A litigious world raises the stakes for employment practices liability; risk managers must pay careful attention to their employment practices because these liability issues are no longer simply a concern in the United States

A litigious world raises the stakes for employment practices liability; risk managers must pay careful attention to their employment practices because these liability issues are no longer simply a concern in the United States – liability

Mindy W. Toran

Until recently, employment practices liability exposures and claims were largely a U.S. phenomenon. Unfortunately, today’s increasingly global economy has led to the growth of employment-related risks in Europe, leaving corporate risk managers searching for ways to manage and address these exposures.

“In the past, many corporations believed they only needed employment practices liability coverage for U.S. exposures, but that’s beginning to change,” says Richard Bessinger, vice president and counsel, commercial lines, at New York-based American International Underwriters (AIU), a division of AIG. “Employment practices liability is becoming an international phenomenon. More than 26 countries currently prohibit workplace discrimination, and at least 20 countries prohibit harassment.

“Increased integration of the national economy through growth of the European Union, globalization of national companies, changing societal standards, evolving legal standards, and the dramatic increase in the frequency of awards and settlements in the U.S. had led to significant growth in local litigation and claims being filed all over Western Europe, Australia, Japan, South Africa, Asia, and beyond. In Germany alone, there were 300,000 EPL claims fried in 2002,” he notes.

“Employment practices liability has become much more global in scope,” agrees Jeff Tanenbaum, an attorney and senior shareholder at Littler Mendelson, a San Francisco-based law firm that specializes in employment practices issues. “These exposures often arise from a lack of understanding of cultural differences, lack of cultural sensitivity and failure to learn about applicable law in the jurisdiction in which you’re doing business.”

Michael J. Maloney, vice president, employment practices liability product manager, Chubb Specialty, in Warren, N.J., stresses that, “Employers have to be attuned to the local climate, wherever they’re doing business. In some parts of the world, discrimination and harassment claims can be considered criminal violations, as opposed to civil violations in the United States. Risk managers need to be sensitive to these cultural differences and educate their boards about potential exposures and penalties for failure to follow local laws,” he says.

Contractual Differences

“The types of allegations we’re seeing overseas are similar to those we see in the United States,” says Bessinger. “Claims range from unfair dismissal, wrongful termination, breach of employment contract, discrimination, sexual harassment, failure to promote, deprivation of career opportunities, employment-related infliction of emotional distress, failure to hire, failure to grant tenure, and the like. A big differential between the international marketplace and the United States is that U.S. workers are considered employees “at will,” whereas overseas most workers are employed by contract, which could lead to a greater frequency in the number of employment-related claims filed in the future.”

Adds Maloney, “Outside the United States, it’s pretty clear what the employer’s obligations are and, for the most part, there are rules you must follow if you want to terminate an employee, such as how much notice you have to give them and the appropriate rationale behind the termination. If you don’t follow the rules, then you’re subject to a fine or you may simply have to pay employees in lieu of the typical three to six months termination notice. For a U.S. employer doing business outside the United States, it’s important to understand these issues and know that you can’t just terminate an employee without following the appropriate procedures.”

While all these employment laws and nuances may be daunting, “It’s important that risk managers work in concert with legal counsel and their insurance carriers and brokers to explain trends in claims, legal actions, settlements and judgments to show that employment-related litigation isn’t just a U.S. phenomenon,” says Richard S. Betterley, president of Betterley Risk Consultants Inc. in Sterling, Mass. “For a U.S.-based company doing business overseas, it’s important to accept that there are employment-related exposures outside the U.S. And for foreign companies doing business here, it’s important to show them that their exposures can be contained and managed, once they understand U.S. laws and regulations.”

Guarding Against Exposure

Kim Russell, a claims attorney who specializes in employment practices liability at AIG, notes, “It’s crucial that companies reassess their risk management policies and employment practices when doing business overseas, focusing on everything from insurance to hiring and firing procedures and employee handbooks to the overall management of the risk of employment-related matters. Risk managers should enlist the help of an employment law firm in the country where they’re doing business or work with a firm in the U.S. that has international experience. It’s extremely important that the firm know the laws in the individual countries in which an employer is operating and how the laws are changing and know the climate of employment-related lawsuits,” she stresses.

