Tag Archives: d&o

Skiing The Slippery Slope Of Employment Practices Liability In The Nonprofit Sector

One of your employees has been out on disability with a workers’ compensation injury and you have been getting great advice and service from your workers’ compensation carrier regarding managing the employee while out on leave. Ultimately, you are advised that it has been determined in the workers’ compensation case that the employee has reached maximum medical improvement (known as permanent and stationary in some states) and cannot return to her job due to a permanent disability. With regret, you terminate the employee since she is now receiving workers’ compensation vocational rehabilitation benefits and you have heard that workers’ compensation is the exclusive legal remedy for employees suffering workplace injuries.

Not so fast! If an employer has 15 or more employees, it is subject to the Americans with Disabilities Act (ADA) and/or a state disability accommodation law with a different threshold for applicability. In this instance, even though you acted appropriately in terms of not discriminating based on a work-related injury in violation of workers’ compensation law, you have violated the Americans with Disabilities Act for failing to engage in the interactive process to determine if there is any reasonable accommodation that would have allowed the employee to return to work for you — perhaps in a different job. Failing to engage in the interactive process prior to terminating a disabled employee is a violation of the Americans with Disabilities Act and would subject you to legal liability resulting from the termination.

Okay, so maybe you knew about that issue. But what about the other employment law moguls out there just waiting for you? Let’s explore some of the common — and maybe not so common — employment practices law issues that face nonprofits, how to guard against mistakes, what it can cost if you do err, and how insurance fits into the picture.

Timing Really Is Everything
Culled from the claims files of the Nonprofits’ Insurance Alliance of California (NIAC) and the Alliance of Nonprofits for Insurance (ANI), member companies in the Nonprofits Insurance Alliance Group (NIA Group) that insures over 11,500 nonprofits around the country, here are just a few examples of seemingly appropriate terminations by 501(c)(3) nonprofits that failed to withstand scrutiny because of their timing.

  • A couple of disruptive employees whose paychecks had been withheld for failure to have reports done on time filed a complaint about not being paid and were then terminated. (Two strikes on this one!) First, most states prohibit withholding paychecks just for poor performance. Second, terminating these two employees after they complained resulted in valid claims under the state’s “whistleblower” laws.
  • A poorly performing employee complained of sexual harassment. A thorough investigation concluded no harassment had taken place. The employee was then terminated on performance grounds alone. Problem — no contemporaneous documentation of the alleged poor performance existed, so it appeared to the state administrative agency that the termination was a result of the harassment allegation because it followed closely behind the report of it.
  • A long-term employee of an elder daycare facility, who was a “mandatory reporter” under state law, filed a report with the state about inadequate staffing at the facility when an elderly client was left unattended and was found wandering around in traffic. She was terminated for not following “internal reporting procedures” (in this case a warning was the appropriate remedy, not immediate termination).

So What’s An Employer To Do?
Let’s start with the exposures under Employment Practices Liability (EPL) that give rise to liability claims. Both federal — and most state — laws proscribe the most commonly known unfair employment practices of wrongful termination, sexual harassment, discrimination and ADA violations. Embedded in each of those categories, however, are some lesser known prohibitions and strict liabilities.

By now most everyone knows that in most jurisdictions you can’t terminate someone based on age, race, gender, or sexual preference. But what if a poor performing employee is the only one working for your nonprofit that’s in a protected category? Termination here may have the appearance of discrimination sufficient to subject you to administrative or civil exposure.

You know that sexual harassment is illegal and that procedures need to be in place to train supervisory and management personnel about its ins and outs. But what if you’re in a state that imposes strict liability on an employer, even if the employer didn’t know the harassment was occurring? Or what about a delivery person that’s been making inappropriate suggestions to your receptionist, or if the delivery person believes that one of your employees has been harassing him or her? That can get you into as much trouble as the typical case.

So, what to do? Defense of Employment Practices Liability claims starts with your agency having documented procedures in place that you and your counsel can use to demonstrate to an administrative agency or a court that you intended to be — and were — in compliance. This is best accomplished from the beginning with a robust personnel handbook that includes policy statements and procedures around at least 12 key subjects.

Twelve Components of a Model Personnel Handbook

Following are twelve components that we recommend all personnel handbooks contain:

  • Introductory Statements
  • Nondiscrimination and Sexual Harassment
  • Organization and Structure
  • Training and Orientation
  • Employee Classifications and Categories
  • Employment Policies, Including Wage and Hour Regulations
  • Benefits Disclaimer
  • Leaves of Absence and Time Off
  • Standards of Performance
  • Workplace Violence Prevention and Safety
  • Search and Inspection
  • Drug-Free Workplace

At a minimum, the handbook should include statements regarding at-will employment, probationary, introductory or benefit waiting periods, and examples of disciplinary offenses (always prefaced with “including, but not limited to” language). Always have employees sign a written acknowledgment that they have read and understand the policies, or you might as well not have created them in the first place.

