were seeing now in claims,” he said.

Mr. Freer discussed the EPL situation in the United Kingdom. “Statistically, there has been a very steady increase in the number of employment claims being made to U.K. employment tribunals over the past few years,” he told National Underwriter. For example, he said, from 1998 to 1999 there were 149,000 employment claims filed, from 1999 to 2000 there were 177,000 claims filed, and from 2000 to 2001 there were 218,000 claims filed. (These statistics are compiled by the U.K. government.)

Mr. Freer said the litigation boom in the United Kingdom is likely to get worse if there is a recession. “When you have a recession, youre always going to get more claims and the claims are going to be bigger because more people lose their jobs and they take longer to find new ones,” he said.

“Its partly because society is getting more litigious, but also there is just more employment law around,” he said, referring not just to directives issued from the European Union, but also to changes in unfair dismissal laws in the United Kingdom.

Therefore, there are more laws that employers can fall afoul of, he said.

With the domestic changes in the unfair dismissal laws, which a few years ago raised the awards cap to 51,700 ($75,482) from 12,000 ($17,520), an employee can get much more for his or her claim, Mr. Freer said.

In addition, the government also has reduced the waiting time that an employee has to serve at a companyfrom two years to one yearbefore he or she has the right to sue for unfair dismissal, he said.

That increases the pool of potential litigants dramatically, he said.

Mr. Vosloh said there has also been somewhat of an EPL litigation boom in France as a result of more organized groups representing employees who have been discriminated against. However, he noted that there are not as many suits being filed elsewhere in the European Union because the amounts are still very low in most of the countries and employees dont really have the incentive to go after their employers.

The cap on damages for discrimination claims in the U.K. was removed in the early 1990s, he said. The cap was removed after a discrimination case that went to the European Court of Justice in the Hague in The Netherlands, which decided that it was against public policy to put a cap on damages for discrimination, he said.

He said the success of this litigation is likely to lead other employees who also have suffered from the same discrimination to organize and try to change the laws in their own countries.

In the United Kingdom, said Mr. Vosloh, as a result of increased disability discrimination litigation and other EPL cases, underwriters are starting to see claims running from 30,000 ($43,800) up to 100,000 ($146,000) and more.

“Thats enough to definitely reach an insurable interest for a company,” he said, “especially because you can still get deductibles that are reasonably lowsomewhere between 10,000 and 20,000 [$14,600 and $29,200],” he said. “Youre starting to talk about claims that really would pay off on an insurance policy.”

To respond to increasing EPL claims, underwriters are not just raising rates, Mr. Vosloh said. “I thinkmost underwriters are probablylooking at deductible options in order to share the risk with the insured.”

For example, he said, underwriters in the market are asking for larger deductibles outside the United States than were previously offered.

Underwriters with exposures outside the United States are increasing the intensity of their underwriting, he said. “Previously, underwriters were not underwriting non-U.S. exposure as intensely as they are now.”

Clearly now, everybody is asking more questions such as what sort of diversity plans does the insured have in place outside the United States, and what is the insured doing to address discrimination and harassment in the work place, he said.

“These questions are coming more and more often now. Thats something we didnt see very much before,” he said.

“Were also starting to see U.S. style employee handbooks [being used in European companies] that you would rarely see outside the United States previously,” Mr. Vosloh said. “Were seeing a very proactive human resource approach to dealing with these problems, very clear messages from companies that they will not support any type of discrimination or harassment in the work place.”

Although anti-discrimination or harassment statutes existed in the law in most European countries, until recently, many European companies did not take a proactive risk management stance about assuring that such practices didnt occur, he said.

Mr. Vosloh said when Chubb first started writing EPL coverage in Europe in 1997, underwriters saw requests for an endorsement to directors and officers liability policies. Now, “because of the increasing employment exposure outside the U.S., we think its much better for a company to have a separate EPL policy,” he said.

One reason for this is that the insured probably wont want to endanger the limit of liability that it has for directors and officers “with an exposure that clearly has frequency and severity issues,” he said. “I think that you also put your directors at risk if you do that because your limit occasionally will be chewed up.”

As a result, in the middle of 2000, Chubb started to see widespread demand for a monoline EPL policy, he said. “At this point, we probably have more demand than we can meet, meaning that were definitely underwriting very selectivelyand were not accepting just anyone.”

Mike Bird, EPL product leader for professional and financial risks at Royal & SunAlliance in London, said that small-to-medium-sized buyers are interested in the EPL product, but not all are actually prepared to buy it at the moment.

That is partly due to the fact that buyers insurance budgets are being pushed upwards by property-casualty rates going through the roof, “and they perhaps havent got the money to spend on a new class such as EPL,” he said.

(Although RSA will provide cover for multinationals as well as the smallest company, it focuses on the small-to-medium sized market in the United Kingdom.)

For those companies that dont buy stand-alone coverage, Mr. Bird said they receive some coverage in a traditional D&O policy, emphasizing, however, that he didnt believe this was a proper solution to the EPL exposure problem. In the United Kingdom, legal expenses coverage also provides some EPL protection, but Mr. Bird said these policies dont provide the flexibility or limits of indemnity that a stand-alone EPL policy will offer.

Mr. Bird thought that interest in buying stand-alone EPL coverage would increase for small-to-medium sized buyers, as litigation increases and employers realize that they do have a very real exposure. “Anybody that has a U.S. exposure is probably more likely to buy anyway because they see the bigger potential from U.S. losses.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 12, 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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