Many lines of insurance are still experiencing a soft market cycle. Management liability for private companies and not-for-profit entities are no exception. Cycles can change for a variety of reasons and in a variety of ways. The shift in an insurance cycle may run parallel to the overall business and economic cycles, a catastrophe or series of large perils, fluctuations in market capacity, underwriting appetite and loss results. Regarding the latter, there are some telling signs along the horizon.
Directors and officers liability (D&O) and employment practices liability (EPL) are usually bundled in the same policy form for private companies and non-profits. EPL commonly leads the way with claim frequency while the D&O may present severity concerns.
A leading contributor to D&O liability claims is an increase in mergers and acquisitions activity, in which allegations are made of false or misleading statements, lack of due diligence, inadequate consideration and breach of executive duties. Economic conditions have dictated smaller employers to consolidate in order to survive, thus increasing merger-related claims. The U.S. Dept. of Justice (DOJ) has enforced the use of the Foreign Corrupt Practice Act (FCPA) when allegations of fraud, corruption or bribery arise from foreign acquisitions. Although for now this has only affected publicly traded companies, the DOJ has the authority to enforce private transactions under the FCPA.
Additional charges of racketeering, anti-trust and unfair business practices may be also be alleged. D&O claims of this nature can be expensive to defend. The loss of revenue and deteriorating financial condition of companies has contributed to growing bankruptcy filings. Lawsuits alleging financial mismanagement, unjust enrichment and excessive executive pay brought by shareholders and creditors are trending upwards. Executive management trying to make the most of their assets and stretching their capital by cutting corners on prior commitments has lead to an increase in breach of contract type claims.
EPL losses are being driven by increased regulatory enforcement of labor and civil rights laws. The Equal Employment Opportunity Commission (EEOC) recently reported a 7 percent increase in filed complaints for 2010 compared with 2009 and has estimated 93,000 backlogged cases by mid-2011. The EEOC has increased its enforcement efforts with an expanded staff and increased budget.
Other contributing factors are the recent financial crisis and current economy. As corporations have trimmed their balance sheets and reduced expenses, more layoffs and terminations have occurred. Recent unemployment rates published by the U.S. Bureau of Labor Statistics (BLS) are still more than 8 percent and employees are finding it hard to find a replacement job, a situation that leads to an increased likelihood to assert wrongful termination, discrimination or workplace harassment.
According to the BLS, today's workforce has transformed. More than 50 percent of the workforce now includes women and lawsuits involving gender equity and equal pay are increasing. Discrimination related to ethnicity and religion have also trended upward as diversity in the workforce mirrors immigration and globalization. Allegations of retaliation also are on the rise, in part from employees reporting corporate governance infractions or false allegations in an attempt to insulate themselves from any anticipated layoffs. Should the layoff affect them, the employees allege wrongful termination and seek whistleblower protection.
The retaliation claim is usually easier to prove than the underlying act of discrimination of a protected class (i.e., race, age, sex, etc.). Litigation deemed "wage and hour" related to how employees are classified and their eligibilities for overtime pay is growing.
Further, recent legislative changes to the Americans with Disabilities Act (ADA) have made it easier for workers to establish that they have a qualifying disability. Under ADA, the employer is obligated to provide reasonable accommodations for that individual as long as the employee can perform the essential job functions. This has helped fuel disability suits. In addition, employee privacy and social media exposures have become a focal point. Social media networks, such as Facebook and Twitter, have created privacy and harassment concerns. Arguments on the employers liability is still evolving.
Coverage trends
It should be evident from the above that there are a growing number of exposures facing employers. How can they protect themselves? One way is risk transfer via a D&O or EPL insurance policy. The market for such policies is vast and each underwriter has his own proprietary form. Although similarities are present, the buyer should beware.
Pay particular attention to the definitions section, specifically the definitions of what constitutes a claim, a wrongful act and who's an insured. The claim definition should be broad enough to include a civil, criminal, administrative, judicial and regulatory proceeding. Many forms may extend to an arbitration, mediation or similar alternative dispute resolution.
The Catch-22 of this approach is that it may trigger the time clock for reporting the claim per the notice provision of a claims made and reported policy form.
For example, an insured may not realize that an EEOC inquiry or investigation would be considered a claim. Thus, possibly resulting in a late reporting issue should the circumstance later evolve into a lawsuit by the employee.
The definition of a D&O wrongful act is by intent broad in scope as D&O forms are "all-risk" type policies. An alleged wrongful act must occur for the policy to respond. It is commonly defined to include any act, error or omission, misstatement, neglect or breach of duty in his/her capacity as an insured. The emphasis is placed on "capacity" within the individual's duties as a director or officer of the insured corporation.
The definition of wrongful act for EPL can vary in style from form to form. Some carriers choose to define the specific acts of wrongful termination, discrimination and harassment. Others compose a list of multiple perils. A recent buzzword that is appearing within these perils is "bullying" in the context of workplace harassment.
Wage-and-hour type allegations and violations of immigration hiring practices may also be considered wrongful acts. Coverage for such is usually available on a sub-limited basis a may only include defense protection, not indemnity.
Just as important is whom the policy protects. The definition of insured will usually include the entity (although this may be limited to shareholder security claims for a publicly traded corporation), the corporation's majority owned subsidiary, directors and officers, trustees, employees, and volunteers (for non-profits). Areas of expansion include independent contractors, temporary or leased employees. Usually if the policy is offering worldwide coverage, the foreign management holding equivalent titles or positions to their U.S. co-workers also are covered individuals. Most EPL policies include coverage for suits brought by third parties that allege discrimination or harassment by an employee against such third party clients, customers or vendors.
The future
A greater emphasis may be placed on the employer's risk management through its employment policies and procedures. Employers without these may find much larger policy retentions in the near future. Most EPL insurers offer some type of loss control services usually through third party vendors or law firms. These services include up-to-date information on labor laws and assistance in developing written employment procedures. Many times a call line is offered to help mitigate a situation from becoming a claim. Further, carriers may intensify their underwriting and begin to require full explanations to application responses and request conference calls with executive management. The financial condition of a corporation may be scrutinized in greater detail and emphasis placed on transparency.
Now may be a good time for agents and brokers to review management liability exposures with their clients. Customers who did not have a previous interest in D&O and EPL may find current trends alarming. As with most liability insurance the defense is usually broader than the indemnity. The defense cost can be negotiated to apply in addition to the aggregate limit for damages. This gives the client piece of mind and the ability to concentrate on their core business should litigation arise.
Overall, management liability and employment practices liability is readily available to private and non-profit entities. The future pricing may reflect the development of losses, especially as the loss tail of this line becomes longer. Yes, the soft cycle will break—but when is anyone's guess.
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