The State of the EPL Insurance Market: Recent Trends

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1 1) Claim Trends a) Overview 2016 CLM Southwest Conference November 3-4, 2016 Dallas, Texas The State of the EPL Insurance Market: Recent Trends The EPL insurance market continues to grow, with estimates of $1.59 billion in premiums written in 2011 to over $2 billion in Rates continue to drift up, although there is resistance from insurers competing for business. The trend in retentions is flat except in high exposure jurisdictions, where it trends up. The top EPL litigation generating states have been, and continue to be California, New York, Texas and Florida. Wage and hour cases represent the highest percentage of losses, followed by gender/sexual harassment claims, race discrimination, disability discrimination, age discrimination, whistleblower and finally, religious discrimination cases. While the Equal Employment Opportunity Commission ( EEOC ) has initiated fewer suits in recent years, an increasing percentage of those suits involve the Americans with Disabilities Act ( ADA ) and the EEOC is expected to remain active in this area. According to EEOC statistics, 81 percent of claims settle in the range of $22,400 to $40,500, but the other 19 percent can be very large. b) Newer Exposures i) Equal Pay Claims The plaintiffs bar has been increasing focus on equal pay claims, based on proposed changes to federal regulations and recent amendments to state equal pay laws. This year, the EEOC announced that it will begin requiring employers with 100 employees or more to submit information on employee wages broken down by gender (as well as race and EEO-1 category) as part of its annual EEO-1 reporting process. The EEOC will use the information to identify employers paying women less than men. There is no doubt that this will lead to an increase in EEOC class-based investigations and litigation under the Equal Pay Act and other federal statutes prohibiting employee discrimination. Many states have passed or are in the process of passing equal pay laws that broaden the scope of employee protections. For example, under California s Fair Pay Act, employees are no Page 1 of 6

2 longer required to show that they were paid less than a member of the opposite sex for equal work. Instead, the work need only be substantially similar. Many of the new state laws include pay transparency requirements that make it unlawful to take an adverse action against employees for asking about or talking with colleagues about compensation. The increased attention to equal pay has already resulted in an uptick in complaints filed by class-action plaintiffs law firms. Pay discrimination claims are an attractive tack on claim for plaintiffs to include in a complaint alleging another type of discrimination, and in a class or collective wage-and-hour action. ii) Third Party ADA Claims For the past two years, there has been an explosion of claims alleging that websites do not comply with the ADA because they are not accessible to the disabled. These claims are covered under some EPL insurance policies or policy endorsements. These suits are primarily brought by the blind and visually impaired. A blind person may rely on a screen reader to convert visual information on a web site into speech. Alternatively, a person who does not have use of their hands may require speech recognition software to navigate a site. Many web sites fail to incorporate or activate features that enable users with disabilities to access all of the site s information, and companies face potential ADA liability as a result. Advocacy groups have been pursuing these claims, and plaintiffs lawyers seeking quick settlements have taken up the cause as well. While plaintiffs lawyers have long brought suits for public accommodation violations of the ADA against traditional brick-and-mortar storefront operations, website accessibility lawsuits are much easier to initiate because lawyers do not have to inspect a physical location. Attorneys can review websites from their computer. As a result, online operations like Netflix have become targets of these claims. High profile businesses have also been targeted, like the NBA and the NCAA, with plaintiffs asserting that these organizations must make their websites accessible to blind and visually impaired consumers. Settling third party ADA website accessibility claims can be challenging because some plaintiffs firms are requiring companies to not only make the website accessible and to pay a lump settlement sum, but also to pay counsel an ongoing fee to monitor the website for continuing ADA compliance. Though the Department of Justice has repeatedly announced its intention to issue regulations setting a standard for website accessibility for several years, in April 2016, the DOJ again delayed the issuance. The continued uncertainty regarding website requirements adds to the appeal of such suits, as companies are more willing to settle claims quickly than to risk litigation involving unclear standards. iii) Wage and Hour Claims Page 2 of 6

