Filed Under:Agent Broker, E&S/Specialty Business

No surprises! High unemployment makes the case for EPLI

Reports of the failing economy, the rise of unemployment and the hopes and fears of federal stimulus packages have become a blaring noise from the radio and TV. News stories abound: "Private-sector payrolls lose 697,000 jobs" or "Employee Discrimination Claims Set Record." Americans--employers and employees alike--have fallen upon tough times. According to a report from Automatic Data Processing, a payroll-processing company, the private sector lost approximately 697,000 jobs in February, up 25 percent from January's 522,000 job cuts--not exactly hopeful prospects for a financially and economically bright 2009. As of March 2009, the national unemployment rate was at 8.5 percent, and several states are even higher, such as California, where it is more than 10 percent. With figures like these, it's understandable that hundreds of applicants will wait in line for hours to apply for one hourly position. Layoffs are taking place in record numbers, including employees with experience and seniority. Employees simply cannot relate to the speed from gloriously good times to the shock of sudden unemployment. This shock quickly turns to resentment as employees search for reasons behind the sudden change in their employment status, often resulting in the belief that their employers discriminated against them, which leads them straight to the Equal Employment Opportunity Commission (EEOC). According to statistics published by the EEOC in March 2009, discrimination claims jumped 13 percent from 2007 to 2008, with a record 95,402 claims filed in 2008. Age discrimination claims account for almost 26 percent of those claims--up 22.3 percent from 2007--and more than 34 percent include retaliation complaints (up 18 percent, almost doubled from 2007). According to the 2008 Jury Verdict Reports on Employment Practice Cases, employees win these cases 61 percent of the time. In addition: o The average overall jury award is $252,000 o The average overall settlement is $75,000 o You must pay your cost of defense, averaging $120,000 per claim o Employment law is unique because it requires employers to pay (if they lose) the costs of the employee's (plaintiff) attorney fees in addition to the judgments, averaging $200,000. It is important to remember that layoffs cut across organizations in pure numbers. To keep their companies open for business, employers do not, under the law, have to consider whether someone is disabled or a member of a protected class before terminating jobs. Layoffs should be accomplished by applying a uniform method of cutting jobs across large employee populations. These uniform cuts will undoubtedly include some who are "protected class" members. "Protected class" employees, however, still have the right to sue employers by virtue of their protected class status--even if job loss is related to layoffs. Employment laws did not change (removing protected class rights) with the economic downturn. The Federal Register clearly states that "the EEOC must honor any and all complaints--even if they are unsubstantiated." The example given in the actual body of the law says "...'I was fired based on my age' is enough to substantiate a charge." This is when the expenses begin to accrue for an employer defending the accusation that termination was because of the employee's protected class. So when economic hard times ultimately result in layoffs, where will the money come from to pay for defense on these types of claims? There is no such thing as a release of a claim from the EEOC or the courts simply because the employer sees it as frivolous. Every time an employee files with the EEOC, the company is in the game and the expenses begin to mount. The employee has nothing to lose and incurs no expenses by initiating a claim against the employer. Regardless of the initial ruling at the EEOC (pro-employee or pro-employer), employees are always given a "90-day right-to-sue" letter simply as a result of filing an EEOC charge. Most employers do not realize that even a "frivolous" lawsuit may not necessarily be dismissed by the courts. Judges are not in the business of determining the validity of a lawsuit. Legal discovery requirements just to get to a dismissal hearing average $45,000 to $50,000 in defense costs, based on our internal analyses, including written discovery, depositions, etc. When sued under employment law, employers are forced to defend the lawsuits whether the claim is true or false. The burden of proof switches to the employer, which must defend and can prevail by showing that the employment decisions made were valid, based upon standard practices, and not related in any way to discrimination. This is the way that the employment laws were constructed by the federal government. Employment laws are unique in that they come with the potential for a worse financial outcome than standard injury or car accident claims. Contrary to the perception that anti-discrimination legislation has been in place since the 1960s, Congress and the Senate significantly updated these laws in the early 1990s by:

o Taking existing law and changing the venue from federal magistrate hearings to actual courtroom trial venues complete with juries

o Altering damages and adding the new feature of punitive damages rather than just the simple math of what the employee had earned or lost in wages, thereby attracting plaintiff attorneys

o Adding the feature of the entire plaintiff attorneys' fees as a separate and specific award of money in addition to the jury award for the plaintiff's damages. All of these changes have fueled the growing industry of EPL claims, and most companies are not set up to absorb these expenses out of cash flow or judgments out of the company's profits. An insurance product such as EPLI is a true risk transfer mechanism in this case, used to help ensure the financial stability of the insured company. The cost to defend one case could be equal to many years of premium payments for a given insured.

