reducing risk. raising expectations. 1 state office of risk management employment practices trends...
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REDUCING RISK. RAISING EXPECTATIONS.
1
State Office of Risk Management
Employment Practices TrendsArthur J. Gallagher & Co.
Phil NortonPresident
Professional Liability Division
July 26, 2011 Austin, Texas
REDUCING RISK. RAISING EXPECTATIONS.
2
Factors Influencing EPL Losses1. The Older Workers Benefit Protection Act of 1990
and The Age of Discrimination in Employment Act of 1967
2. The Civil Rights Act of 19913. The American with Disabilities Act of 1990
(effective 1992)4. The Family and Medical Leave Act (1993)5. The U.S. Supreme Court decision in Harris versus
Forklift Systems, Inc. (November 3, 1993)6. Class Action EPL Claims
Impact of Walmart/Dukes case
REDUCING RISK. RAISING EXPECTATIONS.
3
EPL Perils to consider• Retaliation (including whistleblower)• Wrongful Termination (actual and constructive)• Breach of Employment Contract• Discrimination• Harassment (sexual and workplace, including bullying)• Failure to Employ/Promote/Educate• Wrongful Discipline or Wrongful Demotion• Failure to Grant Tenure• Negligent Evaluation• Invasion of Privacy and False Imprisonment• Employment Related Misrepresentation• Defamation or Employment Related Libel/Slander• Wrongful Infliction of Emotional Distress
REDUCING RISK. RAISING EXPECTATIONS.
4
The Gallagher Database* on EPL Claims
• Research on Public Information - not client data• Focus on Large Losses - $1MM or more• All Losses are Post-1991 [Civil Rights Act]• Mixture of Settlements and Verdicts• Jurisdiction also mixed:
½ State Courts; ½ Federal
*Note: “Donation” to Advisen
REDUCING RISK. RAISING EXPECTATIONS.
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Large EPL Claims By IndustryGeneral Services
14%
Retail17%
Manufacturing21%
Financial12%
Professional12%
Public Sector10%
Energy & Utilities14%
REDUCING RISK. RAISING EXPECTATIONS.
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Large EPL Claims by Type of Claim
7%
20%
7%
18%
14%
7%
15%
12%
0% 4% 8% 12% 16% 20% 24%
Retaliation
Wrongful Termination
Whistle Blowers & Other Claims
Age Discrimination
Gender Discrimination
Disability & Other Discrimination
Race Discrimination
Sexual Harassment
REDUCING RISK. RAISING EXPECTATIONS.
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Top 10 States for Large EPL Claims30
10
6 6
4 4 4 43 3
CA TX NY FL IL NJ MI OH DC MA
Note: numbers are percentages
REDUCING RISK. RAISING EXPECTATIONS.
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Punitive Damages & EPL Claims• About one-third of top $2.5 BL in large
losses are due to punitive damages• Of largest 150 claims, about half have
punitive damages awarded• Average percentage of full award that is
punitive is about 35% for all large losses, but closer to 70%, if a punitive award is present
REDUCING RISK. RAISING EXPECTATIONS.
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Statutes & Law Supporting EPL Claims
• Title VII• Age Discrimination in Employment Act• Americans with Disabilities Act• Pregnancy Discrimination Act• Equal Pay Act• Family and Medical Leave Act• Title IX• Federal Fair Labor Standards Act• State Fair Employment Practice Statutes• Whistleblower Laws• Municipal Statutes and Regulations
• Breach of Contract• Wrongful Termination• Negligent and Intentional Infliction
of Emotional Distress• Defamation• Invasion of Privacy• Tortious Interference with Contract• Harassment• Assault and Battery• Negligent Hiring/Supervision• Fraud and Misrepresentation
Statutory Common Law
REDUCING RISK. RAISING EXPECTATIONS.
