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How to Handle New ‘Ban-the-Box’ Laws

The term, “ban the box,” refers to the question on hiring applications that asks if the applicant has a criminal record/conviction; if so, he has to check the “Yes” box. “Ban-the-box” laws are laws designed to restrict employers from including questions that ask about prior arrests or convictions on initial employment applications. The purpose behind the law is to reduce unfair barriers to the employment of people with criminal records. The ban-the-box movement requires employers to act and fast. Numerous states and cities have enacted such laws, and we expect more to follow in the near future.

Illinois’ ban-the-box equivalent, titled the Job Opportunities for Qualified Applicants Act, takes effect Jan. 1, 2015. Illinois is prohibiting private and public employers from asking about an applicant’s criminal history until after the employer selects the applicant for an interview or provides the applicant with a conditional offer of employment. Illinois’ act applies to all private-sector employers with 15 or more employees.

There are exceptions. The act does not apply to: (1) jobs that cannot be held by convicted criminals under federal or state law, (2) jobs  requiring licensing under the Emergency Medical Services System Act and (3) jobs requiring fidelity bonds. The act gives the Illinois Department of Labor (“IDOL”) the power to investigate alleged violations and authorizes IDOL to impose civil penalties up to $1,500. We expect that IDOL will start fining employers as soon as the act goes into effect.

Private-employer ban-the-box laws currently exist in California, Colorado, Connecticut, Delaware, Illinois, Maryland,   Massachusetts, Nebraska, New Jersey, New Mexico and Rhode Island. Numerous cities have passed similar laws. Pending legislation exists in Florida, Georgia, Louisiana, Michigan, New Hampshire, North Carolina, Ohio and numerous cities.

Some states’ laws prohibit employers from asking about criminal history in the initial employment application before conducting an interview, while other laws prohibit such inquiries until after the employer makes a conditional offer of employment.

Be wary, as ban-the-box laws vary in terms of what types of criminal-history questions employers may ask applicants. For example, some laws only allow employers to ask about specific convictions and explicitly prohibit employers from asking about non-conviction arrests or expunged records. Exemptions can vary as well, with exclusions for facilities or employers that provide programs, services or care to minors or vulnerable adults.

As each state’s ban-the-box law may vary, it is important for employers to reevaluate their pre-employment and hiring practices. Employers affected by ban-the-box laws that do not update their applications and pre-employment processes risk being investigated and fined on an individual and potentially class-wide basis. Employers that operate in different states need to be diligent to make sure their applications are tailored to each state and city.

The takeaway:

Have your HR department or labor counsel review your employment applications and company policies to ensure that questions regarding an applicant’s criminal history comply with applicable laws. Additionally, employers should consider providing compliance training to employees involved in interviewing and hiring to make sure they are knowledgeable about the new laws.

Laura Zaroski wrote this article with her colleagues Joseph M. Gagliardo, Lily M. Strumwasser and Laner Muchin.

Beware of Fee Shifting by Lawyers: The Hidden Danger of EPLI

Sometimes, it’s good to be a plaintiff’s attorney. Why? Fee shifting. You don’t need a big win in lawsuits where stat­utes allow the court to make the defendant pay the plaintiff’s legal fees. Even if the plaintiff only obtains a small award (as little as a dollar), a “win” entitles plaintiff’s counsel to submit fees to the defendant for reimbursement. It seems almost too good to be true! But that is what the law allows in most employment-related cases.

You might ask: What stops plaintiff’s counsel from submitting made-up or inflated fees for reimbursement? Nothing!

The plaintiff’s counsel submits the fee petition to the court, and the court is the only gatekeeper that decides the appropriateness of the request. In a perfect world, a court would review the fee petition carefully, scrutinizing counsel’s listed activities to make sure that those services were actually rendered and that the time billed to those activities was reasonable. But in the real world, courts usually only make reductions for entries or ac­tivities that are clearly duplicative, exorbitant or outrageous.

Based on these fee-shifting provisions, it is important to caution your clients that any employment claim, no matter how seemingly minor, can turn into a case that exhausts their insurance policy limits. For example, in a recent case in San Francisco (Kim Muniz v. United Parcel Service, Inc.), plaintiff Muniz had demanded $700,000 to settle her case. No settlement was reached, and the case went to trial. At trial, Muniz was only awarded $27,000. However, that award was soon followed by a $2 million fee petition by plaintiff’s counsel. The court reviewed the petition and reduced the fees submitted to approximately $700,000. Although the reduction was substantial, what was a minor victory for the plaintiff still resulted in a major victory for plaintiff’s attorneys.

When you add it all up, the bottom-line expenses for the employer in the Muniz matter would include the following: 1) plaintiff’s award of $27,000, 2) plaintiff’s counsel fee award of $700,000, and 3) estimated defense expenses at least equal to the plaintiff’s $700,000 fee and likely much more.