3 Wage and hour claims have been on the rise for several years, and are expected to increase significantly with the changes to white collar overtime exemptions that take effect on December 1, The new rules raise the minimum salary level for executive, administrative and professional exemptions under the Fair Labor Standards Act, from $23,660 to $47,476. Any worker earning less than this amount cannot be classified as exempt, and must be paid overtime for all hours worked over 40 in a week. To avoid liability, employers must either reclassify workers as nonexempt, or raise salary levels to the minimum so that white collar employees can continue to be classified as exempt. Importantly, employers who respond to the new rules by raising salary levels may inadvertently increase the amount of potential liability. In order for a worker to be correctly classified as exempt, she must pass both the salary basis test and the duties test. If a worker does not qualify as exempt based on her duties, an employer does not correct the misclassification by simply increasing her pay to meet the new threshold. Instead, the employer will still face liability for unpaid wages, and the amount of the potential liability has actually increased because she is earning more. Given that the changes are expected to impact 4.2 million white collar workers, the costs of potential claims are enormous. 2) Carrier Responses to Trends The continued legislative activity, along with enforcement actions taken on the heels of the EEOC s yearly Strategic Enforcement Plans, have caused carriers to review their policies and respond to the needs of the marketplace, while focusing on profitable growth. a) Limits and Retentions Depending on the size of the insured, the type of policy procured will impact on the policy limit as well as the application of policy retentions. Larger employers with at least 5,000 employees are likely to see much higher retentions, of at least $100,000. Carriers are also applying mass or class action retentions for large companies that face significant risk of class actions and/or the potential for larger settlements. Typical mass action retentions can fall in the $1,000,000 range and some insurers may also look to apply a co-insurance for these larger scale exposures. EPL insurance costs are also impacted by the geographic locations of an insured s employees. Geography tends to impact significantly on policy premiums and retentions, as the costs to litigate are higher in certain jurisdictions. For example, businesses in California, Texas, Michigan, Florida and New York tend to see higher retentions. Many small to mid-sized employers in these jurisdictions have seen their retentions go from about $2,500 to a minimum of $10,000. Some carriers have significantly increased retentions in California to at least $50,000 and other carriers no longer write EPL insurance in Southern California. Insureds located in other lower-risk states may see more moderate increases in premiums and retentions. Page 3 of 6

4 Retentions in the EPL insurance context are also impacted by the type of industry. In the health care industry, for example, an EPL insurance policy may include a policy endorsement that increases the retention for claims made by a physician or other highly compensated medical professional. b) EPL insurance carriers responses to the increase in wage and hour suits Many EPL insurance policies exclude coverage for wage and hour claims. However, given the continued exposure of wage and hour litigations across the nation under both the Fair Labor Standards Act and its state equivalents, there is clearly a need for coverage that responds to these types of claims. Many carriers provide limited coverage by way of a sublimit that provides defense-only coverage for wage and hour actions. Prior to the losses resulting from the recession in , many insurers were offering a sublimit of up to $500,000 for defense costs associated with wage and hour claims. Currently, most insurers are no longer offering these sub-limits and instead, these sub-limits have been greatly reduced to provide defense coverage only, in the $100,000 range. Newer products in the marketplace offer stand-alone wage and hour policies but with retentions that are much higher, in the $5,000,000 range, and the premiums are likewise very high. c) Duty to defend vs non duty-to-defend policy options Depending on the size and needs of an insured, they have the option of purchasing a duty-to-defend policy or a non-duty-to-defend (or reimbursement) policy. Most policies tailored for small to mid-sized employers are written on a duty-to-defend basis, whereas the larger/public insured policy forms are written on a non-duty-to-defend basis. The type of policy purchased will impact: (1) choice of counsel and the rates typically charged by counsel; (2) the size of the policy retention; and, (3) the ability of an insurer to allocate defense costs between covered and uncovered matters, as well as between covered and uncovered individuals/entities. The advantage of a duty-to-defend policy is that organizations inexperienced in managing EPL claims may be inefficient or overburdened by the process. These organizations can benefit from insurer involvement, even if it means surrendering some degree of control over the settlement process. Additional benefits of a duty-to-defend policy include: (1) the prompt retention of counsel to defend the matter by the insurer. The insured would also have access to the insurer s preferred counsel list at significantly discounted attorney billing rates. An insurer s preferred or panel counsel list is typically comprised of law firms with experienced attorneys who work for pre-negotiated rates with relevant subject matter expertise. (2) The insured hands over the claim to the insurer, who undertakes the duty to defend and does most of the work to resolve the matter; and (3) The insurer is obligated to defend all allegations of the claim, which means if there are covered and uncovered matters; the insurer cannot allocate defense costs for uncovered matters. On the downside, the insured typically is not able to use their own counsel and generally will be required to use the law firm the carrier chooses for them; the insured will have less control over the day-to-day control of the claim; and, the policy may include a hammer clause. Page 4 of 6

