Does Trouble At Walgreens Indicate Rising EPL Claims Potential?

This year, Ms. Galioto reported, the EEOC recently unveiled a new campaign aimed specifically at the problem of racial discrimination in the workplace.

The new initiative, known as E-RACE (Eradicating Racism and Colorism in Employment), is an "outreach, education, and enforcement campaign to advance the statutory right to a workplace free of race and color discrimination," the EEOC said in a Feb. 28 announcement.

The E-RACE efforts, Ms. Galioto noted, should "increase awareness" of discrimination in the workplace and, perhaps more importantly, instruct employees on what to do when they observe such instances.

While this increased awareness of how to respond could result in more EPL claims in the near future, it could also have the benefit of helping employees avoid discrimination incidents as they learn how to better recognize and report instances of discrimination.

With the initiative just announced on Feb. 28, a strong rise in the number of race discrimination charges filed with the EEOC has yet to emerge in statistics compiled by the commission. Nevertheless, 27,238 race-based changes were reported in 2006, up from 26,740 in 2005. In addition, charges of racial discrimination are the most frequent type of filing with EEOC offices nationwide–as they have been historically–accounting for 36 percent of the agency's workload.

Overall, charges of discrimination of all types filed with the EEOC (including race, sex, national origin, religion and age) remained relatively flat in 2006, rising only slightly to 75,768 from 75,428 in 2005, after falling for four years straight.

Cathy Padalino, vice president and employment practices product manager of Chubb Specialty Insurance in Warren, N.J., said the reversal–albeit a small one–was surprising, given the good economic times. Discrimination cases tend to rise during periods when companies reduce staff through terminations, reductions in force or other layoffs, she said.

Meanwhile, the number of suits brought by the EEOC in federal district courts has risen since 2002, when 342 such suits were filed by the agency, to 371 suits filed against employers in 2006. The EEOC normally files such suits only when it cannot mediate or settle a claim.

The 2006 figure is slightly lower than the reported 381 suits filed in 2005, and is just around the average for the last four years.

Even if suit filing numbers are not on the rise, however, representatives of the EEOC said early last year that because of limited resources, systemic issues–some across entire industries–would be a top priority rather than small individual cases.

Describing this "systemic discrimination" initiative at a Professional Liability Underwriting Society meeting last year, Commissioner Stuart Ishimaru said, "From a law enforcement agency standpoint, we need to make sure that we get as broad and as big a bang for our buck as possible." He expressed the belief that in order to change attitudes, deter bad employment practices, and make the best use of limited resources, EEOC targets had to be bigger than they'd been in the past.

In March of this year, about a week after unveiling the E-RACE initiative, the EEOC announced it had filed an employment discrimination class-action lawsuit against Walgreen Company–an action that was an outgrowth of both the systemic case and E-RACE initiatives. The EEOC alleges that the Illinois-based national drugstore chain has engaged in widespread racial bias against thousands of African American workers by making store assignments and denying promotions based on race.

EEOC STATS DON'T TELL ALL

Ms. Galioto noted that while EEOC charge statistics don't yet reflect a major up-tick in the number of charges as a result of education and outreach activities, they also don't reflect the fact that people go into state court to file discrimination lawsuits, where there may be no punitive damage caps on the jury awards.

"So while you're looking at one aspect on the federal level, it doesn't tell you the story that's also going on the state level. You can't look at one without the other," she said.

While there is no real measure of how many discrimination suits are being filed in state courts, Ms. Galioto pointed to comparative median jury awards statistics that could explain why plaintiffs might opt to bring their cases in state venues.

Citing median discrimination award figures for 1999-2005 from a 2006 report by Horsham, Pa.-based Jury Verdict Research ("Jury Employment Practice Liability: Jury Award Trends and Statistics 2006 Edition"), she said the median jury award for race discrimination claims was $145,000, while the state court median was $240,000 over the same period.

"And it trends that way for age, disability, and sex discrimination," she said. "So your award could be $100,000 more in state court than in federal court."

She added, "I think the trend is that defense costs, the costs of settling and the cost of a jury awards are all escalating."

Again citing the 2006 JVR report, Ms. Galioto said the median employment practices settlement for 1999-2005 overall, including wrongful termination, discrimination, retaliation, and whistleblower suits, was $75,000. According to an earlier JVR report released in 2004, for the 1997-2003 time period, the comparable median settlement was $60,000.

"When you couple those–the jury award and the settlement–that still doesn't capture what you have to pay in defense costs," she said. Anecdotally, she noted that when she asks defense counsel how much it costs to defend a single plaintiff, they report average costs on the East and West Coasts exceeding $100,000.

While costs might be less in the middle of the country, the $100,000 estimate relates to "a very simple, single-plaintiff matter," she said. "If there's extensive and intensive discovery and motion practice, the defense costs will of course go up.

"So one would hope the industry would hold the line when it comes to pricing. That's what good discipline would dictate."

Looking ahead, Ms. Galioto expects age discrimination complaints and lawsuits to rise as the baby boom generation enters its senior years. She noted that by 2012, the portion of the workforce that will be over 55 is expected to be nearly 20 percent.

Alan LeNoble, vice president of international directors and officers and employment practices coverage for Liberty International Underwriters, sees retaliation claims as another area with a propensity for increased claims. He pointed to a June 2006 U.S. Supreme Court decision, Burlington Northern & Santa Fe Railway Co. v. White, which lowered the threshold for a plaintiff to allege retaliation for bringing a discrimination claim.

