reducing risk. raising expectations. 1 state office of risk management employment practices trends...

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


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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


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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


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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


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Large EPL Claims By IndustryGeneral Services

14%

Retail17%

Manufacturing21%

Financial12%

Professional12%

Public Sector10%

Energy & Utilities14%


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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


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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


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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


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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


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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


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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


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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!


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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

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es

Lia

bili

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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


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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


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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


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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)


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Who can bring covered claims?• Employees• Students• Applicants for hire• EEOC• State Agencies• Directors• Other individuals/entities acting on behalf


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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


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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


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Coverage Triggers

• Written Demand for Monetary Damages• Civil Proceeding• Arbitration Proceeding• Administrative Proceeding• Request for Toll of Statute of Limitations


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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


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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)


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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!

reducing risk. raising expectations. 1 state office of risk management employment practices trends...

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