Carol Ann O'Dea wonders whether (re)insurers have sufficient loss data yet to appreciate the growing exposures to managed care, employment practices and D&O suits.
Although US professional liability exposures have remained relatively stable, a few areas are emerging as lightning rods for expanding claim activity. The dramatic change in employment practices, managed care and directors' and officers' exposures is driven by several factors, at least from the NAC Reinsurance perspective. New laws create civil liability for more types of discrimination and medical malpractice, for example, while tort reforms have not produced the anticipated benefits. An increasingly sophisticated plaintiffs' bar is better organized to pursue emerging claims for individuals and large classes. Societal expectations seem to be increasing, leading to more suits and larger awards.
While claims are emerging with greater frequency, more companies are purchasing these covers and using soft market savings to increase their policy limits. NAC Re's experience is that premium for these specialty covers rose over the past decade, although rate decreases may now start offsetting the increasing demand.
We have also witnessed some selective broadening of policy terms, many of which have not been tested in claims or the courts. These trends leave the claims professionals with one troubling question: do we have an appreciation of the employment, health care and D&O losses we are covering? It is hard to keep up with these expanding liabilities, and at NAC Re we track our claims and reported decisions in an effort to stay ahead of the curve. However, it appears that evaluating employment practices, managed care and D&O liability trends presents a professional challenge.
Employment practices claims reach more small businesses
The market for employment practices liability insurance policies (EPLI) has grown rapidly in the last couple of years, due in large part to the notoriety of a few high profile cases and verdicts. The $176 million Texaco racial discrimination award (later settled at a high amount) grabbed employer and employee attention last year, followed by large verdicts and settlements with several auto makers and retailers for various discrimination and harassment charges. The subtle change now taking place is that smaller businesses are increasingly targets, and that the losses can still be significant while not catastrophic.
Consider the case of the grocery picker suing his employer for failure to promote and retaliation for a racial discrimination charge; the employee was awarded $8.65 million by a jury, most of it in punitive damages. Even though the award was pared back to $421,000, it took five years of attorneys fees - and still nearly half a million dollars - to resolve the matter. It is the wrongful termination, discrimination and harassment claim against large and small employer alike that is now sparking interest in EPLI policies.
Surely recent changes to, and heightened awareness of, expanding employment laws are driving employee claims. Our courts are struggling daily with interpreting new and old employment rights laws, like Title VII of the Civil Rights Act, and more recently the Age Discrimination in Employment Act (ADEA) and Americans With Disabilities Act (ADA). In an effort to clarify the ADA, for example, the Equal Employment Opportunity Commission (EEOC) last year issued guidance to facilitate enforcement of the law by individuals alleging employment discrimination based on psychiatric disabilities. Courts are finding that workers with a wide range of psychiatric disabilities are protected under these rules, even where medication controls the disability. These claims represent the second highest source of ADA activity at nearly 13%, so employers can only expect more litigation in the future.
One new twist on EPL exposure surfaced in the Microsoft decision, which essentially deems independent contractors (in this case, computer programmers) to be employees for purposes of securing employment benefits. The EPL implication of Microsoft is that these workers could also enforce any discrimination, harassment, retaliation and other employment laws protecting the traditional workforce. We wonder if employers actively train or monitor independent contractors for compliance with discrimination and harassment laws, as they do for traditional employees. The Ninth Circuit Microsoft ruling also broadens employer liability exposures, in that employers may find themselves responsible for the acts of independent contractors for injury caused by their negligence. The decision changes the legal rules dramatically, and while not yet the law of the land, Microsoft signals more employer responsibilities and exposures to all workers - whether or not they are on the payroll.
