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Closing the Coverage Gaps in Lawyer’s Professional Liability Insurance Policy

Having gaps in your liability coverage is like venturing out into a snowstorm without an overcoat. In either case, it’s tough to succeed without protection. Before purchasing any insurance policy, you need to fully understand the basic structure of the contract in terms of what’s covered and not covered.

In general, liability policies are written as “claims-made” policies; that is, the claim for a wrongful act, error or omission must be made and reported to the carrier while the policy is in effect. This means that should your current insurance policy terminate for any reason, such as the insurer refusing to renew or your firm allowing the policy to lapse while shopping for new coverage, any wrongful acts occurring during this gap between the expiration of the old policy and the start date of the new one will not be covered unless you have either “prior acts coverage” or “extended reporting endorsements.”

The first of these, “prior acts coverage” is written into your new policy.  This allows for all incidents leading to claims after your former policy expired to be covered regardless of when they happened provided the coverage is written without a time limitation. There is generally a surcharge for this unlimited coverage based upon how many previous years you want covered. A carrier will not always write this type of “full prior acts” coverage even if you agree to the surcharge. For example, a carrier may refuse because information on your application indicates a high level of risk. Another alternative may be that the carrier provides full coverage, but only within a more restrictive policy. The carrier may also elect to provide prior acts coverage but with the stipulation that coverage would not be in effect under certain circumstances, such as a claim in which the firm knew of the wrongful act, error or omission or should reasonably have know about it prior to the start date of the policy.

Adding “extended reporting endorsements” or “tail” coverage to your current liability policy allows you to make and report claims for prior wrongful acts, errors or omissions after the policy has expired for a specific period of time. There are several instances when this type of coverage is critical. The first is when the insured is changing carriers and “prior acts coverage” is not available or is too restrictive in scope. Secondly, this coverage is even more important when the carrier change is necessitated by the insurer’s refusal to renew coverage and your law firm doesn’t have an alternative yet. There is an additional surcharge for extended reporting coverage.

The other scenario in which this coverage is vital is when a lawyer is no longer actively practicing. When an attorney retires, becomes a judge, or goes from private practice to in-house counsel, the exposures that may arise from the former practice can be covered by “extended reporting endorsements.”

The time to determine what kind of extended reporting your policy provides is before you purchase. Each carrier determines how long an extended period they will provide, under what conditions this coverage can be purchased, and the cost for such an endorsement. In some cases, the coverage is sold in multiples of the policy premium; while in other cases, the cost is the rate that is in effect at the time the endorsement is purchased.

Does Your Insurance Cover What You Agreed to in That Contract?

Most construction projects involve written contracts. A contractor signs a contract with the project owner, with the general contractor, or with a subcontractor on the project. The contract normally spells out the obligations of the contractor regarding, among other things, the insurance the contractor must carry and liability that he will assume. Construction contracts often contain “indemnification” agreements under which the contractor agrees to assume some of the owner’s or general contractor’s liability for accidents that occur during the project. Should something happen, will the contractor’s general liability insurance policy pay for the damages he assumed?

The policy is probably similar to the Insurance Services Office’s Commercial General Liability Coverage Form. This form covers the injury or damage for which the insured is liable because he assumed liability in an “insured contract” executed prior to the accident. It also covers attorney fees and other litigation expenses to defend the owner or GC if the contractor agreed to assume those costs in the contract. By an insured contract, the form means:

  • A lease of premises
  • A sidetrack agreement with a railroad
  • An easement or license agreement
  • An indemnification agreement with a municipality
  • An elevator maintenance agreement
  • Other business contracts

Contractors are mainly concerned with these “other” business contracts, as construction contracts fall into this category. The general liability form covers the tort liability of one party assumed by another. This means that, for coverage to apply, the first party must have some legal responsibility for injury or damage suffered by someone else.