Risk is on the rise
Since August 2008, three major employment laws have either been amended or added to an employer's daily concerns:

The Family and Medical Leave Act (FMLA): Effective January 2009, amendments to FMLA provided new additional military leave entitlements and updated the regulations under the 15-year old act. The Dept. of Labor published its 700-page final rule in November 2008. A partial list of the amendments include clarifications of a serious health condition, light duty, intermittent leave and gaps in service as well as broadened light duty requirements. This translates to increased requirements on employers to recognize additional FMLA qualifying events, such as military disability and employees caring for individuals injured in the line of duty. New forms required during the FMLA process are substantially different than the WH-380 and WH-381 forms that were used before January 2009, and are specifically tailored for the new qualifying events. Americans with Disabilities Act Amendment Act (ADAAA): Signed into law in September 2008 and effective January 2009, ADAAA changed disability law nationwide. While most of us know that California has the most cumbersome ADA regulations in the country, the 2008 Amendment has surpassed even the California standards and moved the entire United States beyond the requirements once isolated to California. The new law redefines the term "disability" to include individuals with far less severe impairments than were included under the "old" law. This new law lowers the bar for individuals to qualify as disabled and now includes "activities that are of central importance to most people's everyday life activities," including: o Walking, standing, lifting, communicating, working, etc. o Bodily functions--normal cell growth, digestive, bowel, respiratory, etc. o Individuals may now be "regarded as" disabled merely by showing they have been subjected to any adverse action because of an actual or perceived physical or mental impairment, even if it doesn't limit a major life activity, as was previously required o Those individuals who are able to control their impairment by medication or medical devices may now qualify for protection as "disabled." These changes mean that employers and human resource professionals must recognize situations that could qualify. Situations that previously were not disabilities because of corrections (eyesight, epilepsy, migraines) will now all qualify as disabilities and require the employer to go through the interactive process with that employee. Management training will also need to occur to help managers recognize potential ADAAA qualifying situations so that employees can be worked with quickly to identify any reasonable accommodations that could exist. Lily Ledbetter Fair Pay Act of 2009: The Lilly Ledbetter Fair Pay Act of 2009 was enacted in January 2009, but is retroactive back to May 28, 2007. This law amends the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act and the Rehabilitation Act, to clarify that an "unlawful employment practice" occurs when: o A discriminatory compensation decision or other practice is adopted o An individual becomes subject to the decision or practice, or o An individual is affected by application of the decision or practice, including each time compensation is paid. The Ledbetter Act overrides last year's Supreme Court ruling (Ledbetter v. Goodyear Tire & Rubber Co., 550 U.S. 618 [2007]) that declared plaintiffs had to file wage claims within 180 days of a company's decision to pay a worker less than a counterpart doing the same work. The "enhanced" statute of limitations for pay discrimination claims means that employers could be scrutinized--and made liable for--acts and decisions made years earlier, when the company may have been run by employees and executives who no
longer work for the company. In addition, retirees could bring suits alleging pay-related discrimination that occurred decades ago if they are presently receiving benefits, such as pensions or health care, as the amount they receive is potentially lower because of past discrimination. The grim reality is that employers are being held to greater responsibility to protect employees and are subject to greater regulation while employees enjoy lower thresholds for filing claims against their employers. Growing need for EPLI
While employees enjoy the resources and help of the EEOC, there are resources for employers in the form of EPLI. Agents should educate their clients that their employment exposure is not one thing: it is many things, each with their own requirements, protections, fines and penalties. Old laws change and even more new employment laws appear. Employment laws range from the federal level all the way down to the city government level. It is up to each employer to be aware of their obligations under each of these laws. More specifically, employers need a broad insurance policy that covers a complex variety of discrimination, harassment and tort causes of action in addition to punitive and exemplary damages and liquidated damages. Every new employment law has been written with unique forms of language, and even damage calculations may differ from law to law. It is important for agents to understand that each EPL insurance policy may be different in terms of what types of employment actions and damages may be covered. Not every insurance policy has set out to provide broad forms of coverage. Narrower forms may allow more price-competitive quotes and capture the attention of some agents and potential insureds, but will disappoint during the time of a claim. Agents also should know that there are carriers that include free risk management services, which can be of great help to insureds, bringing very cost effective (or free) policies and practices revision help as well as help during actual unfolding employee disciplinary events, layoffs and other day-to-day employee management issues.

Given the variety of claims and potential for significant financial loss as a result, the issues of price should be less of a concern than the available claims and risk management services. Instead, issues of the insured's satisfaction with coverage at the time of the claim may be the greater goal in this market.

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