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Outlook For The Private Directors & Officers Marketplace

Private Directors and Officers Liability (D&O) policies are generally combined policies including D&O and Employment Practices Liability (EPL). Although they are typically marketed as Directors & Officers policies, and there are definitely D&O claims, claims frequently come from the Employment Practices Liability side of the form. Private Directors & Officers carriers find it challenging to cope with the high frequency of Employment Practices Liability claims that come with this line of business.

The premiums associated with these policies have been creeping up over the past few years, and now is an appropriate time to investigate and report on the causes. Rather than give you generalities that claims are frequent, here is some of the data that supports what the insurers are telling us.

2012 EEOC Complaints
Top Five States Total Complaints Percent Change Since 2010 2010 Total Complaints Total Population 2010*
Texas 8,929 -4.1% 9,310 25.1 million
Florida 7,940 2.1% 7,779 18.8 million
California 7,399 3.3% 7,161 37.3 million
Georgia 5,903 2.3% 5,771 9.7 million
Illinois 5,490 3.8% 5,288 12.8 million
Year Total Total Complaints – All 50 States
2012 99,412
2011 99,947
2010 99,992
2009 93,277
2008 95,402

* The population totals are included to show that the highest volume of claims generally come from the largest states.

The Equal Employment Opportunity Commission (EEOC) isn't the only regulatory body bringing employment actions against employers — state agencies like the California Department of Fair Employment and Housing (DFEH) are filing cases as well. In its 2010 annual report, the California DFEH notes that they filed between 17,500 and 20,000 cases each year between 2007 and 2010 (2011 and 2012 numbers are not yet available). The department also estimates that the average post-accusation case settled for more than $40,000.

Let's put this into perspective. The Betterley Report: Employment Practices Liability Insurance Market Survey 2012 (December 2012) estimates the total Employment Practices Liability market at around $1.6 billion in premium. Just for discussion purposes, let's assume that the Department of Fair Employment and Housing estimate is applied to all claims. At $1.6 billion in total premiums collected, the insurance marketplace could handle 40,000 claims and break even (40,000 claims X $40,000 average settlements = $1.6 billion). Considering we know there are more than two times that many EEOC complaints, plus tens of thousands of other state agency claims, we know that the volume of insured claims exceeds 40,000 per year.

Since we know that there are more than 40,000 claims a year, the second half of the debate is what these claims cost. The Department of Fair Employment and Housing has their estimate for out of court settlements at over $40,000. Jury Verdict Research, a publication that puts out jury trial settlement trend data, indicated in its 2011 report titled, “Employment Practices Liability: Jury Award Trends and Statistics,” that the average awards range from $600,000 for discrimination claims to as much as $790,000 for wrongful termination claims. Their median award range is from $200,000 to $260,000 based upon their research. This data implies that the average claims are going to be far greater than $40,000 to settle on a nationwide basis. These reports only show us awards, which do not include the defense costs paid to get to the award stage.

If we take this one step further and assume that the average claim will cost approximately $120,000 — though the Jury Verdict data tells us it's higher — then the amount of claims the insurers could handle in a year, and possibly break even, is more like 13,333 claims per year ($1.6 billion total annual premium divided by $120,000). If we factor in underwriting expenses and other transactional costs, then even less money is available for defense costs and settlements.

So, what's the bottom line? The insurers have been struggling to make a profit on this line of business for many years. While competition for market share has continually lowered the premiums they could charge and still write business, we've gotten to a crossroads and blown right through the stop sign. The pricing has been creeping up over the past three to four years, and we are still far from a corrected market. The dilemma for insurers has been how to adjust their pricing and terms in a way that still provides a valuable policy for insureds. The responses have varied from insurers pulling out of a specific region (like southern California), gradual elevation of retentions, increasing premiums, reducing limits available and declining risks with specific employee count ranges.

Bertrand Spunberg, Senior Vice President, Hiscox USA: “We have strived to maintain 'sustainable underwriting' since we opened up in 2009, even when the market was still very soft. That discipline is now starting to pay off as other insurers are adjusting their rates and retentions up to a point that's more comparable to what we have been all along. We are seeing some insurers revising their appetites or pulling out of jurisdictions and segments altogether. Other carriers are taking a portfolio view of the business, making them more prone to declining rather than underwriting around account-specific exposures. This creates an environment that is increasingly difficult to navigate for both insureds and brokers. EPL claims have been leading the way, but we are also seeing D&O claims arising from financial issues, such as bankruptcy. In response to that, we have seen insurers indicate that they would be looking to limit or even remove entity coverage.”

Mr. Spunberg's comments should serve as a warning to all brokers. While pricing and retention changes are typically obvious changes to renewal terms, you need to pay extra attention to any other changes in coverage terms. On some policy forms, the inclusion of entity coverage may only be signified by an “X” in a box on a declarations page or quote letter. It could be easy to miss the removal of this subtle notation. Also watch out for changes in endorsement numbers and titles. You may find an insurer substituting an endorsement with the same title as previous years but adding a new clause that removes or restricts coverage from what you've come to expect.