For example, assume GC hires SC to run the cabling in an office building GC is constructing. GC and SC sign a contract in which SC agrees to assume GC’s liability for injuries and damage SC may cause during the project. One of SC’s employees trips over a toolbox that was resting on a ladder, and the falling tools injure an employee of another contractor on the job. The injured employee sues both GC and SC for medical costs and pain and suffering. Because SC agreed to assume GC’s liability for injury or damage suffered by a third party (GC’s tort liability), the contract qualifies as an insured contract. SC’s liability insurance will cover GC’s liability and provide legal defense for GC.

The insurance will not cover all of a GC’s tort liability, however. A third party must suffer bodily injury or property damage before coverage will apply. Suppose GC turns the completed building over to the owner, and the owner finds that computer networks do not work in four offices. The owner determines that the problem is the result of faulty cabling, and he sues GC and SC. Even though SC has agreed to assume GC’s liability, the liability insurance will not cover this loss. That is because the building owner did not suffer property damage. The building is defective, but it has not been damaged.

Contractors should expect to find indemnification agreements in most construction contracts. Because of this, the contractual liability coverage contained in general liability insurance policies is critical to their financial health. It is very important for contractors to review their liability policies to ensure that their insurance companies have not limited this coverage.

Contractual liability coverage is vital to a contractor’s business. Make sure that it does all that you need it to do.

Protect Your Company from Nuisance Lawsuits

A March 2007 study from the Pacific Research Institute titled Jackpot Justice: The True Cost of America’s Tort System, stated that lawsuits in the U.S. cost the American Public an estimated $865 billion dollars per year. Much of this litigation was needless or stemmed from nuisance lawsuits which could have been largely avoided. In these litigious times, business owners need to sit down and analyze their risk exposure.

Here are 6 proactive steps that every business owner can implement to reduce their liability resulting from nuisance lawsuits:

  • Form an asset protection plan by designing a list of all the potential assets you stand to lose from a lawsuit. Take a hard look at your current insurance coverage. Make a point to sit down with both your insurance agent and lawyer to limit your exposure from both an insurance and legal perspective.
  • Separate your personal assets from business assets by setting up a C or S corporation or else consider a Limited Liability partnership or even a Limited Liability company. Although this action does nothing to limit lawsuits, you may be able to remove your personal assets from a lawsuit settlement. Consider setting up a qualified retirement plan as federal laws offer protection from creditors for such accounts. However, remember that some states may not include IRA’s so seek qualified advice.
  • Purchase the right liability insurance for your business as this can be the best investment you can make. Seriously consider buying excess or umbrella coverage as you can easily get additional $1,000,000 coverage for a very cheap rate. Today, almost every business which has employees should seriously consider Employment Practices Liability Coverage (EPL) This form of insurance covers current employees, past employees, potential employees, customers or clients from employment related civil actions of discrimination such as gender, age, race or disability, sexual harassment litigation, wrongful dismissal actions, breach of contract, retaliation and other claims brought against your company. Due to the significant rise in such claims, this relatively new insurance coverage has taken on significant importance for companies of any size in recent years.
  • Form your own risk management plan to eliminate unnecessary risk in your workplace. Be proactive in the house cleaning for your company and eliminate hazards by performing repairs or maintenance as they arise. Instill strict and enforceable policies to protect the safety of workers and the public from harmful situations that can quickly translate into a needless lawsuit.
  • Specify your policies to clarify everything and anything that could result in a lawsuit. An employee handbook should be issued to all staff. Have them read the handbook before they start work and sign an appropriate form stating they have read and understood the material. Ensure any policies directed to your customers or general public are clearly visible and explicit. Incorporate your customer policies in all your promotional material. Don’t trip yourself up by making promises which can’t be kept. Train all your staff so they clearly understand any policies which apply to customers or other relevant third parties.
  • Consider taping phone conversations so you have a record of what your caller is inquiring or complaining about. This also provides you with a record of how staff are responding or stating to the caller. Remember that if you decide to take this approach, you must initiate the call with a notice that the call is being recorded. Clear this with your legal advisor first.

