Emerging and changing US liability exposures challenge risk managers, professionals and the insurance industry to keep abreast of legal and technological developments and the needed and changing insurance coverages to protect professionals and businesses. This article briefly addresses some of the most dramatically changing areas of US liabilities due in part to the active and proactive legal arena in the United States and in part to the rapid expansion of technology and the internet.

Managed care organizations and nursing homes face increased liability

The US healthcare industry has been under fire in recent years as it has battled against increasing claims and lawsuits, new theories of liability, and the rising frequency and severity of suits against nursing homes, managed care organizations, and health care institutions alleging such things as inadequate and unqualified staff, lack of training and negligent hiring, malpractice and intentional fraud, breach of contract and violations of consumer protections and deceptive trade practices. Managed care medicine, the answer to the US national healthcare crisis, has fallen short of many its promises as some US health maintenance organizations face bankruptcy, leaving unpaid physicians and hospitals wondering how they are going to get paid. Additionally, recent court decisions, huge unexpected jury verdicts and awards of punitive damages, coupled with past inconsistencies, continue to spur litigation and create unexpected exposures for managed care organizations. The US federal and state courts' narrowing interpretation of the federal statutory protection from the Employee Retirement Income Security Act of 1974 (ERISA) continues to challenge healthcare. One of ERISA's most significant features is its preemption clause. When preemption applies to claims against healthcare benefit plans, including managed care employee healthcare plans, the complainant's remedies are severely restricted to delivery of the benefits or a clarification of the rights to benefits. However, these remedies may be too late if the patient has died or experienced further injury because of a delay in treatment.

While legislative changes in the US are almost certain, state and federal judges around the country have continued to issue decisions not only criticizing the law, but clearly narrowing the application of ERISA in managed care liability claims. Several state courts have upheld the rights of patients to hold HMOs liable for refusing to authorize treatment or for the negligence of a physician. While state and federal courts nationwide chip away at the ERISA preemption protection, justices of the US Supreme Court, the nation's highest court, heard arguments in late February on whether patients can sue their health maintenance organizations for giving doctors financial bonuses to cut costs, resulting in improper medical care. In Pegram v. Hendrich, the plaintiff had argued that the delay in her treatment had been motivated by cost-saving considerations on the part of the plan administrators who had a vested interest in minimizing total plan costs in order to ensure larger year-end bonuses. Although a decision is not expected until some time this summer, the case presents a major test of whether injured patients can sue managed care organizations for putting cost concerns ahead of patient care and will have a profound effect on how much power managed care organizations will have in the future to dictate Americans' healthcare.

The Supreme Court's decision to hear the Hendrich case came just a few short months after a huge punitive damages award against a managed care organization. Perhaps in part due to a ground swell of opinion that damages should be available to all US health plan participants, and a push to hold managed care organizations more accountable for their participation in the delivery of health care services, a California jury awarded a managed care enrollee's widow $120.5 million following the managed care plan's alleged denial of coverage for treatment of a rare form of stomach cancer. Although ERISA was not applicable in that case, the stakes are high and the magnitude of the award sent a warning to all managed care organizations.

Managed care organizations do not stand alone in the battle against increasing liability exposures facing the US healthcare industry. Claims and lawsuits against nursing homes have increased dramatically in recent years. Allegations of inadequate and unqualified staff, lack of training and negligent hiring have become common in these personal injury suits against nursing home facilities. This increase in litigation, including federal intervention and investigation, is viewed as creating a crisis which may smother an industry that is critical to our society and in dire need of legislative reform. The civil suits brought by governmental agencies, challenging the quality of services provided to Medicaid and Medicare nursing home residents and allegations of fraudulent billings for reimbursement of services, often result in millions of dollars of fines. Furthermore, fuelled by the rising interest of patient advocates in nursing home quality of care issues, and the passage of state and federal legislation aimed at curbing elder abuses and establishing standards of care, plaintiffs continue to win million dollar verdicts - verdicts that may not be capped by US tort reform measures. In one of the largest nursing home awards, a Texas jury handed down an $83 million verdict for fraud and gross negligence in a case brought by the niece of a deceased 84 year old woman. It was reported that the jury found that the defendants engaged in a systematic practice of intentional fraud and showed absolutely no remorse or intention to stop the practice of under staffing the facility.