Steven Dyson, Executive Vice President, ERisk Services, LLC: “We track a lot of data on our insureds and claim performance. Rather than penalize all insureds in every state, we have evaluated where our claims are coming from and adjusted our rates in a targeted fashion. Difficult venues like southern California, Illinois, southern Florida and metro New York, are getting more rate adjustments than less litigious parts of the country. We drill down to the county level when evaluating the performance of our book and adjust accordingly.”

As brokers, we appreciate ERisk's targeted approach. As insurance professionals, it can be a difficult message to give to insureds that an underwriter is penalizing them for the poor performance of another risk, or that the underwriters may have misunderstood the risks of the businesses they underwrite.

No insured likes to see their premiums rising. It helps when underwriters are doing their best to stabilize the marketplace and articulate the logic behind rate changes.

Joseph Casey, President, ACE Westchester: “At Westchester, we have seen a significant increase in the number of Private Company D&O submissions, apparently based in part by some markets reacting to an increase in Employment Practice Liability claims. The increase in EPL litigation and the corresponding rise in defense costs require, more than ever, greater underwriting discipline. However, the right carrier, with an expertise in EPL and a flexible approach, has the ability to look at the type of company, the jurisdictions in play and other factors unique to the insured, and provide suitable coverage.”

Our wholesale-dedicated markets like ACE Westchester and ERisk are less prone to some of the broad brush underwriting approaches taken by many of the standard markets. The wholesale markets are always looking for a way to differentiate and uncover risks that are neglected or underserved by the standard markets. When the retail-focused markets head out the door, our markets are usually running in; that appears to be what we are currently experiencing. We've had a sustained period of underpricing in the private D&O/EPL area as insurers compete for market share. With the loss frequency where it is and expenses rising, it is indeed time to reevaluate. While the wholesale markets are noticeably more competitive in a challenging market, they also do a great job when things are going smoothly.

Trucking Company Pays $450,000 to Settle Fresno Workplace Discrimination Case

California’s Department of Fair Employment and Housing (DFEH) settled a group action lawsuit on behalf of newspaper delivery drivers against Penske Logistics, LLC for $450,000. The DFEH alleged that Penske refused to hire the drivers because of their real or perceived disabilities. The case arose after Penske entered into a contract with the Fresno Bee to deliver newspapers. The Bee informed its newspaper delivery drivers that it had outsourced their jobs to Penske, and advised them that they could apply for employment with Penske if they so desired. When the drivers applied, Penske required them to disclose non job-related physical conditions, which is prohibited. Penske also rejected several drivers due to the conditions they disclosed.

The DFEH lawsuit alleged that Penske rejected 13 of the delivery applicants who had ably performed their jobs for the Fresno Bee for four or more years, after they received unsatisfactory scores on Penske’s Physical Capabilities Exam. According to the Department, the exam was neither job-related nor consistent with business necessity, which the Fair Employment and Housing Act (FEHA) requires. Prohibited disability-related questions included whether an applicant has heart disease, diabetes, or high blood pressure. The exam also required applicants to achieve a strength rating of “medium-heavy,” while the U.S. Department of Transportation standard Penske claimed to follow assigns a strength demand of “medium” to a wholesale newspaper delivery driver job. The Department alleged that because the 13 applicants did not achieve the artificially high strength demand Penske required, Penske refused to hire them, although they had safely and successfully performed the duties of a newspaper delivery driver for the Fresno Bee for years.

In addition to paying $450,000 to the 13 applicants, Penske agreed to stop subjecting applicants at any of its facilities in California to the Physical Capabilities Exam, to maintain and distribute a written policy prohibiting workplace discrimination on the basis of actual or perceived disability, to train its officers, managers, supervisors and Human Resources personnel in California on the policy, and to maintain and distribute written procedures by which current and prospective employees in California may report discrimination.

This is not the first time the DFEH has challenged a pre-employment test. In a class action against Loma Linda University Medical Center, the agency negotiated a settlement for $259,853.96 on behalf of ten job applicants, for subjecting candidates to a “nerve conduction test” to screen out those who have or may have carpal tunnel syndrome or repetitive motion injuries. The applicants who were required to take this test had passed all other employment tests and interviews. In some cases, job applicants had already attended orientation and were ready to start work. The hospital rescinded its employment offer to applicants with “failing” test results, even though there was no objective evidence demonstrating that they could not perform their essential job tasks. These two settlements suggest that the DFEH is paying increased attention to discrimination based on “actual or perceived disabilities,” and starting in 2013 will be able to file class lawsuits in civil court.

Prevention Strategies: The new disability discrimination regulations that will take effect on January 1, 2013 emphasize “accurate and current job qualification requirements.” DFEH is clearly starting to enforce this now. The enforcement agency is taking the position that not only was there disability related inquiries, but that rejection of the applicants was “regarded as disabled” discrimination. Accordingly, it is prudent to take a look at the current pre-employment testing protocols to be sure that they are within appropriate guidelines under FEHA (job related and consistent with business necessity) and that any post-conditional offer medical examinations only ask for appropriate job-related medical history.