These are but a few simple steps that any company can take to reduce their liability exposure from a host of costly yet nuisance lawsuits.

Increased Use of Medical Services Contributes to Higher Workers’ Compensation Costs

In December 2003, the American College of Occupational and Environmental Medicine (ACOEM) developed a set of medical protocols, backed by scientific findings, for the treatment of injured workers. Occupational medicine physicians and other specialists involved in the medical care of workers developed these guidelines to provide practitioners with:

  • A step-by-step outline to assess the patient’s condition, and to educate the patient about that condition.
  • Specific guidelines about what physical findings and/or test results are required to establish a diagnosis.
  • A methodology for identifying the role psycho/social factors plays in a worker’s response to treatment.

The effectiveness of these guidelines was documented in a study titled Acceptance and Self-Reported Use of National Occupational Medicine Practice Guidelines, published in the April 2000 issue of Journal of Occupational & Environmental Medicine.

Ninety-five percent of those polled reported that the guidelines improved their practice in some manner. Fifty-two percent of physicians thought that guideline use decreased medical costs. Seventy-one percent reported that their care complied with the guidelines in 70 percent or more of their cases. The researchers concluded from their study that physicians’ attitudes toward the guidelines were positive and that reported compliance was high.

However, a 2006 study conducted by the National Commission of Compensation Insurance (NCCI) titled Workers’ Compensation vs. Group Health: A Comparison of Utilization, showed that compliance with ACOEM protocols had dropped considerably since 2000. In fact, the researchers uncovered significant growth in the number and mix of medical treatments practitioners provided compensation patients. The study, which compared 2001-2002 to 1996-1997, found that the number of treatments for all diagnoses increased 45 percent, except for injuries such as knee and leg sprains, which had increased as much as 80 percent.

But increased levels of treatment and unnecessary testing are just the tip of the iceberg. There are some other serious outcomes resulting from over utilization:

  • The barrage of doctor’s visits, tests, prescriptions, therapy sessions, etc., convinces the employee that they are getting all of this treatment because they are seriously injured. The employee begins making emotional decisions, and overlooks their economic well being. This kind of response often results in lawsuits and the loss of a valuable employee.
  • More narcotics are being prescribed as part of the treatment program, resulting in addiction among some employees.

Given these outcomes, it is incumbent upon employers to select a doctor who will follow evidence-based treatment protocols. The doctor should be in agreement with the ACOEM philosophy that it is important to return the injured employee to the workplace in the appropriate time, whether to their own job, or to a modified position.

The best way to find the right doctor is to talk to other local companies, asking if they use physicians who are specifically trained in occupational medicine. After you have found the right doctor, establish a line of communication. Be sure your doctor knows that their recommendations and restrictions will be respected. They should also be fully aware of the return-to-work possibilities that exist within your company so that they can make the appropriate decision for their patients.

Data Theft Is Big Business – Are You Protected?

According to the U.S. Federal Trade Commission Internet fraud complaints soared from $206 million in 2003 to $336 million in 2005. The worst news, according to a survey performed by the Enterprise Strategy Group in 2006, is that your data is more likely to be stolen from inside your company by employees or on-site contractors than by outside hackers.

Protecting your most valuable and sensitive data must be a three-fold approach:

Assess Your Data Risk

Begin the process by asking yourself three basic questions.

  • Who would want steal from my company? Consider the possibilities from different perspectives such as hackers, competitors, thieves, disgruntled current or former employees.
  • What data would they want to steal? Sensitive data is any information which compromises the security of your company. Client information, product and technology information, social security numbers, bank account and financial information, credit card numbers are just a few examples of the data which could be at risk.
  • What do I need to do to plug the leaks and protect this data? Security measures you can implement range from the very economical, such as purchasing commercial security software, to having an IT security consultant develop a custom security system appropriate to your company’s needs.