With US healthcare litigation on the rise, and verdicts and punitive awards increasing dramatically in recent years, healthcare institutions, managed care organizations, nursing home administrators, boards and officers are carefully examining their potential exposures and recovery for these exposures under their professional liability policies, general liability policies and even, their directors' and officers' (D&O) liability policies. Without this proactive approach to the expanding liabilities facing the healthcare industry, the industry and their insurance carriers may be caught unprepared for the financial exposures resulting from the increasing and emerging liability exposures. Insurance carriers are responding to these changes in both the statutory and common laws by broadening coverages under professional liability policies.

Employment practices liability and claims of discrimination clarified by the courts

Complaints alleging civil rights violations, such as discrimination in employment, are on the rise in the US with more than 42,000 complaints filed during 1998 in US district courts according to US Justice Department statistics. With employment liability claims increasing and nearly tripling between 1990 and 1998, claims of wrongful termination, sexual harassment, and discrimination continue to make headlines and foster the rapid growth of the employment practices liability (EPL) product. The department statistics reported that the percentage of plaintiffs who won their cases and were awarded $10 million in damages or more, increased from 1% in 1990 to 9% in 1998. These damage awards do not include the legal fees incurred in investigating and defending cases of employment discrimination, the costs of which can often exceed the damage awards. In its 1997-98 and 1998-99 terms, the US Supreme Court decided several issues which clearly demonstrated the court's willingness to address issues affecting workplace discrimination and harassment, opening the doors to new theories of liabilities for employers and companies for employment related claims under federal employment discrimination laws.

The Supreme Court's recent rulings have been welcomed by all sides of the employment discrimination bar for the guidance provided. The court, deciding that an employer could be held vicariously liable to a victimized employee for the harassment of a supervisor, provided the employer with a defense stemming from the “reasonableness” of its conduct and that of the victim. Over the course of the last year, companies have been interpreting the new standard for employer liability for sexual harassment by supervisors, and reviewing their internal anti-harassment and discrimination policies to ensure that they have taken all measures necessary and “reasonable” in light of the Supreme Court's guidance.

Additionally, the use of technology has brought new exposures in the already exploding arena of employment practices liability. The emergence of e-mail and the internet has generated new means of creating a hostile work environment, such as the transmission of discriminating or sexually harassing material. Risqué jokes distributed throughout the company or to employees of another company can be costly. In 1995, Chevron Corp paid $2.2 million to settle a lawsuit brought by four female employees over a sexually-explicit e-mail spoof that listed 25 reasons why beer is better than women. Every company and professional corporation using e-mail, whether for internal and/or external business communications must be aware of the risks associated with unknown e-mail content. Risk managers, brokers and companies are carefully scrutinizing their EPL forms and finding that some forms have broader coverages to protect employers from punitive damages, and cover more common law employment torts. To be sure, the EPL exposure is broadening and claims are increasing. For insurers, this trend means more interest in EPL covers and/or more challenges to general, professional and D&O liability policies.

The internet, changing the way we look at liability exposures

The explosion of internet usage over the past ten years has meant fast growing businesses with just as fast growing liability exposures. Businesses are in the midst of an information technology revolution and with the new technology come many issues for professionals, risk managers and the insurance industry as insureds face old liability exposures with new twists, new and unsettled liability exposures and many yet unknown risks. Partly because of the uncertainty of the laws and partly because of companies' efforts to expand into the brave new world of e-commerce, often these new and rapidly changing liability exposures and risks are not fully understood by the company's e-commerce team or risk managers.

Prior to the internet, companies purchased insurance coverage designed to provide general protections for bodily injury and property damages, advertising and personal injury. Then, as the comprehensive general liability and property policies began to narrow the scope of their coverages due to expanding exposures, niche insurance products for environmental liability, and professional liability were developed. However, new issues face e-business companies and the challenges of e-commerce. Some of these issues are hacking and breach of internet security, intellectual property and privacy, delivery problems and business interruption, data destruction and/or alteration, software and hardware errors, criminal liability, and domain name disputes. Risk managers face the issue of whether the company's insurance policies provide coverage for the increasing liability exposures faced in e-commerce transactions.