If your client had a $1 million employment practices liability policy, the policy would almost have been exhausted just by the client’s own defense expenses, leaving little to fund an award or the award of plaintiff’s attorney fees. Unless your client had other applicable insur­ance coverage, the client would have to dig into its own pocket.

What does this mean for your clients? It means that when clients seek insurance protection for employment-related lawsuits they should consider not only the potential award but also the possible fees for plaintiff’s attorneys if even $1 is awarded to the plaintiff. Even the smallest of victories for plaintiffs can still leave the employer holding the bag.

Buyers beware! Carefully consider your client’s EPLI coverage and ask yourself: Are their limits adequate? 

Representations and Warranties Insurance: How It Can Help Close Business Deals

A Representations and Warranties policy provides coverage for losses incurred as a result of breaches or inaccuracies of the representations and warranties made in business transactions.  A seller typically makes numerous representations to the buyer and warrants to the buyer critical facts about the business.  These attestations are an inducement to the buyer.  While parties both hope that the representations are accurate, disagreements often arise.  Such disputes routinely occur in connection with financial condition, accounts receivable or intellectual property.  Disagreements can also arise over the scope of representations and warranties made, as well as the duration and amount of a seller’s indemnification obligations.

Often, when a transaction is nearly complete, last-minute issues can create an impasse.  It is at this critical juncture that R&W insurance can be utilized to remove obstacles and  facilitate closure.  The preemptive purchase of R&W insurance can remove fears regarding certain representations that might lead to litigation after the deal closes. An R&W policy can also eliminate the need for a buyer to rely on the seller to make continuing indemnification payments—meaning a buyer wouldn’t need to chase down sellers who might be foreign, insolvent or long gone.  In this regard, R&W policies provide both sides of the deal with peace of mind that each party will receive what they believe they bargained for.

HOW are R&W Policies Structured?
Each agreement is unique, and an R&W policy is tailored to meet the specific needs of each deal.  Depending on the client’s needs (whether the buyer or seller), R&W policies can be structured to achieve various things.  These goals might include: (1) increasing the amount of indemnity available, (2) providing a “backstop” to the indemnity already available, (3) extending the expiration of the indemnity, (4) eliminating the need for collateral for contingent liabilities, (5) providing “ground up” coverage to replace an indemnity, or (6) increasing the scope or breadth of an agreed indemnity.

WHEN should parties consider the purchase of an R&W policy?
Most often, R&W policies are purchased in a mergers-and-acquisitions context.  However, R&W policies are also secured in connection with restructurings, insolvencies, liquidations, financings or loans, or in connection with the licensing of intellectual property.  In these situations, an R&W policy adds value as it can eliminate or reduce perceived or identified exposures and can address disagreements on the allocation of legal or financial risk for certain perceived or already identified exposures.  It can also give one buyer a competitive edge over another.

For example, consider a transaction where the buyer requires that a seller retain liability equal to 30% of deal consideration in respect of breaches of representations and warranties, while the seller is only willing to assume liability for up to 10% of deal consideration.  An R&W policy could provide coverage for the buyer for loss resulting from breaches exceeding 10% of deal consideration up to a limit of 30% of deal consideration. 

Or consider a situation where the seller’s weak financial position causes the buyer to require that security be posted for seller liability for breach of any representations and warranties.  An R&W policy could be designed to cover the buyer for loss resulting from breaches only if the seller is unable to meet the liability it has agreed to assume under the sale agreement.

WHO Buys an R&W Policy?
Buy-side policies make up the majority of R&W policies.  A buy-side policy enables the buyer, should a breach occur, to recover losses directly from the insurer without having to make a claim against the seller, often without having to locate and pursue the seller.  Such a policy provides the buyer with assurance that the value of the acquired business will not be reduced by unexpected liability.  Further, buyers can utilize R&W policies to improve their bargaining position by using the coverage to enhance their bid by reducing the indemnity ceiling and required escrow.

A sell-side policy provides indemnification by the insurer for defense costs and loss resulting from claims made by the buyer for inaccuracies in the transaction that are the subject of seller representations and warranties.  Simply put, a sell-side policy also enables the seller to walk away from a closed deal confident that the proceeds it receives in the transaction will not be diminished by subsequent legal claims and claw-back.  A sell-side policy provides a structure so that the seller can make a clean break once the sale has been executed by reducing or eliminating the need for an escrow account.  This is of great value to the seller as the seller can distribute more of the proceeds from the transaction more quickly, thereby expediting shareholder return (and the purchase of the yacht or sports car that the seller has always wanted).

If I have a client who wants to consider R&W coverage, what information would they need to provide?  Generally, underwriters can prepare a non-binding indication with a minimal amount of key information.  This information would include (1) the draft purchase agreement, (2) the draft disclosure schedules, and 3) the most recent audited or reviewed financials of the target.