Formulate Internal Security Procedures

Creating in-house security procedures is the only sure way to prevent data leaks from occurring inside your company. Security measures should include technical features, physical safeguards and the human element. Proactive steps to remedy potential weak points include:

  • Ensuring terminated employees lose access to not just the physical locale, but to the computer network, e-mail, and voice-mail systems as well.
  • Implementing access controls through the creation of internal firewalls to restrict the availability of sensitive data to only those employees who need it.
  • Creating stringent password policies to ensure employees do not share passwords. Alter passwords when employees leave or use additional passwords for sensitive data. Passwords should be strengthened by using a mixture of letters and symbols.
  • Updating your operating system regularly. Newer systems upgrade their security software and the options relating to access control giving you better security.
  • Scrutinizing how employees use your computer system. Prevent employees from being able to download material to CD’s or Ipods. Install security alarms to alert you when large blocks of data are deleted. Include a system to allow designated IT staff to be guard against unauthorized remote access to internal data.

Develop Systems/Internet Security

Data threats from within your physical locale can be solved by:

  • Employing encryption algorithms to protect vital data by making it unreadable to outside eyes. This includes your order forms where sensitive information such as credit card numbers or bank account information is involved and e-mail between employees who are transmitting crucial or sensitive information should also be encrypted.
  • Basic or custom designed security software packages which guard against viruses and worms are essential. Many companies fail to regularly update their security protection. Hackers or crackers evolve their methods and strategy of attack frequently and can be incredibly diabolical and creative.
  • Ensure you have a firewall suitable to the needs of your company. Commercial software packages may be adequate for smaller companies, but larger companies may require custom designed systems to safeguard sensitive data.
  • Back up all of your systems on a regular basis. Larger companies should do so daily while smaller companies could get by with weekly backups. Regardless, backups should be stored off-site! Should you keep backups on-site when your business experiences a natural disaster your backup system could also be destroyed. Companies need to be able to set up their system from another location with minimal delay.
  • Consider adding a virtual private network (VPN). Vested partners must be able to access the necessary data from your company in a secure manner. A VPN will allow safe access from remote locations. Extend your security system to any hardware employees are using such as cell phones, laptops etc.

Additional Insureds: What Coverage Do They Really Have?

Most construction contracts require one party to name the other party as an additional insured under the first party’s general liability insurance policy. For example, a contract between a project owner and the general contractor will require the GC to cover the owner as additional insured. A contract between a GC and a subcontractor will have a similar requirement in favor of the GC. By making this requirement, the owner or GC is attempting to transfer the liability insurance responsibility from itself to the other party. However, what the GC is trying to achieve and what it actually gets may not be the same.

Many owners and subcontractors, when they require additional insured coverage, are seeking coverage that an obsolete insurance form used to provide. This form covered the person or organization listed on it for liability arising out of the policyholder’s work for the person or organization. The industry has revised this form several times over the years. The current version covers the named person or organization for liability arising at least partly out of the policyholder’s acts or omissions or those of subcontractors working for the policyholder. It covers liability for the policyholder’s ongoing operations for the additional insured. Coverage ends when all work on the project is completed or the part the policyholder was working on is put to its intended use.

The modern version has some significant differences from the old one. Courts interpreted the old version as covering the additional insured even when the accident was 100 percent its own fault. The new version requires the policyholder to be at least partly responsible. The old version covered liability arising out of the policyholder’s work, whenever it occurred. The new version covers liability arising out of the policyholder’s work only while it is in progress. It does not provide any coverage for liability arising out of the work once it is complete.

Contractors who need or want coverage for additional insureds arising out of their completed operations must request a separate coverage form from the insurance company. Willingness to provide this coverage varies from one insurance company to another.

Another option is to cover all additional insureds automatically. Many insurance companies offer this, but the form ordinarily applies only when a written contract requires the policyholder to add the additional insured. Also, it usually does not provide completed operations coverage for the additional insureds, and it may provide only the amount of coverage the contract requires even if the policy actually provides more. The contractor must request to add completed operations coverage separately for each additional insured.

