Underwriters Must Anticipate Third-Party Exposures

The nature of employment practices liability has changed. Coverage for liability claims arising out of discrimination, harassment, and other employment practices issues is no longer limited to first or second parties. Third-party claims from a policyholder’s employee’s contacts with customers, clients, vendors, visitors, patients or other non-employees are now being disputed, and underwriters must develop loss prevention techniques to address businesses prone to these exposures, panelists told the PLUS Employment and Fiduciary Issues Symposium.

“Third-party coverage came about because these discrimination claims were not otherwise covered under the CGL,” said Elizabeth Benet, Esq., vice president, General Reinsurance Corporation.

According to Benet, claims range from $25,000 to $46 million. “Because it’s relatively recent in the marketplace, adjusters don’t have a good handle of the loss costs,” she explained. “Classes of business prone to these exposures include security operations, property managers, entertainment, healthcare, counseling, finance, real estate and even insurance,” she said, noting that establishments offering credit, e.g., auto dealers, membership clubs, health, country and private clubs were also at risk. “Schools, universities, car rentals, hotels and restaurants are also susceptible.”

Philip R. Voluck, Esq., partner, Kaufman, Schneider & Bianco, LLP, noted that third-party exposures in the workplace are considered a covered claim. “The actions of employees of an insured who have contact with customers can make the employer vicariously liable,” he explained. “Federal law interacts with state law, but not arcane local ordinances. A part of these claims are attorneys’ fees,” he said. “We’re always faced with litigation versus resolution. There are economic factors that underlie that decision, but there are things that you as an insured can do to prevent a third-party claim.”

One way to prevent third-party claims is to look at how prospects interact with others, according to Jack McCalmon, Esq., Titus, Hillis, Reynolds, Dickman & McCalmon. “The more independent the interaction, the greater the risk,” he said. “How do other third parties interact with the prospect?” he asked, noting, “‘Open to the public’ equals greater risk.”

McCalmon said that if control of the workplace is contracted to a third-party there is also greater risk. He cited the example of doctors and consultants who have managerial control over nurses and personnel. “Employees are at a risk for that third-party.

“The first thing needed are policies and procedures that are wide and broad enough to make them understand the interaction,” McCalmon said. He stressed the need for open reporting and orientation for employees and third parties. “Training is very important,” he said. “Orientation is different from training. Training is educating employees what the exposures are, especially your managers and supervisors and even volunteers,” he said. “How employees interact with their managers and supervisors is vital. Most managers know they should not harass their employees.”

Voluck disagreed, stating that many managers still don’t get it. “Those who significantly interact with the workforce are liable. Anyone who goes to a sales seminar–how they interact with other third parties can put the insured at risk.”

Voluck also noted that training should be done in the employee’s language. “If there are a lot of Hispanics, for example, material should be written in Spanish.”

According to Voluck, there are different interpretations of what an employee is. “Many employers consider leased employees not real employees,” he said. “But that’s what makes these third-party exposures. Affirmative action must take place so that regular employees and leased employees understand.”

Benet added that as an industry, insurers need to look at these exposures. “Just because the insured has a handbook, doesn’t mean anything. It’s the implementation and the execution that count.”

Voluck noted that franchisees distribute a corporate handbook to the owner/operators, “but it’s the rare ones that look at it and make it applicable to their people.”

The legal experts provided different scenarios to the audience to help them become familiar with the potential claims that could arise from third-party exposures. The first scenario was that of a board member, who was an investor and the largest account holder of a small regional bank, who made lewd and suggestive comments to the bank president’s assistant every time he deposited money at the facility. The president, who reported directly to the full board, did nothing when the assistant complained.

The audience noted that this was an issue of sexual harassment and a failure to read the employee handbook. It was considered a straight charge–that the employer failed to protect the employee. In terms of loss prevention, it was suggested that the board of directors be trained and sign-off on having read the employee handbook.

Another scenario was that of a nursing home patient who alleged an “on-premise” rape by a visitor of another patient and an employed attendant. The audience determined that this would be covered under negligent hiring/negligent retention of a CGL or nursing home policy.

In another scenario, a salesperson attended a seminar related to her job. Another salesperson from a competitor asked her to dinner and later to his room. In his room, he physically attacked her. Voluck noted that this trend is going to be seen more and more. “These policies don’t cover the cost of remediation,” he said. “There are no compensatory damages.”

McCalmon explained that there are many different contexts in which third-party exposures may arise. “How we define third-party liability is very different from how underwriters define third-party,” he said. “Some exposures are preventable, but the debate will continue as to whether such claims are properly handled under EPLI.”