Socius has conferred with Ambridge Partners LLC, a leading managing general underwriter of Representations & Warranties Insurance (R&W), to present this article.

Resolving the Confusion About ‘Admitted’ and ‘Non-Admitted’ Carriers

Confusion sometimes arises about the difference between “admitted” and “non-admitted” insurance carriers and about the consequences of the difference. The designation of an insurance company by a state’s Insurance Commissioner as “admit­ted” may seem to give the company a stamp of authority, but this designation is primarily an administrative one rather than a mark of quality or stability. Other factors should be more important in the choice of a carrier.

Let’s take a close look at what admitted v. non-admitted really means.

What is an “Admitted” Insurance Company? – An admitted carrier is often referred to as a “standard market carri­er.” To qualify as an admitted carrier, an insurance company must file an application with each state’s insur­ance commissioner and be approved. Approval requires compliance with a state’s insurance requirements, including the filing and approval of that company’s forms and rates. This process often takes a long time.

Once a carrier is licensed to transact insurance business in a certain state, the carrier is required to pay a portion of its income into the state's insurance guaranty association. One of the main selling points of being an admitted is that the carrier’s liabilities are backed by that state’s “guaranty fund.” If an admitted company becomes insolvent, the state will help pay off policyholders’ claims. 

What is a “Non-Admitted “Insurance Company?  – A non-admitted carrier is often referred to as an “excess and surplus line carrier” and operates in a state without going through the approval process required for admitted companies. Non-admitted carriers are not bound by filed forms or rates and therefore have much greater flexibility to write and design policies to cover unique and specific risks, and to adjust premiums accordingly. When standard markets can’t or won’t write a risk, or when an admitted carrier cannot offer the appropriate terms, the non-admitted market is available to fill this gap.

Non-admitted insurance carriers are regulated by the state Surplus Lines offices, but regulation is far less invasive than for the admitted markets. The most obvious difference between admitted and non-admitted is that purchasers of non-admitted policies do NOT have the protection af­forded by the state’s guaranty fund. Each state does charge taxes for non-admitted insurance, and agents must be licensed in surplus lines to sell non-admitted insurance.

The designation as “non-admitted” should not be taken as an indication that these insurance carriers aren’t legitimate or financially stable. In fact, to sell surplus lines insurance, non-admitted insurance companies have to set aside a large monetary reserve or secure adequate re-insurance.

Insolvency – When an insurance commissioner determines that an insurance company is having significant financial difficulties, the insurance company will go through a process called “rehabilitation.” The state’s insurance commissioner will make every attempt to help the struggling company regain its financial footing. If the company cannot be rehabilitated, the company is declared insolvent, and the court will order liquidation.

Liquidation of an Admitted Carrier – If the carrier to be liquidated is an admitted company, the processing/pay­ment of existing and future claims is taken over by that state’s guaranty fund. However, the guaranty fund’s obliga­tions are limited by regulations and will only pay claims up to that state’s cap.  In some cases, if insureds exceed a certain revenue threshold they may not quality for any guaranty fund coverage. 

Depending on the state, guaranty funds usually provide only $100,000 to $500,000 of protection per policy even if the policy had a much higher limit. Most states are at $300,000. In addition, if several liquidations take place in one state, the state’s guaranty fund may be depleted. Policyholders often only receive pennies on the dollar of their true loss amount from a guaranty fund.

While state guaranty funds try to pay claims as quickly and efficiently as possible, payments are often slow.

In sum, although the guaranty funds provide some level of comfort if a carrier becomes insolvent, in reality, policyholders can be left with little or no assistance.

Liquidation of a Non-admitted Carrier – If a non-admitted insurance company goes “belly up,” the liquidator/receiver collects the assets of the company, determines all the liabilities/creditors outstanding, develops a plan to distribute the company’s assets and submits the plan to the court for approval (much like a typical bankruptcy pro­ceeding). In most cases, the insurance company’s estate will not yield sufficient money to pay the company’s cred­itors (including their policyholders' claims) in full. Policyholders often have to fund defense and settlement payments themselves before they can request reimbursement from the estate. Usually, the policyholder will have to wait patiently and will,  again, only get pennies on the dollar.

The largest surplus lines writer in the U.S. is Underwriters at Lloyd’s, London. In 1925, Lloyd’s created the Lloyd’s Central Fund, which pays claims in case any underwriting member should be unable to meet his or her liabilities. Unlike the guaranty funds, the Central Fund does not have a cap. The only cap for the Central Fund is the policy limit. (Illinois, Kentucky and the Virgin Islands are exceptions because Lloyd’s is admitted there and is subject to the state guaranty funds.)

Bottom Line – The choice between admitted and non-admitted insurance companies is something that needs to be considered, but examining the financial strength of the individual providers, the breadth of coverage and competitiveness of terms is more important. The priority should always be to seek a high-quality provider, regardless of whether the company is admitted or non-admitted.