Next comes training and adherence. Regardless of size, every nonprofit needs to train its management personnel about the employment laws relevant to their jurisdiction and the policies and procedures the agency has adopted. Include here any state mandates such as sexual harassment training for supervisory personnel. Then, walk the talk! Follow those policies and procedures diligently — every day. Oh, and did you remember to include your board members in the training? They are at risk as much as the Executive Director because they are ultimately responsible for the agency’s overall management.

The Old “Ounce Of Prevention”
The last, and most overlooked, step in Employment Practices Liability claim prevention is checking in with experienced employment counsel before taking a significant personnel action. A poorly drafted employment offer letter can bind you for a lot more than you thought. So can the improperly announced new personnel policy or procedure — even if it’s meant to be a “positive” for employees.

More than anything else, however, is every Employment Practices Liability defense lawyer’s wish that you consult counsel before termination. There would be obvious questions about clear documentation of performance issues, protected classes of employees, and compliance with your own policies and procedures, but some circumstances might require some “drill down” inquiry. Suppose a health issue, disclosed or not, is involved. Is the employee perhaps entitled to an ADA accommodation? What about Family and Medical Leave Act entitlement, or workers’ compensation benefits?

Always, always, check with counsel experienced in employment law. Some are available on a pro bono basis — check with your local bar association. A number of Directors and Officers and Employment Practices Liability insurance carriers provide this service to their policyholders, although sometimes on a limited basis. So ask them if they do. If they don’t, ask them for a referral. At ANI-RRG and NIAC, we feel so strongly about the importance of our members getting good advice before they take an important employment action that we have three experienced labor law attorneys dedicated solely to providing preventative advice on this subject to our member-insureds.

And The New “Pound of Flesh”
If you haven’t heard or read about it, employment practices law is one of the latest and greatest fertile fields for aggressive plaintiff’s attorneys. It matters not that you are a charitable nonprofit (particularly if you have good insurance limits). Six-figure jury verdicts have become more frequent, particularly in metropolitan areas where the majority of the nonprofit sector does its work. Need convincing? Think about this data from ten recent years of our closed claim files:

  • One out of every 100 nonprofits (regardless of size) will have an EPL claim this year
  • 97% of all claims against directors’ and officers’ policies are in the EPL category
  • The average cost to defend when a claim has some merit is $29,000 and the average loss on those claims is $44,000 — a combined average of $73,000
  • 40% of EPL claims have some merit and when they do, one in ten will cost more than $100,000
  • When claims do not have merit, the average cost to defend is only $5,000, thanks to early intervention by our experienced employment defense counsel
  • The two largest claims cost $1 million and $400,000 respectively

Did You Say Something About Insurance?
Unless you have tens or even hundreds of thousands of dollars just sitting around, you probably want to think about how your agency can protect itself in this vulnerable area and one other that directors and officers should be concerned about.

When Employment Practices Liability claims first came into vogue years ago, the insurance industry’s “knee jerk” reaction was to find a way to exclude the exposure. Smarter heads prevailed, fortunately, so that today EPL coverage is readily available. But like many things, it comes in different shapes and sizes, and not always where you think it is.

Let’s talk first about Employment Practices Liability as a stand-alone coverage. It’s available and commonly protects the nonprofit from damages claimed as a result of an adverse employment action. The defense component provides for payment of attorney fees and costs, and the indemnification component provides for payment of actual damages, if any. There are exclusions as discussed below.

It is more common, however, to find EPL coverage as either an attachment to, or embedded in, the nonprofit’s Directors and Officers (D&O) coverage. The components are generally the same as described above. Key issues to consider are detailed below, but look out for some tricky provisions such as the one that requires your consent before the carrier settles a claim, but makes you responsible for all the ongoing legal expenses if you don’t accept the carrier’s recommendation.

Typical exclusions include fines, penalties and sanctions (these are uninsurable risks), back wages, multiplied damages and plaintiff’s attorney’s fees. Wage and hour claims are one of the biggest uncovered liabilities that a nonprofit faces. Properly classifying an employee as exempt from the overtime requirements of the Fair Standards Labor Act (or similar state laws) can be tricky business and sometimes requires extra sensory powers of hindsight. To be properly classified as exempt, an employee must make a threshold salary as defined by federal and state law and pass the duties test of either the professional, executive or administrative exemptions. While most insurance policies do not cover payment of back wages and penalties, a few at least provide some defense costs to cover wage and hour claims.

So what are the key EPL components of a good D&O policy? At a minimum, expect the following:

Adequate policy limits

  • $1 million is generally adequate for small to mid-size nonprofits. Larger agencies should consider higher limits or an umbrella policy.

Broad definition of who is an insured

  • Is the nonprofit agency itself insured in addition to its directors and officers?
  • What about prior directors and officers?
  • Committee members?
  • Employees and volunteers? (Volunteers don’t have all the federal or state immunities you may think.)