The decision held that an employer's actions are retaliatory if they are "harmful to the point that they could well dissuade a rea-sonable worker from making or supporting a charge of discrimination."

INSURANCE MARKET RESPONSE

In spite of worrisome indicators of potentially more and bigger EPL claims across a wide range of industries, insurers say competitive pricing continues.

"We're seeing competition in all areas of the EPLI market," Ms. Galioto said. "We've been experiencing, for the last two years, pressure on rates, but we have been adhering to strict underwriting guidelines. So while we may remain flat in some instances, we are still getting some rate."

While she said there is no particular type or size of company not benefiting from increased competition among insurers in terms of lower prices–"it's throughout the entire book of business"–other market participants said soft pricing wasn't necessarily evident across the board. They identified classes of buyers seeing increased pricing and even availability problems.

Mr. LeNoble said the healthcare industry, for example, is seeing rising rates because of the high amount of litigation. Additionally, he said that rates are not declining as significantly for larger companies, or for those companies with very highly paid employees.

In other areas, where competition is more evident, he predicted the rate picture would settle out in the relatively near future. While he would not say that rates had bottomed out, he did say, "We're going to see carriers writing standalone EPLI more judiciously" as insurers see claims rise.

At Chubb Specialty, Ms. Padalino said companies in higher-profile industries are evaluated more carefully when they apply for coverage, listing the retail, financial services and hospitality industries in this category.

For higher-profile companies, rates are not always higher but retentions may be, she said. In particular, a policy might have a high retention for class-action lawsuits, but not for individual claims, she said.

She said that higher profile companies and industries may be subjected to litigation because they represent attractive targets for the plaintiffs' bar and the EEOC. Referring to the EEOC's "systemic discrimination" initiative, she said the agency can use its authority to bring a direct action against a company "to send a message to others."

"As underwriters, we look at the image of the organization, as well as its human resources policies, their internal complaint resolution processes, diversity initiatives, and their loss experience" in setting rates and terms, she said. She added that other underwriting factors are size and geographic location of the business.

Ms. Padalino said Chubb offers EPL coverage for a variety of different institutions, including private companies, non-profits, educational institutions, law firms, publicly traded companies and other types of professional firms. She noted that the industries the carrier specializes in are wholesale, manufacturing, natural resources and all types of services organizations. Chubb also writes EPL coverage for retail, technology, medical, pharmaceuticals, healthcare and transportation and telecom companies, she said.

At Liberty International Underwriters, Mr. LeNoble noted that LIU, a division of Boston-based Liberty Mutual, is "one of the few" carriers willing to provide coverage for defense costs in wage-and-hour cases, and even then only with a sublimit in the policy and a much higher retention level.

"Generally, most EPLI policies are silent on wage-and-hour issues or they have exclusions," he said.

BUYER TROUBLE SPOT

Dana Coates, a broker in the Pasadena, Calif., offices of United Agencies Inc. and the owner of the website www.epli.com, said that some areas, especially third-party contractors, are finding it difficult to obtain coverage at affordable rates.

He said that schools and municipalities are increasingly hiring independent contractors as managers of projects to oversee building or maintenance of their facilities. When they do so, he said, they pass along the employment practices risks to the contractors as well.

"Those independent contractors are being asked to provide supervisory services, and included in the contract agreement are requirements that they be responsible" for the conditions and practices of their employees, he noted.

Effectively, Mr. Coates said, these provisions help the municipalities avoid having their own problems by moving the risk onto their contractors. "This is a way for municipalities to distance themselves from any problems," he said. "The load is really being put on the shoulders of the independent contractors."

That requirement "scares" most independent contractors, "as it should," and obtaining the coverage can be challenging for both the insureds and their brokers, he said.

"It's difficult to obtain the coverage, and the cost does not seem to be softening," he said. Additionally, he noted that third-party coverage is no longer considered to necessarily be part of a larger insurance policy, whereas in the past, he said, "it used to be thrown in."

Mr. Coates said that third-party liability claims can also hit "cash register insureds," who are service providers such as those in a cafeteria or store. "If one of these employees discriminates," he said, "the customer can bring a suit," which is often filed as a class action.

Among the main problems, he said, is that the insured independent contractors are generally relatively small businesses and don't have the understanding of what their employment practices risks are. Insurers are also aware of this, and are thus somewhat skittish about underwriting the coverage.

LIU's Mr. LeNoble said he sees insurers are more willing to provide third-party coverage with a higher retention level of $100,000 or more.

While coverage limitations exist, insurers continue to show a willingness to help policyholders learn about employment liability issues and how to go about reducing their exposures, experts say.

"There are numerous resources available" that can help a policyholder become a better manager and demonstrate techniques that can be implemented to avoid employment practices complaints, Mr. Coates said. Many of these, he said, are crafted by carriers or brokers and agents themselves to meet the needs of smaller businesses.

Ms. Padalino said underwriters are increasingly offering a number of tools designed to guard against a hostile work environment. These include workshops, education delivered electronically, printed materials and other tools, she said.

In fact, Chubb will pay 50 percent of the cost of eligible services related to employment practice loss prevention, she said, with up to 10 percent of the premium available for reimbursement each year.