It is important to note that none of these forms promise to provide the additional insured with advance notice if the company decides to cancel the policy. Owners and GCs often require advance notice in the contract. If this is the case, the contractor should discuss it with his insurance agent and ask to have this provision added to the policy separately. Insurance companies’ willingness to do this varies.

An owner or GC that requires its contractor to add it as an additional insured may expect or demand coverage for all operations, both ongoing and completed. They may also require advance notice of cancellation. It is crucial for contractors to be aware of what their policies do and do not provide. The contractor should discuss any coverage deficiencies with his agent as soon as he discovers them. If the insurance company is unwilling to remedy them, he may have to negotiate with the other party. The worst possible outcome is for the other party to be surprised by lack of coverage when an accident happens.

OCP Policy: Better Than Additional Insured Coverage?

When a contractor wins a bid for a job, the contract with the owner or general contractor will often require the contractor to provide liability insurance coverage for both the contractor and the owner or GC. The contractor usually accomplishes this by having his insurance company add the other party to his policy as an additional insured. An additional insured has certain rights under the policy, the most important of which are the right to insurance company provided defense and payment of losses. However, this approach may not satisfy all of the other party’s requirements. In this situation, the contractor may want to consider an alternative coverage approach.

An owners and contractors protective liability insurance policy covers an owner or contractor for liability arising out of the actions of a subcontractor. It is unique in that, while the subcontractor arranges for and purchases it, the sub has no underlying coverage. Rather, the insurance company issues the policy in the name of the owner or GC (the policy information page identifies the contractor doing the work). For example, assume Owner A hires Contractor B to build a small office building. Contractor B purchases an OCP policy insuring Owner A for liability it incurs from Contractor B’s work. If Contractor B erroneously cuts down trees on a neighboring property and the neighbor sues Owner A, the OCP policy pays for A’s defense and the cost of any settlement.

This is a much different arrangement than additional insured coverage. In that arrangement, Owner A has coverage under a policy issued in Contractor B’s name. Owner A may be one of many parties that B’s policy covers.

Beyond that difference, there are advantages and disadvantages to each approach. Assume that B’s policy covers losses up to a total of $2,000,000 during the policy term. If Owner A is an additional insured, he is sharing that $2,000,000 with B and any other parties with coverage under that policy. However, an OCP policy in A’s name will provide a separate amount of insurance just for A. Also, Owner A may want the insurance company to notify him in advance if it decides to cancel B’s insurance. An additional insured under B’s policy usually does not have any rights to advance notification. As the party named on the OCP policy, however, A is entitled to advance notice. This can be important, as the advance notice requirement may be included in the construction contract.

One disadvantage of an OCP policy is that it does not provide completed operations coverage. Coverage ceases when the contractor finishes the job. If the contract requires completed operations coverage, the subcontractor may have to ask his insurance company to add the GC as an additional insured for this coverage on his own liability policy. Also, because the OCP is a separate policy, the insurance company will charge an additional premium for it, something they might not do for adding an additional insured. The OCP policy covers losses only if the GC is held liable for the subcontractor’s actions. It will not cover the GC’s sole liability for its own actions. However, recent changes to additional insured coverage have had this effect as well. Finally, OCP policies may be more difficult to obtain than additional insured coverage.

Which coverage arrangement to choose is a matter of negotiation between the subcontractor and the GC. Both contractors should discuss the options with their insurance agents and become informed about what each form does and does not cover. Most importantly, whichever coverage is selected should meet the insurance requirements and other provisions of the construction contract.

Workers’ Compensation Experience Modifications: What Happens When a Loss Reserve Changes?