Additionally, the global nature of the internet means that internet liability knows no boundaries and material posted on the internet can turn up anywhere in the world with internet access, regardless of geographic location. Hence, both the ease and complexities of doing business electronically raise a host of additional international liability exposures, as well as legal jurisdictional issues. Take the recently publicized theft of customer credit card information from a US Connecticut based e-commerce CD business. It was reported that a system hacker attempted to extort money from the company after he reported that he had obtained customer information, including names, addresses and credit card numbers, of the CD business. After the company's refusal to pay the demand, the extortionist posted the information on a web site allowing several thousand visitors access to 25,000 credit card numbers. It is believed that the hacker and extortionist is somewhere in Europe.

Consider the potential liability exposures that may be faced by the CD company, the credit card companies, any independent software vendors who may have provided the allegedly hacked software, merchants who may have accepted the stolen credit card information, and the customers. For risk managers, keeping abreast of expanding liability exposures to ensure that their insurance products will provide coverage as expected or perhaps not even yet contemplated, may mean keeping abreast of legislative action and complex legal developments in both criminal and civil cases, international and national.

The US courts are beginning to grapple with internet liability. Last year, the US Supreme Court decided to leave intact a decision by the Court of Appeals that has expanded the subject matter of patentable material and sparked a race in the financial industries to obtain patent protection on methods of doing business or financial calculations that involve the use of computer software. Essentially, the decision expanded the scope of patent protection available for software related inventions in the area of business and finance by affirmatively rejecting an old and often cited doctrine that methods of doing business and mathematical algorithms were not patentable. While the ruling created a boom in business method related patent applications, it also increases the risks faced by businesses that utilize some financial product or method that may be, or may soon be, covered by a patent for claims of patent infringement, copyright violations and perhaps threats of unfair business practices.

And legislative action is moving forward. The Anticybersquatting Consumer Protection Act, a new US federal law signed into law in late November 1999, makes it illegal, for the intent of profiting, for a person to “register, traffic in or use” a domain name of another person where the domain name is a trademark (or confusingly similar to the trademark) of another person. Immediately following the passage of the law, trademark holders around the county filed lawsuits in an attempt to win the right to names they consider their property.

While our judicial systems have only begun to sort out the liabilities associated with the use of electronic technology, there are some professions that are more susceptible to those unknown risks and liabilities because of the manner in which they are using this technology. “On-line service provider” is perhaps the newest business that we associate with on-line liability exposures. Since on-line service providers cannot control the material their subscribers post, the providers are being named in suits concerning defamation, content infringement and fraud. Recent legislation is helping to define the parameters of internet liability exposures. The Digital Millennium Copyright Act dramatically alters the standards for imposing liability on internet service providers, as well as owners and operators of many corporate web sites, and provides certain safe harbor provisions. However, companies that fail to implement new procedures will be unable to benefit from the Act's safe harbor provisions.

Additionally, there are numerous laws, rules and guidelines that govern electronic transmission of information and records, including the Electronic Communications Privacy Act of 1986 and the Health Insurance Portability and Accountability Act of 1996. These laws are aimed at protecting electronic communications, whether stored or transmitted, from interception and improper use and require companies to “maintain reasonable and appropriate administrative, technical and physical safeguards to ensure the integrity and confidentiality of the information, and protect against any reasonably anticipated threats or hazards to the security or integrity of the information, and unauthorized uses or disclosures of this information.” Failure to ensure system safeguards exposes the companies to potential violations of the law, in addition to penalties and legal costs.

Confidentiality of information, unauthorized access, breach of contract, and securities violations are all issues for which there is little legal precedent for assessing the liability of responsible parties, but, as businesses expand their use of e-mail, the internet, e-commerce and other means of computer transmissions and storage, the courts will respond and lawyers will find themselves moving on a parallel track, analyzing the risks, liabilities and, exposures faced by business professionals. The chain of defendants subject to internet liability is steadily increasing and as companies further expand into e-commerce, they must carefully consider all of their potential liability exposures and evaluate the precise coverage available under their current products and the need for any additional products. As new e-commerce insurance products are emerging, they are specifically designed for the needs of businesses that use the internet for commerce, such as retailing, manufacturing, business-to-business and publishing. These new products should not be overlooked. Only a complete understanding of the insurance products, the developing potential liabilities, the new laws and judicial determinations can ensure proper protection for today's new business and professional liability exposures.

  • Carol Ann O'Dea, J.D., is vice president in the claim department of NAC Reinsurance Corporation, a member of the XL Capital Ltd. group. She is an editor of the NAC Re Liability Bulletin and frequent author of articles on topics including healthcare and managed care liability, directors and officers liability, e-commerce liability, employment practices liability and other professional liability exposures.