“Unfortunately,” says Larry Stuart, a partner in the U.S. compensation and employment law practice group at Baker & McKenzie in Houston, Texas, “it’s often difficult to get corporations and their leadership to take potential litigation seriously. Many companies often treat employees as if they’re part of one big company–whether they’re U.S. or foreign-based employees–and not all companies create written documentation to protect employees working between jurisdictions.

“Employers need to link U.S. and foreign risk management, human resources and legal departments in order to provide cultural/ legal training and bring people to a middle ground,” he continues. “Employers need to create an open dialog between U.S.-based and foreign risk management, HR and legal counsel to provide employment practices training and facilitate understanding of local laws, cultures and responsibilities.”

Risk managers have numerous tools at their disposal to educate their board members, CEOs, managers and employees about the employment-related risks of doing business overseas. “Working with their legal counsel, risk managers can utilize memos and legal updates to provide board members and CEOs with information on developments in employment law,” says Tanenbaum of Littler Mendelson. “In addition, they can provide training programs and seminars for board members, senior management and employees, engage in regular audits of employment practices policies and procedures, regularly update employment practices documentation, and become familiar with employment laws and regulations on a local, state and national level.”

Chubb’s Maloney notes that, “Risk managers need to need time with their underwriting counterparts to learn about the employment-related issues in the jurisdictions in which they’re doing business, look at loss prevention techniques and communicate those concerns to their board members and CEOs. A prudent risk manager will take the time to explain employment-related issues to senior management and board members, make recommendations about insurance purchases and work with HR and legal departments to provide the best defenses for the company.”

Covering the Exposure

When it comes to coverage for international employment-related exposures, “Many underwriters have been unwilling to differentiate between foreign and U.S. risks,” says Ann M. Longmore, senior vice president and practice leader of the global financial executive risk program at Willis Group in New York. “Many companies previously carried excess coverage on umbrella policies to include employment practices liability, but most of these policies no longer cover EPL, which leaves clients looking for excess capacity.

“Some employers may want to look into split retentions so foreign claims can be covered to some [lesser] extent; particularly since their frequency of claims is generally lower than in the United States and, thus, requires lower retentions,” she notes. “Other employers are looking to bifurcate programs–splitting foreign and U.S. policies–such as holding a North American policy and a ‘rest of the world’ policy to take advantage of the different underwriting styles in the U.S. and abroad. And many employers prefer to have the same insurance carrier writing their EPL policies for business in the U.S. and other parts of the world, working with carriers that have global operations and are familiar with handling international risks.”

Currently, says Chubb’s Maloney, “Some underwriters are redrafting their forms to make them work on a global scale–addressing not just U.S. statutes and claims, but claims that could come in from anywhere in the world. In addition, there are careers that are domiciled in Europe, Australia, Asia, etc. that do a good job of addressing local claims definitions and statues. The key is to make sure the carrier you partner with has claims handling capabilities where you have people or where cases are most likely to occur.”

Bessinger of AIU stresses, “A good risk manager will partner with an insurance carrier that’s global in scope and can address corporate exposures on a worldwide basis. Global carriers often have local claims operations in foreign jurisdictions where the claims professionals and underwriters clearly understand what the local exposures are, speak the local language and understand the local culture. In the event a loss does occur, claims reps can step in to help a company handle that loss or litigation in a foreign country and the employer knows it will be protected. It’s extremely important to be proactive and have someone there who can walk you through the process and address all of your concerns.”

With more attention than ever on U.S. employment-related lawsuits and verdicts, employers with global operations need to be more vigilant in addressing international EPL exposures and educate their boards accordingly.

“It’s incumbent that risk managers, HR executives and legal counsel remain aware of these issues as they continue to evolve, and adjust their internal employment practices, policies and procedures to stay consistent with appropriate conduct in the workplace and have an appropriate defense in case a claim arises,” says Maloney.

“Companies that have the proper employment practices guidelines in place and make their employees aware of those guidelines and what procedures they’re to follow in the event of a problem will generally fare better in defending themselves than companies that remain uneducated about these issues,” stresses Bessinger. “The key is to educate board members and managers, and make sure employees understand their rights and know that there are means available to them for recourse in the event that a claim occurs.”

Mindy Toran can be reached at mrtoran@comcast.net.

COPYRIGHT 2003 Axon Group

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