Most Companies View Employment Liability Claims Through Rose Colored Glasses

“It will never happen to me” is a multi-purpose rationale people use to avoid doing what they know they should, especially when it is difficult or requires extra effort. Interestingly this rationale also applies to small and medium-sized businesses wanting to avoid the issue of employment practices liability (EPL).

Research proves there is no reason for employers to adopt such a rosy outlook. According to November 2005 figures from Jury Verdict Research, the average compensatory jury award for employment practices liability lawsuits has risen by an annual average of almost 5 percent. The average amount for these awards in 1998 was $164,200, which rose to $218,133 in 2004. A significant factor in this trend has been the U.S. Equal Employment Opportunity Commission’s aggressive approach in prosecuting offenders. The agency obtained an unprecedented $168.1 million in awards in 2004.

Jury Verdict Research went on to note that since 1998 the most frequently targeted businesses are retail and service companies. Although these lawsuits outnumbered those brought against manufacturing and industrial companies by more than three to one, the average awards against manufacturing and industrial companies were far higher. Awards in manufacturing and industrial company suits averaged $250,000, as compared with $137,853 for retail and service companies.

With statistics such as these, why would any business risk liability when it comes to employment practices? Specialty insurer Beazley commissioned research to find the answer to that question. What they discovered was that many small and mid-sized businesses have developed a sense of prosecutorial immunity from the media’s bias toward reporting only awards against Fortune 500 corporations. This reinforces the impression that EPL claims are only a problem for large companies that maintain public visibility.

What should a small company do to protect itself from EPL claims? Start by reducing your exposure with a comprehensive employment practices program. Your program should not only spell out company policy, but must be specific in terms of the consequences for violating that policy. The next step you need to undertake is to protect your company’s financial assets. You can transfer this risk by purchasing Employment Practices Liability Insurance. While sound employment practices and well-trained managers can help reduce the risk of EPL suits, if an employee feels they have been unfairly treated, they can take legal action at the drop of a hat. For this reason you should consider the financial protection an EPLI policy provides.

Understanding the Difference Between Claims Made & Reported and Pure Claims Made

Under a claims-made policy, the insured is required to file claims during the policy period or during the extended reporting period (ERP), if applicable. However, there are two distinct types of claims-made policies. One is the “Claims-Made & Reported Form” and the other is the “Pure Claims-Made Form.” While the differences of the policies are subtle, not understanding the differences can have a significant impact on your coverage.

The most commonly used claims-made policy is the “Claims-Made & Reported Form.” This policy requires that not only must the claim be made during the policy period or ERP; it must also be reported during this same period. This means that the insured has a designated time frame within which claims can be filed.

The “Pure Claims-Made” Form is less prevalent. It also requires that a claim be made during the policy period or the ERP. However, the major difference between this and the “Claims-Made & Reported Form” is that under this type of policy, the insured is only required to report the claim as soon as possible. This means that the report of a claim may happen after the policy’s expiration.

If your company’s professional liability policy is a “Claims-Made & Reported Form,” then time is an important factor when a claim needs to be filed. It is your obligation to report a claim or a potential circumstance that could lead to a claim to your carrier within the policy period or the ERP. If you attempt to handle the situation internally to avoid reporting it to your carrier, the delay could negatively affect your coverage. Professional liability polices are very specific as to how and where to report a claim. Failure to comply with these provisions can negate your coverage. The “Pure Claims-Made” policy, on the other hand, only requires that the claim be reported as soon as practical, which allows for more flexibility. This means that the claim can be reported at any time in the future even after the policy expires.

In addition to the issue of claim reporting time, many “Claims-Made & Reported Form” policies have an awareness provision that allows the insured to report any circumstance that may lead to a future claim. Such notice must also be given during the policy period or ERP.

When a circumstance is reported, it’s considered to have been reported during that policy period even if it results in litigation after the policy has expired. Because each policy has a different reporting provision, it is important that you know your policy’s reporting requirement to ensure your coverage remains in effect.