For many businesses, workers’ compensation insurance is one of the largest expenses. A firm’s experience modification, which is a numeric factor that applies to the workers’ compensation premium, is a major influence on that cost. It is designed to reward firms that have below average loss activity and penalize those with above average activity. Firms with losses below average will have a mod of less than 1.0, while others with above average losses would have mods greater than 1.0. The insurance company multiplies this number by the calculated premium, producing either a reduced or increased premium. Firms with frequent, small losses fare worse under experience rating than those with infrequent, large losses. However, large losses and changes to the amounts reserved for them can still have a great impact.

In each state, a bureau independent of the insurance company calculates an eligible firm’s experience mod. The bureau uses a formula that considers the type of operation, the payroll over the previous three policy periods (not including the current one), the losses with values of less than $5,000 each, and the losses valued at more than $5,000. Through the application of mathematical factors, the formula determines the firm’s actual losses for the three-year period. The bureau divides this number by the expected losses for a firm in that classification with that amount of payroll. If actual losses exceed expected losses, the mod is greater than 1.0; the mod is less than 1.0 if the converse is true.

The formula values losses of less than $5,000 at full value. For example, a firm that had five losses totaling $10,400 would be charged that amount in the experience rating formula. However, a firm with one $10,400 loss would not be charged the full amount. The formula breaks this loss into two amounts — $5,000 plus some fraction of the amount in excess of that. The experience rating manual contains the factors that apply to the amount over $5,000, and they will vary by the firm’s expected losses. Factors are greater for firms with greater expected losses. Each state has a maximum amount for which any one loss can be valued, no matter what its actual size. For example, if a firm suffers a loss reserved at $900,000 and the state’s maximum single loss is $200,000, the formula will apply the factor only to $195,000 (the amount between $5,000 and $200,000).

A significant change in the amount reserved for a loss can have a dramatic effect on a firm’s experience mod. In the example above, if the reserve dropped from $900,000 to $100,000, the factor would now apply to $95,000 instead of $195,000. This would produce a major decrease in the formula’s calculation of actual losses, resulting in a big drop in the experience mod. Conversely, a loss reserve that jumped from $50,000 to $250,000 would produce a sizable increase in the calculated actual losses, as the factor is now applied to $195,000 rather than $45,000. This shows the importance of proper claims management. Lingering problems such as back injuries can result in large reserve increases if the injured worker does not receive effective medical treatment early on.

A good insurance agent will work with the firm to analyze the experience modification worksheet and verify its accuracy. The firm and its agent should inform the insurance company of any errors in reported losses or payroll. Also, the firm should question an usually large decrease in a reserve and appeal to have its mod reduced. A properly calculated experience mod should neither over-reward nor under-penalize a firm for its loss experience.

Shield Your Business from Phony Slip and Fall Claims

If you’re open to the public, you’re always vulnerable to a fraudulent slip and fall claim. These types of claims are a favorite among con artists because they’re easy to perpetrate and difficult to disprove. Circumstances like a slippery floor, or a broken sidewalk are an open invitation to a specialist in insurance fraud to make you their next target.

Your first line of defense in the war against slip and fall scam artists is a video camera. Most surveillance systems are priced so as to make them affordable to purchase and maintain. Keep in mind that the money you invest in a good surveillance system will be paid back many times over if it prevents you from becoming a victim of one of these schemes.

You should also rely on your insurance company’s claims examiner to spot signs of possible fraud and to thoroughly investigate those cases. These professionals are trained to use a number of techniques to uncover hoaxes, like reviewing video footage, examining the scene, interviewing the claimant and witnesses, and verifying that the claimant is actually being treated for the injuries claimed.