All of these jury verdict, statutory and judicial trends have come together to fuel demand for the EPLI policy which had little following only five short years ago. The EPLI form is designed to pick up these employment-related liabilities not covered by the typical general liability, workers' compensation and employer liability policies. The EPLI form has undergone much change in our competitive market, largely in response to the requests of key clients with particular client needs; for example, insurers might pick up more internal legal expenses or drop the employment contract exclusion, if appropriate for a special policyholder. At the same time, EPLI protection has crept into the D&O policy via endorsement, for the directors and officers as well as the entity. Wherever the employment practices coverage ends up, be it a stand-alone policy or endorsement, the claims will end up there as well, if discrimination, harassment and other employment lawsuits continue as the hottest litigation trend of the decade.
Managed care liability and claims grow
Managed care medicine was the answer to our national healthcare crisis and is now the predominant insurance provider form, serving more than 80% of employee needs. Ironically the same controls on health care access and costs that led to its success have now exposed managed care medicine to legislative criticism and expanding liability. That exposure has gone far from its initial base, where managed care organizations (MCOs) were responsible for their administrative errors but not for medical negligence. Now managed care providers can be targets for a whole range of activity, ranging from denial of benefits to patients, medical malpractice of member physicians to wrongful denial of entry by outside physicians. The claims are coming from all directions, as are continued demands from the public to improve benefits and hold MCO's accountable for all acts in the health care chain.
The genesis of new MCO liability is erosion of federal statutory protection from the Employee Retirement Income Security Act of 1974 (ERISA) and new state laws creating avenues of liability. ERISA preempts state laws affecting the administration of employee benefit plans, and for a time MCOs succeeded in being shielded from state tort laws for their health plan actions. However, we have seen judicial retreat as more courts hold that MCO care decisions are less administrative than medical, hence exposing those decisions to state medical malpractice and negligence laws. At the same time, several states have stepped in to codify many pro-patient rulings and mandate disclosure of MCO financial arrangements. Texas led the pack with a law allowing individuals to sue the MCO directly for medical negligence. Even Congress is considering ERISA amendments to narrow MCO protections. These laws will undoubtedly pave the way for more claims, at the very least giving plaintiffs more ammunition to challenge the impact of cost controls and physician decisions on their medical cases.
Now able to get MCOs into court, patients are presenting a variety of legal theories and arguments to support liability. Claims of misrepresentation and false advertising are based on allegations that the MCO breached warranties of high-level care displayed in their advertisements. We have also read court opinions creating MCO liability for the negligent credentialing of physicians, on the basis that the MCO - like a hospital - has a broad duty to take reasonable care in selecting qualified physicians. The flip side of negligent credentialing is that MCOs are being charged for interfering with the doctor-patient relationship by selecting and limiting the physicians their members may see. Furthermore, MCOs are being held vicariously liable for the negligence of these physicians under the doctrine of respondeat superior, which now accounts for more than one-third of all allegations brought against MCOs.
Just as the dynamics of managed care expose the MCO to a host of new liabilities, the financial incentives or disincentives for controlling expensive referrals and medical tests are exposing the treating physician to new theories of liability. Member doctors face arguments that injuries were caused or exacerbated by failing to refer, negligently denying benefits or treatment, or simply not advocating the needs of a patient following a rejection for benefits. Another liability exposure is non-disclosure of alternative treatments based upon the legal principles of informed consent. These same physicians are turning against the powerful MCOs for breach of contract. Non-member physicians may allege anti-trust violations from wrongful denial of access to, and wrongful eviction from, the medical subscriber list. If MCOs control the health care playing field, then keeping any physician off the approved roster can curtail, even destroy, his or her practice.
Insurers are providing E&O and D&O coverage specially tailored to the ever greater needs of MCOs, while trying to avoid or contain their exposure to some of the more complex and explosive anti-trust suits and punitive damage awards. As the lines between these policies may not be perfectly clear when applied to some claims, many insurers want to provide both covers to ensure seamless, consistent coverage. Few tests to MCO policies have yet produced a body of case law, but the time will come. For now, emerging theories of liability for the MCO and the physicians are a continuing challenge for medical malpractice and professional liability insurers.