Employers Have Affirmative Duty To Take Reasonable Steps To Prevent Harassment Or Discrimination

On July 26, 2012, a federal judge in Las Vegas ordered Prospect Airport Services, Inc., a provider of wheelchair assistance services to airline passengers, to implement extensive measures to prevent future sexual harassment.

After agreeing to a monetary settlement of $75,000 in a lawsuit brought by the the Equal Employment Opportunity Commission, Prospect refused to agree to any prospective relief to prevent future harassment. The Equal Employment Opportunity Commission petitioned the court for an injunction and order directing compliance.

The judge issued an order prohibiting Prospect from further violating Title VII as it relates to sexual harassment for a period of five years. Prospect must develop a policy and procedures for handling reports of sexual harassment and an effective investigation process for all harassment complaints. It must also “appropriately discipline management and human resources staff for failure to comply with such procedures and provide annual sexual harassment training to all supervisory employees.”

The Equal Employment Opportunity Commission will monitor compliance and can haul Prospect into court again for any failure to comply with these orders or for damages based on new harassment incidents.

The Equal Employment Opportunity Commission had charged the company with failing to address complaints of unrelenting sexual advances toward a male passenger services assistant by a female co-worker. The employee, whose wife had passed away, received sexually suggestive notes and unwelcome advances. He rebuffed the advances and brought the notes to the attention of a general manager who made light of the situation and failed to stop the harassment. There was no effective company policy at the time to address the issue.

Over the course of a year, the harassment escalated to a near-daily basis, including offensive remarks by co-workers about his sexuality due to his rigorous rejection of the sexual advances. Despite his repeated complaints to management, the hostile work environment ended only when he resigned.

The Equal Employment Opportunity Commission’s press release states: “Today the court has spoken to affirm the importance for all employers to have effective policies and procedures in place to prevent discrimination in the workplace … A strong policy, meaningful training and a swift response to complaints help to contain an existing hostile work environment or to prevent one from arising.”

Under California’s Fair Employment & Housing Act (FEHA), failure to “take all reasonable steps to prevent discrimination or harassment from occurring” is a separate unlawful employment practice.

In a precedent-setting decision against a small law firm, the Fair Employment & Housing Commission (FEHC) determined that the Department of Fair Employment & Housing (DFEH) can prosecute an action for such failure, even when the underlying claims of harassment and retaliation aren’t proven.

In DFEH vs. Law Offices of Jeffrey Lyddan, the Fair Employment & Housing Commission determined that Lyddan’s statements, gestures and cartoons directed toward a paralegal, while often in bad taste, did not rise to the level of objectively severe and pervasive harassment that interfered with her ability to perform her job duties. Nevertheless, it supported a “stand alone” action by the California enforcement agency for failing to take all reasonable steps to prevent harassment from occurring. Without actionable harassment or retaliation, such a claim may not be actionable by a private litigant in a civil action.

The Commission found that Lyddan failed to maintain an anti-harassment policy, did not attend harassment training, and failed to order a fair and impartial investigation into the paralegal’s charges of harassment presented in her email when she resigned. Therefore, Lyddan was liable for failure to take all reasonable steps to prevent harassment from occurring.

California’s Fair Employment & Housing Act requires “effective remedies” that will both “prevent and deter” discrimination. This is why the Equal Employment Opportunity Commission and the Department of Fair Employment & Housing require employers to adopt significant future anti-discrimination practices and conduct widespread training as part of their settlement agreements.

The affirmative duty to prevent future harassment goes beyond sexual harassment to other hostile environment claims, including disability, as is seen in Espinoza v. Orange County, in which an employee was awarded more than $850,000 after harassment by his co-workers and indifference by the County to his complaints.

Failure to prevent future discrimination is also a separate unlawful employment practice in disability discrimination lawsuits. The Department of Fair Employment & Housing has obtained settlements and Commission decisions with affirmative requirements for expanding reasonable accommodation procedures, adopting preventative practices and training in several pregnancy and disability discrimination actions in the last 18 months.

In DFEH v. Acme Electric, the Fair Employment & Housing Commission handed down the largest award in its history to a sales manager with cancer when his employer violated California’s Fair Employment & Housing Act by ignoring the duty to engage in a good faith interactive process, refusing to reasonably accommodate his disability and “failing to take all reasonable steps necessary to prevent discrimination from occurring.”

Prevention Strategies

  • Update your discrimination prevention policies and periodically audit their enforcement — even before someone complains.
  • Make sure your complaint procedures have accessible avenues for employees to report harassing work environments.
  • Conduct an immediate neutral fact-finding investigation with every internal discrimination complaint, even when it is raised by a departing employee, because the alleged behavior may still occur with others.
  • Update your disability processes to comply with the broad interactive process and reasonable accommodation requirements imposed by California’s Fair Employment & Housing Act. California law mandates that leaders receive harassment prevention training every two years.
  • Provide training for front-line supervisors on the standards for preventing discrimination or retaliation against employees who seek reasonable accommodations or take leaves of absence for medical conditions and/or disabilities.