In addition to these resources, The Hartford has created a list of steps you can take to further protect your business:

  • Eliminate the opportunity for fraud – Maintain facilities inside and out. Keep floors clean, dry, and clear of debris. Thoroughly clear sidewalks of snow, ice and other hazards. Repair damaged sidewalks, parking lots, and other walkways that customers use to enter and exit the facility.
  • Document prevention efforts – Check public areas on a regular basis, and keep a detailed log of cleaning and maintenance activity. List each task, which employee performed it, and when it was completed.
  • View and capture video footage immediately after an incident – Many systems reuse tape. These systems often run on a 24-hour loop, which means the footage will be erased if not properly secured after an incident.
  • Take photos of the area, and of whatever hazard the person claimed to slip or trip on – Be discrete and considerate, but photos of the accident scene can be invaluable in managing the claim and any fraud investigation.
  • Identify witnesses – Act quickly to secure names and contact information. Often, in cases of fraud, a witness might say, ‘Yes, I saw the fall and he just laid down on the ground and then called out in pain. It looked really fake to me.’
  • Be thorough in collecting details – In an authentic slip and fall, the person will usually land in the substance they slipped on. Is there any sign of the substance on the person’s clothing? Is there evidence of a slip mark on the floor? Is a witness overly enthusiastic? This can be a sign of two people working together. Any unusual aspects of the incident should be noted.

What Is and Isn’t Age Discrimination

With a troubled economy and continuingly soaring healthcare costs, employers are always on the lookout for ways to limit expenses. Much as they might not want to, they often look at personnel costs, including those for healthcare. Personnel moves, however, can be a minefield for the unwary. Handled incorrectly, they can land a well-meaning employer in court, especially if they smack of possible discrimination against older workers or retirees. Several court and regulatory decisions over the past few years have weighed in on what employers can and cannot do regarding their older employees.

In February 2008, a unanimous U.S. Supreme Court declined to rule on the question of whether a court must, in an age discrimination case, accept testimony from former employees who are not parties to the lawsuit and whose accusations are against supervisors not accused in the lawsuit. Rather, they ruled that a federal appellate court was incorrect in overruling the trial court on the question. The court said that the appellate court should have sent the case back to the trial court with orders to clarify its decision. The ruling left the question about testimony from non-party employees unsettled.

In March 2005, a divided Supreme Court ruled that the Age Discrimination in Employment Act authorizes older employees to recover damages from an employer when the employer’s decision adversely impacted them because of their age. The court found that the law’s language was virtually identical to that in the Civil Rights Act of 1964, which prohibits limiting, segregating or classifying employees in a way that adversely affects their status because of race, color, religion, or other protected characteristics. While noting that the ADEA’s scope is narrower than that of the Civil Rights Act, the court nonetheless ruled that the ADEA, in principle, provides for recovery in so-called disparate impact cases.

The Supreme Court also ruled in 2004 that employers may make employment decisions that favor older employees over younger ones. In 2007, the EEOC announced an amendment to its rules implementing the court’s decision. The prior rules had forbidden such practices.

In August 2007, a federal appellate court held that defined benefit plans employing a cash balance formula do not violate the Employee Retirement Income Security Act. Older employees argued that the cash balance formula discriminated against them because younger workers who received the same employer contributions would be entitled to a retirement benefit greater than that due the older workers. The court rejected this contention, saying that the employer’s plan was legal so long as the contribution rates did not discriminate on the basis of age.

Lastly, in June 2007 a federal appellate court ruled that the Equal Employment Opportunity Commission acted within its authority when it issued rules permitting employers to reduce or eliminate employer-sponsored retiree health benefits when retirees become eligible for Medicare or comparable state-sponsored programs. The American Association of Retired People had sued the EEOC on the grounds that the ADEA prohibits these practices. The court said the rules were consistent with the law’s purposes and intent; it also said that the rules actually encourage employers to provide all retirees with the best possible health benefits.

As these decisions show, employers must be very careful when they make employment decisions that will impact groups of employees in different ways. A qualified human resources consultant can advise an employer on the legal implications of a decision. Also, employers should consider purchasing an employment practices liability insurance policy. Such a policy will cover the employer for defense of age discrimination lawsuits and for the cost of judgments against the employer. An insurance agent can give advice on the availability and cost of the most appropriate coverage.