Keep in mind that any extended reporting period provided by the policy only extends the period in which a claim may be reported. The wrongful act that precipitated the claim must have taken place before the policy expired.

PIP and No-Fault-Is “Reform” the Wave of the Future?

More and more states are abandoning the PIP/No-Fault form of auto insurance in favor of a tort-based set of laws.  PIP/No Fault originated in the 1930s as an alternative to the often slow and expensive process of litigating claims.  The intent was to speed up the process by shifting the dispute resolution to the insurance companies rather than the courts.  In theory, this was supposed to reduce insurance rates, and initially rates did go down.  By the mid-70s, almost 20 states had some form of no-fault insurance laws.  However, over time, rates rose until “No-Fault” states had higher rates than tort-based states.  Beginning in 1980, states started repealing their no-fault laws, and now only nine states (Florida, Hawaii, Kansas, Massachusetts, Missouri, Minnesota, New York, North Dakota, and Utah) have mandatory no-fault laws. Eleven states plus the District of Columbia have hybrid laws (Arkansas, Delaware, Kentucky, Maryland, New Jersey, Oregon, South Carolina, South Dakota, Texas, and Virginia).

The pendulum seems to be swinging back to tort-based auto insurance. What does that mean for you as a policyholder?

The Good News

Tort-based systems, in theory, give you more choices for medical payments and could save you substantial amounts of money.  As an example, depending on the insurance company and coverages selected, insureds in Colorado (the most recent state to revert to a tort-based system) could see savings of 10%-30%, according to several recent Denver Post articles.

The Choices

PIP, or personal injury protection, is still available (in most cases), should you wish (or need) to pay for it.  If you choose to drop this coverage or are already under a tort-based system and don’t have this coverage, you can still purchase it, with most policies, for medical expenses.  However, this coverage will be limited, generally to no more than $50,000.  If the additional coverage is purchased, it will pay expenses incurred by you and your immediate family for injuries resulting from an auto accident when you or they are at fault.

Since many drivers are uninsured or underinsured, it is essential that you understand the ramifications and make an informed decision about the “Uninsured/Underinsured Motorists” coverage option.

What If?

What happens if you are at fault? Your auto policy should pay the other person’s claims.  Companies normally negotiate this with each other.  If you have insufficient coverage you may have to go to court—the tort aspect of the law. Either you or your health insurance company will normally pay medical expenses for you and your family once expenses exceed your auto policy coverages.

What if you are injured by another driver and that driver is at fault?  Generally the two auto insurance companies will work together to determine fault and pay benefits accordingly.  This resolves the problem in most cases.  If not, or if the amounts paid are insufficient, it may be necessary to resort to the court system to recover damages.

What if the other driver is at-fault and has no (or has inadequate) insurance?  Your insurance company normally covers your medical expenses.  This protection is provided under the uninsured/underinsured motorist coverage.  If you do not have this coverage, then your health insurance usually pays the bills, or you can sue the other party.  Which brings us to the final important considerations.

Consider the “Deductible Gap”

Generally, under a tort system, medical payments under your own policy are limited.  However, in most cases you can choose “additional medical payments” and “Uninsured/Underinsured Motorists” coverages as part of your auto insurance policy.  After years of rising rates, many people may choose to forgo any additional coverages.  This could be a problem if you have high-deductible health insurance, or no health insurance at all.  There is potentially a huge gap between the amount paid under a tort-based policy and your health insurance deductible.  If you have no insurance, the out-of-pocket costs could be staggering.  If you are not at fault in the accident, the tort-based system allows you to go to court to get compensated for these costs, as well as for pain and suffering, but there is a time factor and a lot of out-of pocket expenses involved.

What Does This Mean for Health Insurance Costs?

As more costs are shifted to the health insurance system, your costs are likely to rise.  Furthermore, not everyone has health insurance.

So, What Is Next?

This is a good time to look at your health insurance to make sure it covers you adequately if you drop PIP/No-Fault coverage.  It’s all about avoiding unpleasant surprises!