Directors' and officers' liability after securities reform
One of the biggest liability exposures directors and officers of publicly traded companies face is the shareholder class action and derivative action alleging securities violations and misrepresentations of material information, usually triggered by a drop in the share price of the company's stock. While some of these suits are valid, a significant number are "cookie cutter" claims filed immediately after a stock drop and lacking any connection to improper corporate conduct. In response to a growing disapproval of this litigation, Congress enacted the Private Securities Litigation Reform Act of 1995 (Reform Act) to curb the perceived abuses in securities fraud litigation. At NAC Reinsurance we have followed the filing and development of securities cases since the passage of the Reform Act, and we are disappointed to say that just over two years later, little has changed since its passage. Rather than fewer suits, we have witnessed an increase in dual court filings in federal and state courts.
The anticipated relief from the Reform Act lies in several litigation provisions that have not met their promise. Consider the "lead plaintiff" procedure giving larger institutional shareholders the opportunity to control the course of litigation. Many of the smaller individual shareholders are arguing that the particular institutional investor is not typical of the class as a whole and that co-plaintiffs should be appointed, something recently rejected in the Gluck v Cellstar litigation but appearing in other suits. The legal costs associated with fighting these challenges will only depress interest in pursuing lead plaintiff status. The automatic stay provisions were intended to halt discovery during the pendency of motions to dismiss. Instead, plaintiffs brought suits in state courts as well, where they were not barred from discovery and could secure information useful for their federal action. The result is, ironically, more litigation.
High technology and managed care companies are still the major targets of shareholder suits, and California remains the forum of choice after proposed state reforms did not become law. Given this liability picture, D&O writers have not altered their products dramatically although some valued clients might find broader entity coverage or fewer regulatory exclusions at renewal. The end result is not great change, but rather an expectation of change not met. The underwriting challenge is matching coverage terms to the current D&O exposure and not what the Reform Act hinted it might be.
Year 2000 as the next major professional liability and D&O trend
Enough has been written about the year 2000 issues to justify avoiding a discussion, but the exposure to professional liability and D&O insureds is just too great to give in to that temptation. Suffice it to say that the clock is ticking for corporate America (and elsewhere) to identify and, if necessary, begin correcting any year 2000 compliance problems. It is also the time for corporate America to start disclosing the status of those year 2000 efforts, and the Securities and Exchange Commission has offered guidance. Essentially, publicly traded companies must report material expenditures and uncertainties associated with the year 2000. In addition, various state regulators are joining the enforcement bandwagon. In one recent and highly publicized case, a bank auditor sought a cease and desist order allegedly due to year 2000 failures, which were promptly corrected to forestall that harsh remedy. Professional organizations, like the American Institute of Certified Public Accountants, have issued guidance to their members on client disclosures.
It remains to be seen what effect these disclosures will have on the directors, officers, accountants and lawyers our industry insures. Many attorneys believe that a full, accurate and timely disclosure will afford greater protection from shareholder suits; we have heard plaintiff counsel opine that disclosures are fodder for more lawsuits, and we have no reason to doubt their determination or creativity. Obviously the insurers of software and other computer professionals are in a different but still direct line of fire, should their services prove unsuccessful or lacking for year 2000 compliance.
With every challenge comes an opportunity, and the appearance of year 2000 policies are the best example of filling a developing insurance need. With almost every claim comes a claim lesson for refining underwriting guidelines or policy wordings, or creating a new product. We at NAC Re do not yet know how employment practices, managed care, D&O and year 2000 liabilities will evolve. We do know that our industry will get claims to learn lessons from, and that the insurers who learn and adapt the quickest will be the most successful.
Carol Ann O'Dea, J.D., is assistant vice president in the claim department of NAC Reinsurance Corporation. She is the author of NAC Re's Professional Liability Trends Bulletin, and frequently contributes to the NAC Re Liability Bulletin on professional liability and D&O topics.