Broad coverage for employment practices liability

  • Either by endorsement or imbedded in the D&O policy itself

Duty to defend

  • Does it extend to administrative proceedings (where most EPL claims start) or just to suits in civil courts?

Advancing of defense costs

  • The carrier should pay for defense costs as incurred, not after the nonprofit has paid for them and is seeking reimbursement

Anything Else?
Make sure that you understand your policy before you need to use it. For example, be sure that you understand when you need to report facts that may result in employment practices liability. For example, you may decide not to report to the insurer an employee grievance filed with your Human Resources Department pertaining to the employee’s termination, perhaps thinking that a legal claim may not develop from it. Unbeknownst to you, your policy may require you to report potential claims, including grievances filed with your HR Department. By the time the terminated employee files a legal complaint with the district court, the reporting period has passed and your insurer may deny coverage.

Don’t be disappointed if your insurance carrier insists on using defense counsel of its own choosing. It has the right to do so and generally has developed over time a panel of attorneys experienced in employment law defense who understand the nonprofit sector better than most.

While not directly EPL-related, make sure your Directors & Officers policy also protects you for fiduciary liability claims such as failure to properly account for grant funds.

If unsure about the nature and extent of your Employment Practices Liability coverage, by all means consult with your insurance agent or broker. They are usually paid commissions when they place your coverage, and providing appropriate advice is part of what they are paid for — and a service you have a right to expect.

Happy skiing!

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.

Bank Failures And FDIC Actions Update

As seen in the chart below, the number of bank failures in 2011 dropped from the highs of 2010 and 2009.

But the number of bank failures in 2011 is still significantly greater than the relatively low numbers prior to 2008. In recent years, the Federal Deposit Insurance Corporation (FDIC) has authorized suits in connection with 54 failed institutions, naming 469 individuals for Directors and Officers (D&O) liability with damage claims of at least $8 billion. This includes 27 filed D&O lawsuits naming 222 former directors and officers. However, the FDIC doesn’t file an action against the directors and officers of a bank just because the bank fails. In fact, the FDIC only brought claims against the directors and officers of 24% of the bank failures from 1985 to 1992.

Annual Number of Failed Banks Since 2000

Statute Of Limitations
When they act as a receiver, the FDIC has three years from the time a bank is closed to file suits for tort claims and six years to file breach-of-contract claims. If there is a longer statute of limitations permitted in a specific state, the longer statute is followed. Prior to bringing an action, the FDIC conducts an investigation into the causes of the failure. The investigations are generally completed within the first 18 months following the closure of the institution.

The FDIC will often seek a settlement prior to filing the claim in order to manage expenses. Available assets and potential insurance proceeds are considered when the FDIC contemplates filing suit and seeking damages.

FDIC Suits Authorized D&O Defendants Damage Claims ($ millions)*
Authorized in 2009 11 $366
Authorized in 2010 98 $2,123
Authorized in 2011 264 $5,110
Authorized in Q1 2012 96 $401.1
Totals 469 $8,000.1

* Losses typically exceed these amounts and may result in higher damage claims in filed lawsuits. Recovery on these claims is dependent upon available recovery sources, such as insurance and personal assets, and competing claims. http://www.fdic.gov/bank/individual/failed/pls/index.html

Personal Liability
According to the Federal Deposit Insurance Act 11(k) (FDIA): “Liability Of Directors And Officers. A director or officer of an insured depository institution may be held personally liable for monetary damages in any civil action by, on behalf of, or at the request or direction of the Corporation, which action is prosecuted wholly or partially for the benefit of the Corporation (FDIC) … for gross negligence, including any similar conduct or conduct that demonstrates a greater disregard of a duty of care (than gross negligence) including intentional tortious conduct, as such terms are defined and determined under applicable State law.”

What Does This All Mean?
As discussed above, bank failures frequently lead to suits brought by the FDIC against the directors and officers of a failed bank. The potential for damages is substantial, and the individuals can be held personally liable per section 11(k) of the Federal Deposit Insurance Act.

Further, litigation brought by the FDIC does not preclude actions brought by other creditors or shareholders of the bank. Since merger activity is one of the leading causes of litigation against directors and officers, and 94% of banks are acquired rather than fail, the risk of litigation against the directors and officers of financial institutions is meaningfully higher than in other industries.

Because the underwriters of Directors and Officers insurance are acutely aware of these factors, their underwriting guidelines will be extremely stringent — if they will even consider this class of business. Typical D&O policies, including Side A D&O policies, can respond to actions brought by the FDIC. It is important to watch out for regulatory exclusions that could preclude coverage. It is also important to negotiate a waiver of the bankruptcy stay on a primary D&O policy so the policy proceeds do not get frozen by a bankruptcy trustee in order to pay liabilities of the corporation ahead of the interests of insured individuals.

As a wholesaler in professional and management liability insurance, AmWINS has many markets that are providing insurance to banks of all sizes and financial conditions. The more distressed the bank, the more difficult the placement will be, so it is important to gather and provide as much information as possible. A high quality submission will influence the perception of the underwriters.