Paybacks are hell

Retaliation claims surpass claims based on race

By Michael J. Moody, MBA, ARM

Signs are good that the world economy, and more important, the U.S. economy are beginning to move out of the recessionary period of the past few years. But make no mistake; we are not out of the woods yet. And while there have been too many casualties to name as a result of this recession, one of the most visible is in the field of employment. Economic downturns such as this typically are fertile ground for employment practice litigation, and such is the case today.

Growing exposure

While the exposures that are generally associated with employment practice liability (EPL) have been around for years, over the past 15 to 20 years, they have really been expanding. Any list of exposures typically puts wrongful termination of employment close to the top, but it is only one of nearly a dozen risks on this list. In addition to wrongful termination, these risks include:

• Discrimination, including situations related to age, sex, or disability

• Workplace harassment, including sexual harassment

• Wrongful demotion or promotion, including negligent evaluation

• Failure to hire

• Breach of employment contact

• Employment-related libel, slander, defamation, or invasion of privacy

• Failure to pay wages

The coverage for employment-related claims has evolved over the years. Initially, employment practice liability was endorsed on the commercial general liability policy. However, since the EPL coverage was written on a claims-made policy, while the general liability coverage was written on an occurrence form, it soon became obvious that this would need to be changed. Coverage was then offered under the directors and officers (D&O) liability coverage, where much of the coverage remains today. However, many smaller employers have no need for D&O liability coverage, so the insurance industry began offering EPLI protection on a stand-alone basis a number of years ago.

Numbers don't lie

During this poor economy, personal injury lawyers are discovering new and creative ways to involve their clients in employment practice claims. A perfect example of this more aggressive approach is in the area of retaliation claims. One of the newer exposures, wrongful retaliation, is a growing problem for all types and sizes of employers.

According to the most recent Equal Employment Opportunity Commission (EEOC) report, 2010 had a record number of all types of filings, topping out at close to 100,000. Much of this, according to the EEOC, was the result of the difficult economy. As a result, the EEOC officials note that "discrimination continues to be a substantial problem." However, another important fact disclosed in the 2010 numbers was that last year, "for the first time ever, retaliation (36,258 claims) surpassed race (35,890 claims) as the most frequently filed charge." Further, they noted, "Historically, race had been the most frequently filed charge since the EEOC became operational in 1965."

While there are a number of legal definitions for retaliation, technically it means, "repayment in kind," or a sort of revenge. And while it is difficult to agree on one legal definition over the many federal and state employment laws, retaliation in this context means an unlawful payback by an employer for something lawful the employee did. A frequently used example in today's employment picture is in discrimination cases. An employee may institute a discrimination claim and fail to win the case but still remain "on the job." At some point in the future, the employee may be disciplined, or even discharged for an unrelated incident. With increasing frequency the employee may decide to pursue a retaliation claim. The real problem with this situation is that many legal observers believe that the level of burden of proof in a retaliation claim is considered lower than in the initial charge of discrimination. More and more, retaliation claims are surviving judgment in the wake of the unproven discrimination claim.

Scope of coverage is a key

Even when employers successfully defend themselves from EPL claims, they frequently have an "ah-ha" moment. This is the point when the employer "wins" a case, only to find out that they have spent significant dollar amounts just defending themselves. This is primarily due to the fact that EPL claims tend to be frequency type claims, according to EPLI underwriters. Thus, typically, the majority of these claims can be settled for less than $50,000, even if there is merit to the case. Certainly there can be larger, class-action type claims that have significant settlements associated with them, but the vast majority are for much smaller settlement amounts. However, they still carry significant defense costs.

EPL claims are trouble for any employer; however, since much of the claim is made up of legal costs that are incurred regardless of who "wins," they represent big problems for small employers. For example, it can cost a minimum of $5,000 just to get a lawyer to write a letter in response to the initial notice of a claim. Thus, it is frequently difficult for small employers who don't have massive legal and/or HR departments to handle these types of claims internally or stay current on claim trends. That is why EPLI coverage is so beneficial for most small employers.

As noted above, some D&O liability policies either include EPLI coverage directly, or it can be added by endorsement. But few small employers see the need for D&O coverage, so it becomes harder and harder for agents and brokers to explain why smaller employers should purchase a D&O policy, just to get EPLI coverage Accordingly, many have begun suggesting a stand-alone EPLI policy, from carriers that specialize in mid-sized accounts. Frequently, these EPLI policies are specifically designed with smaller employers and their coverage needs in mind.

While there are many important coverage aspects of EPLI, some key features should be included in any policy. One of the first concerns for smaller employers is how the defense costs are treated; and a major question that will need to be resolved is: Are defense costs inside or outside the limit of liability? It is extremely important, especially for small employers, to have defense costs outside the limit of liability, so these expenses do not erode the limits. Another important feature is providing a broad definition of "claims" that includes "written demands for both monetary and non-monetary relief."

Another area that will be important as the economy begins to improve is making certain that the definition of "Insured" includes the company, and both permanent employees and any leased employees. Many underwriters believe that when the economy comes back, employers will turn to leasing, before hiring full-time employees, so it is important to have leased employees covered under the policy.

The size of the employer is another important consideration in pricing the coverage; however, it is also an important aspect in determining the scope of coverage. Insurers may provide employers with 100 or fewer employees additional coverage enhancements that are either not available to larger employers or are available only for an additional premium charge. The scope of coverage for smaller employers in many instances can be broader than that offered to larger employers.

For most employers, the first line of defense against employment practice claims is to develop proactive loss mitigation strategies. However, this is difficult for small employers who do not have the in-house resources to assist in this important area. That is why many insurance carriers have partnered with an outside legal firm that specializes in employment practice liability. The law firm's qualifications are of paramount importance; it should be a national firm with recognized experts in this legal specialty. Loss control services available to EPLI insureds may vary from carrier to carrier but, at a minimum, would include training materials and a toll-free hotline.      

Conclusion

It is hard to argue with the facts—EPL claims are on the rise. The recession has contributed to this rise, although many underwriters believe that regardless of the employment picture, EPL claims were going to increase anyway. Many ex-employees are now becoming concerned about their economic situation and are looking for new avenues for funds, just to make ends meet. Agents and brokers must be mindful of this situation, continue to make their clients aware that EPL claims are on the rise and point out the need for an appropriate insurance product.

This is where specialized EPLI coverage for smaller employers comes in. Agents and brokers need to remember that any and every employer could be the next one to face an employment- related lawsuit. For that reason, it is important that the employer's agent or broker offer the proper coverage.

The author

Michael J. Moody, MBA, ARM, retired as the managing director of Strategic Risk Financing, Inc. (SuRF), a firm that had been established to advance the practice of enterprise risk management. As a regular columnist, he continues to actively promote the concept of enterprise risk management by providing current, objective information about the concept, the structures being used, and the players involved.