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Henry Lopez of Shand Morahan & Co. hosted the first in a series of “How to Write” broadcasts from the Insurance Journal Studio in San Diego where he discussed the great EPL opportunities in today’s soft market.
“EPL is about employment law,” he said. “Unlike commercial auto or property insurance where you have damage and you go out and assess what’s happening, EPL is about violations of statutes and common law.” With about 30 or 40 markets out there that write EPL coverage today, Lopez said it’s the agents’ and brokers’ job to determine which of those policies offer the best coverage and the best value for the insured. “Unfortunately no two policies are the same. So it is up to you to decide which is best for your client.”
After quizzing the studio audience, Lopez established the difficulty in understanding all the variations of employment law. “We are too busy being a wholesaler, a retailer, an insurance company, etc. We don’t think about all that can go on.” He then discussed some recent cases that have appeared in the press.
“Texaco recently had a $170 million settlement against them for racial discrimination based on discriminating against African Americans. State Farm had a near-$160 million settlement against them for gender discrimination that was brought by three women who were denied sales positions within the company. Wal-Mart had a $50 million verdict for a sexual harassment case and that was brought by one woman. Farmers Insurance had an almost $40 million verdict against them for wrongfully terminating a sales manager. Some others are the Coca-Cola case that was $192 million for discriminating against African Americans. The largest to date was from the Voice of America, in which a class action suit brought by 100 women denied positions within the company for $508 million. A public supermarket agreed to pay an $81.5 million settlement because they were accused of keeping women in dead-end, low-wage jobs. And Home Depot had a hostile work environment lawsuit brought against them.”
These are clearly large numbers, especially when weighed against the cost of an EPL policy. Lopez noted EPL litigation is up over 2000 percent in the last 10 years.
To explain what has generated all this activity Lopez said, “In my mind there are several things. Number one: there is too much media power. As we read these things in the paper, employees are reading the same thing plus, there has been a change in attorney’s fees. Essentially, attorneys take on very small cases where in the past they wouldn’t have done so. Thirdly, jury trials. In the past, these cases were bench trials-now they’re heard before a jury of the employee’s peers. There has been an erosion of contract laws. Contract law only allows for compensatory damages, but now the common law courts and the state legislature have expanded tort law to allow for punitive damages. The expansion also allows for recovery of plaintiff’s attorney’s fees. The Civil Rights Act Amendment was broadened in 1991 both in interpretation and in its remedies. Now all of a sudden one can recover attorney’s fees as long as they win one dollar.”
Before the change when these trials were bench trials only, about 30 percent of employees won their cases. Now tried before a jury of the employee’s peers, they are won 75 percent of the time. So the tables have exactly turned in that regard.
According to Lopez there are now over 200,000 EOC charges per year. And over 40,000 law suits per year under employment practices. That is statistically more lawsuits for employment practices than there are suits against an employer from a third party. Unless insureds have heavy product or practice exposure, they are statistically more likely to be sued by one of their employees than they are by a third party. Therefore, they are more likely to need EPL than they are GPL in today’s environment.
The average compensatory charges have been increasing over the years, but according to Lopez, they are about $200,000 against typical insureds for EPL claims plus legal fees on both sides-no matter how frivolous.
“There are a lot of ways employers can be sued today,” Lopez said. “They can be sued for age discrimination, racial discrimination, sex discrimination, disability, pregnancy, sexual harassment, wrongful termination, retaliation, etc. There are all these new ways to be sued by employees. And if you do, you’re probably looking at $200,000 plus legal fees. When an employee decides to make any of these charges they have to go through the EOC, which costs them nothing. The employer then has to hire an attorney right away to start defending it. Immediately, the employer is incurring expenses while the employee has no money in it.”
About $40,000 to $50,000 dollars is the average legal fees an employer is going to incur in defending one of these cases, according to Lopez. “Now compare that to an EPL policy-pretty good investment. Especially when you consider that even if the plaintiff wins a dollar you still incur the costs of legal fees for both sides.”
When the defendant does lose, one out of three awards involves punitive damages. And punitive damages usually make up about 75 percent of the award. Most states allow insurability of punitive damages, but some, around a dozen or so including California, don’t allow insurability of punitive damages. stating, “if the insurance company is paying the costs, then they are not punitive.” But about a dozen or so states, however, will allow the vicarious liability of the acts of your employees if damages are awarded, Lopez said.
“So in other words, we are not going to let you insure punitive damages when you’ve done something wrong, but if we find you are vicariously liable for the act of your employee we will allow punitive damages to be insurable. So a lot of times when you are talking to your insureds and they say, ‘I don’t need this kind of coverage because I know a lot of the awards are punitive and we are in California, Florida or Illinois and I can’t insure punitive damages,’ you now know there are exceptions in EPL cases for the vicarious liability of the insured,” he said.