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Classic EPL Cases of Significance
• Texaco• State Farm• Publix• Home Depot• Triton Energy• Walmart
• Denny’s• Miller Brewing• Proctor & Gamble• Baker & McKenzie• Tishman
Construction• Ashland Oil
REDUCING RISK. RAISING EXPECTATIONS.
11
Trends in EPL Insurance• The EPL exposure, including potential for catastrophic loss, has
increased significantly since 1991• Pricing started high (1992/1993) then declined (1997), rose again
(2001-2003) and then declined a few years before stabilizing into 2011• Meanwhile, EPL coverage has been greatly improved:
– sometimes packaged with Loss Control consulting– punitive damages covered– no downsizing exclusion– bilateral discovery offered– no “intentional acts” exclusion– simpler reporting requirements often available– flexible selection of defense firms may be possible– third-party claim coverage
REDUCING RISK. RAISING EXPECTATIONS.
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The EPL Marketplace Today• Cycle of Capacity starting to turn up
– 1992 to 1997, 1998 to 2003, 2004 to 2009, 2010+ Note: Loss Ratios historically > 100%
• Carriers took action in 2003 with: – Increased deductibles– Premium adjustments– Coverage fine-tuning
Risk Management, Insurance and Loss Control are more important than ever!
REDUCING RISK. RAISING EXPECTATIONS.
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Strategic Planning
• Gallagher Tools:• Loss
Benchmarking• Limits Analysis• Loss Analysis• Exposure
Modeling
• Gap Analysis• Terms / Conditions• Program Updates
• Contract Language Customization
• State of the Market Design
• Manuscript Wording
Em
plo
yme
nt
Pra
ctic
es
Lia
bili
ty
PROGRAM DESIGN
POLICYANALYSIS
LOSS QUANTIFICATION
LOSS MITIGATION
• Claim analysis for internal trends
• Claim reporting procedures to carriers
• Use of outside law firms
• EEO- 1 review• Human Resources
policies and procedures
• Employee handbook• Cash on Balance
Sheet• Inventories• Acquisition Strategy
RISK IDENTIFICATION
REDUCING RISK. RAISING EXPECTATIONS.
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Loss Quantification - EPL Limits Analysis
Peer Analysis: Independent survey results.
Loss Modeling: Proprietary model using EEO1 data, etc.
Historical Review: Considers EPL claims settled.
Suggested: A weighted average to estimate exposure.
$90
$120$110
$100
$0
$50
$100
$150
Lim
its ($
M)
Peer Model Historical Suggested Minimum
REDUCING RISK. RAISING EXPECTATIONS.
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Sample EPL Exposure Models
1. Total EPL limits purchased by Employee Count (75,000) – Greater than 50,000
(98 participants)
2. Total EPL limits purchased by Revenue ($75B) – $50 Billion to $100 Billion
(11 participants)
3. Total EPL limits purchased by Assets ($50B) –$25 Billion to $65 Billion
(9 participants)
14% 16% 19%
25% 26%
0%
30%
60%
<$20M $20M-$30M $30M-$50M $50M-$75M >$75M
Lim
it
11%
22%33%
0%
33%
0%
30%
60%
<20M $20M-$30M $30M-$50M $50M-$75M >$75M
Lim
it
0%
27%
18%
9%
45%
0%
30%
60%
<20M $20M-$30M $30M-$50M $50M-$75M >$75M
Lim
it
Summary Data
Total Employees 96,000US Employees 36,000Foreign Employees 60,000Part-time Employees 0Employee Risk Count 51,000Number of Employees in California 1,000Percentage Full-time Employees in California 1.96%Number of Females Total 25,000Percentage of Female 69.44%Number of NonWhites Total 11,000Percentage NonWhite 30.56%
Key EEO-1 dataa Total "White Male" in Line 1 (Officers/Managers) 1,200b Total "White Female" in Line 1 (Officers/Managers) 2,500c Total Male for Line 1 (Officers/Managers) 1,500d Total Female for Line 1 (Officers/Managers) 3,000e Total "White Male" in Line 5 (Office/Clerical) 1,000f Total "White Female" in Line 5 (Office/Clerical) 6,000g Total Male for Line 5 (Office/Clerical) 2,000h Total Female for Line 5 (Office/Clerical) 12,000