5 The primary advantage of a non-duty-to-defend (or reimbursement) policy is that it gives the insured control over the defense of the matter. The insured typically has choice of counsel, subject to the insurer s approval. The insured is able to control the defense decisions made on a claim, and in the process, establish its own claim handling reputation. For example, some employers are intent on sending the message to all potential plaintiffs that they routinely contest all claims, regardless of merit. In contrast, other organizations settle expeditiously all but the most frivolous claims. Given the nature of EPL insurance claims, this reputation is sometimes a weighty factor for an insured to consider because the unwarranted settlement of a single case could provide the impression that the company is an easy mark, thus potentially generating additional claims by other employees. d) Enhancements to coverage Third-party EPL insurance claims are those made by non-employees, usually customers. Companies engaged in customer-intensive businesses, such as retail stores, airlines, or car rental companies, are most susceptible to third-party liability claims. The claims may allege that an employee engaged in wrongful conduct, typically sexual harassment or discrimination. These types of third party lawsuits are becoming more frequent. The most notable of these third-party liability claims to date are those alleging discrimination against the national restaurant chain Denny s, by a number of minority groups. Alternatively, the claims may be for ADA violations, whether involving physical barriers or web site accessibility. While we have not seen significant exposure associated with these types of claims yet, it is a growing trend. Although an EPL insurance policy might cover the cost to defend this type of claim, the bulk of most settlements are often excluded from coverage since the costs associated with bringing the subject non-compliance into compliance with the ADA or similar state statute are not covered by EPL Insurance. The widespread use of technology is also increasing the need for broader coverage from the market s perspective. In this regard, we are seeing carriers provide social media coverage as well as enhanced third party liability coverage. 3) Anticipated Evolution of Trends Depending upon Outcome of Presidential Election a) Likely impact of results of presidential election on economy Republican Presidential nominee, Donald Trump, advocates slashing both business and personal taxes, confronting China on trade, and repealing a major financial reform law. Many models predict that a Trump presidency, whether he ultimately pushes his stated agenda or not, will result in another recession. The Democratic Presidential nominee, Hillary Clinton, intends on maintaining and tweaking Obama policies, by raising taxes on the rich, raising minimum wage, investing in infrastructure and toughening financial reform. Most experts predict that Clinton s proposals would have a neutral impact on the economy, or result in modest growth. Page 5 of 6

6 If Trump wins the election and the anticipated recession follows, unemployment figures would be expected to rise. If Clinton wins, and the economy remains stable or improves slightly, unemployment will likely remain constant or dip. Typically, the filing of EPL insurance claims tracks closely with the unemployment rate. As unemployment increases, claims increase. Accordingly, we expect a Trump victory to result in an increase in claims, and a Clinton victory to have little impact on claims, or to result in a slight dip. b) Impact of Election Results on Executive Rulemaking and Federal Legislation While Trump s policy agenda is relatively nonspecific, his experience as an employer, his anti-immigrant rhetoric and his running mate pick foretell a de-emphasis on employee rights. The Trump organizations have faced a myriad of employee suits, with allegations ranging from anti-union intimidation to hiring undocumented workers, to large wage and hour class actions. Earlier this year, an Iowa campaign worker sued Trump for sex discrimination. This summer, the Trump International Hotel Las Vegas settled numerous NLRB charges. This summer, Trump said that if his daughter, Ivanka, was the victim of sexual harassment, he would tell her to leave the employer and to consider a change in careers. As a frequently sued employer, Trump is unlikely to advocate for greater employee legal rights. Trump s emphasis on radical immigration reform, and his very public battle with the Khan family makes his support for national origin employment discrimination claims unlikely. Trump s vice presidential pick, Michael Pence, is perceived as harboring an anti-lgbtq rights agenda, so we do not expect to see an expansion of employee rights for those individuals. In great contrast, Clinton s policies are decidedly pro-employee. She intends to continue the Department of Labor s focus on employee misclassification and so-called wage theft. She plans to expand the reach of the FMLA that was passed during her husband s presidency to include guaranteed paid leave. And, she has made clear her intention to focus on equal pay for women. Accordingly, depending upon who takes the White House, the expected Executive rulemaking will vary drastically in terms of employee rights. However, it is less clear that the identity of victor will have a significant impact on federal employee rights legislation. Democrats are well positioned to reclaim the Senate, but Republicans are expected to retain control of the House of Representatives. A divided Congress is unlikely to allow the president, whoever it is, to accomplish much in the way of legislation. The likely result is that employment laws are unlikely to change significantly in the near term. Page 6 of 6