More Workers’ Compensation Claims Made As the Result of Work-Related Traffic Accidents

According to the Network of Employers for Traffic Safety, both on- and off-the-job motor vehicle crashes cost employers $60 billion annually from 1998 through 2000. The problem is so widespread, that in a recent study, the National Council on Compensation Insurance Inc (NCCI) noted that traffic accidents are the leading cause of accidental deaths in the United States. The study also said that workers’ compensation claims resulting from motor vehicle accidents are more severe than the average claim. Although they make up approximately 2 percent of all claims, they account for more than 5.5 percent of all losses because they cover a disproportionate share of the most severe claim types.

While workers’ compensation claims from motor vehicle accidents are growing, their frequency is declining but at a slower pace than for workers’ compensation claims in general. There are some other important characteristics about these claims that the NCCI noted in its study:


  • They almost always involve time lost from work.
  • Neck injuries are the most frequent diagnoses in these claims.
  • The average duration for a motor vehicle claim is 70 percent longer than for other types of claims.
  • They are three times as likely to involve a claimant attorney as compared to other types of claims.


The leading cause of these claims is a traffic accident that happened because the driver became distracted. The study revealed that almost 80 percent of the crashes and 65 percent of the near crashes resulted from the driver becoming distracted within three seconds of the event. The chief causes of the distraction were drowsiness and cell phone use.

The researchers had some specific suggestions regarding the steps employers can take to reduce the frequency and severity of these claims:


  • Encourage your employees to use seat belts – Failure to use seat belts cost employers roughly $2.1 billion yearly from work-related crashes between 1998-2000.
  • Be sure your employees never drive under the influence of alcohol – During 1998-2000, work-related crashes that resulted from drivers being intoxicated cost employers $3.1 billion annually.
  • Encourage employees to take defensive driving courses – These courses teach drivers how to react during an emergency so as to lessen the severity of the accident or avoid it all together.
  • Provide internal driver’s education courses – Teach employees good driving practices like pre-planning the trip route, realistically estimating how long the trip will take, being sure the vehicle is in good condition before hitting the road, and informing colleagues about travel plans.


Your Roommate Wrecks Your Car – Who Pays What?

If your roommate borrows your car and causes an accident, who pays what? If you both have auto insurance, your insurance will pay first and you’ll be responsible for your deductible. Your auto insurance policy insures your vehicle plus you, any relative, and anyone else using your car if the use is reasonably believed to be with your permission. 

On the other hand, if your roommate causes an accident that results in serious bodily injury and property damage to another person, the actual driver’s policy will cover the bodily injury liability and the car owner’s liability covers property damaged caused by his or her car. As owner of the car, your liability insurance also covers the cost of your legal fees in the event you are sued, but if your liability limits are exceeded, the courts can attach your personal assets, such as your home, to recover damages. Liability coverage will not pay for damages beyond the limit for which you are insured. 

If you lend your car to a roommate who does not have insurance, you are opening yourself up for trouble. If the damages your friend causes exceed your insurance policy limits, the injured party can come after you for medical and property damage expenses. 

What if your roommate drives your car without your permission? You’re likely not to be held responsible for the damages because your roommate borrowed you vehicle without your knowledge. In this case, your roommate’s insurance will kick in first. If your roommate isn’t covered, you will need to use your collision insurance to cover the damages to your vehicle, and your liability coverage will cover damage to other’s property. Unfortunately, the insurance company will assume your roommate has permission to use your car unless there are clear indications that you denied permission or there are extenuating circumstances, such as a drunk friend takes your car without your knowledge. 

If your car is stolen and then involved in an accident, you will not be held responsible for damages done to other people and their property, but you will probably have to use your collision insurance to pay for the damage to your car. In the unlikely event the thief has auto insurance, his company will not pay for his criminal act.

Regardless of the scenario, it is wise to understand your insurance policy and exactly what it covers and when. Just as important, exercise common sense when loaning your car to roommates, friends, and relatives.