Class Action Model CalculationsTotal EEs for Line 1 4,500Total EEs for Line 5 14,000Pctg Male Line 1 0.3333Pctg Female Line 1 0.6667Pctg Male Line 5 0.1429Pctg Female Line 5 0.8571Gender ratio 1.2857Pctg White Line 1 0.8222Pctg NonWhite Line 1 0.1778Pctg White Line 5 0.5000Pctg NonWhite Line 5 0.5000Minority ratio 2.8125Class Action Factor - Gender 1.3691Class Action Factor - Race 3.6422California Enhanced Exposure 1.0147
EPL Exposure Calculations and EstimatesGender Class Action Exposure 82,145,133Race Class Action Exposure 192,308,990Average of Gender and Race Exposures 137,227,061Exposures Adjusted for California 139,245,106
Indemnity portion of Overall model 85,343,317Defense portion of Overall model 3,021,443Total Exposures for Overall model 88,364,761Exposures Adjusted for California 89,664,242
Weighted average exposure for the two methods 106,191,197Minimum Exposure to consider: 90,000,000
Employment Practices Exposures ModelingBased on both Individual Plaintiff and Class Action Exposures
REDUCING RISK. RAISING EXPECTATIONS.
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The EPL Insurance Policy• Who is covered?
– Directors & Officers– All Full-time Employees– Temporary Employees and Volunteers– Independent Contractors– The Corporate Entity and Subsidiaries– Students (generally in a limited capacity)
REDUCING RISK. RAISING EXPECTATIONS.
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Who can bring covered claims?• Employees• Students• Applicants for hire• EEOC• State Agencies• Directors• Other individuals/entities acting on behalf
REDUCING RISK. RAISING EXPECTATIONS.
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Potential Exclusions• Strikes, Lockouts• Downsizing• Willful or Malicious
Intent• Willful failure to
comply with law• M/A activity• Bankruptcy• Class Actions
• Deliberate Fraud• Prior Notice• W. A. R. N. • Benefits Due• Employment
Contracts• Work Comp Claims• OSHA• Securities Violations• Wage & Hour Claims
REDUCING RISK. RAISING EXPECTATIONS.
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Some Coverages to Request• Punitive Damages• Back Pay• Front Pay• Pre/Post Judgment Interest• Nonmonetary or Injunctive Relief• No hammer on D&O; no more than 20% on EPL• Ensure Unemployment Filings don’t trigger exclusion thru P&P• Amend Subrogation Clause• Add minimal coverage for IP, Publishing, Wage & Hour• State Amendatory inconsistent• Extradition Coverage as applicable
REDUCING RISK. RAISING EXPECTATIONS.
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Coverage Triggers
• Written Demand for Monetary Damages• Civil Proceeding• Arbitration Proceeding• Administrative Proceeding• Request for Toll of Statute of Limitations
REDUCING RISK. RAISING EXPECTATIONS.
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Defense and Settlement Considerations
• Duty to Defend• Panel Counsel• Claims reporting threshold• Right to Settle (especially Hammer Clause)• Reporting – When and How
REDUCING RISK. RAISING EXPECTATIONS.
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Rating EPL - The Exposure Base
• Number of Employees– U.S. versus Foreign– Full-time versus Part-time– Leased Employees– Students, if applicable– By state (especially CA, TX, and MI)
REDUCING RISK. RAISING EXPECTATIONS.
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Other EPL Underwriting Factors• The nature of the operations• EEO-1 report• Turnover• Percentage of highly paid employees• The quality of employment manuals and handbooks; the
stated positions on the key practices and procedures• Financial Condition• M&A Activity• Policy Wording Considerations• Approach to Risk Management• Litigation/Loss History - Claims experience is essential!
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