Settling out of court can be just as expensive as fighting in some cases, according to Lopez. “A lot of times insureds will settle because they know that 75 percent of these cases are lost and you’ve got a one out of three chance for the settlement to be between $100,000 and over half a million dollars. But to settle out of court, the cost will likely be somewhere in the neighborhood, for small- to mid-size employers, of $100,000 to $200,000.”
There was a survey done by a company called Dispute Dynamics, which put together thousands of people and created a mock jury. The percent that said it is was important to send a message to companies in order to improve their behavior was 61. Seven out of 10 said they would want to award punitive damages if a company were found guilty of causing injury to someone. And three out of four people said they would tend to believe a woman who said she had been sexually harassed at work; this is the environment employers face.
Lopez discussed some of the larger statutes that employers face. “The Family Medical Leave Act enacted in 1993 essentially states that you must give 12 weeks of unpaid leave to an employee to take care of an ailing spouse, or a newborn child. We had a case where a woman doesn’t show up to work on Monday morning. The employer calls her at home and there is no answer and no returned call. The same thing happens the rest of the week with no returned call. Finally, the employer sends a certified letter to her home stating, ‘we have not heard from you, we don’t know what is going on and you are hereby terminated.
“The following Monday, the woman comes back into the office, and said she was taking family medical leave because her mother was in the hospital. She was told, ‘That doesn’t matter, you didn’t call, please leave; you are fired.’ She subsequently filed suit against her employer under the FMLA and wins. If required care is unforeseeable, you must give your employer notice as soon as practicable. In her case, the following Monday was practicable because she was under emotional stress from her mother being in the hospital.”
The Fair Labor Standards Act is another one. It has actually been around for a long time, but Lopez said they still see claims under this Act all the time. It deals with the payment of overtime and minimum wage. He gave an example of a case where there was a salesman who sold big pieces of equipment and about once a month he would have a sale. When he did, he earned $5,000 in commission so he made about $60,000 per year. He was terminated for nondiscriminatory reasons. But he went down to his local attorney’s office who had a list of all EPL claims and they discovered he was due minimum wage despite making $60,000 dollars per year because minimum wage is calculated weekly.
He sued his employer and won his suit because he was due minimum wage the three weeks out of the month that he didn’t make his sales. He won three years back pay, two years front pay and damages adding up to several hundreds of thousands of dollars.
Lopez went on to discuss The Employee Polygraph Protection Act, Whistle Blower statutes and Title 7. Title 7 of the Civil Rights Act, initially instituted in 1964, is the flagship of anti-discrimination law, Lopez said. “This was amended in 1991. The interpretation was broadened and the remedies were enhanced.”
Title 7 is a federal statute. It caps damages, both compensatory and punitive, based on the number of employees starting at 15 employees and goes up to around 500 and caps damages at $300,000. “So what about companies with three or four employees, and where do all the million dollar settlements come from?” asked Lopez. “Well, states like to do their own thing so they may set the low-end number at five employees. And even the federal statute has exceptions. For example, if the discrimination is based on race, which was the primary intent of protection for Title 7, it is one employee no matter what state you’re in.”
The Age Discrim-ination Act and Americans with Disabil-ities Act are also federal statutes. The Americans with Disabilities Act protects people with both physical and mental disabilities requiring employers to make reasonable accommodations.
“There was a case where a trucking line had an employee who all of a sudden started having seizures and could no longer drive a truck. The driver was terminated and not given a desk job; [then] turned around and sued his employer under the Americans with Disabilities Act and wins easily because the court ruled no reasonable accommodation was made,” said Lopez. The statute does not define “reasonable accommodation” and in this case giving the man a desk job until he could figure out what was going on was deemed a reasonable accommodation.
A fairly recent one is the Immigration Reform and Control Act, which prohibits discriminating against people who are legal aliens and according to Lopez, there are a lot more claims on this in a ‘post-9/11’ environment.
Another big one is common law torts. “The state legislation and common law courts have expanded the definition of these laws and they now apply in the workplace. These laws allow for unlimited punitive damages. So any attorney worth their salt is going to combine the federal statute claim with the common law tort because that attorney can get unlimited punitive damages for their client,” Lopez said. “Also, the statute of limitations is much longer when you throw in the common law tort. Many times [it is] four years where most of the statute of limitations on the federal laws we have talked about is about one year. Most of the EPL forms I have looked at do not cover all the common law torts. So look for forms that cover all common law torts, it’s your safest bet.”
Negligent hiring and supervision is a common law tort that Lopez sees combined with sexual harassment cases very often. “What will happen is there will be a star salesman who makes off-colored remarks from time to time. But his employer does not want to confront him for fear he will leave and go somewhere else. Eventually, another employee is offended and files suit against the employer for sexual harassment or a hostile work environment and combines the allegation with negligent supervision because the employer knew the behavior was going on, but turned the other way because he was the star salesman.
“So given all these laws and new changes, how do we as agents and brokers protect our clients?” asked Lopez. “These are not going to be covered in a standard CGL policy. They are just not within the scope of the coverage. With D&O forms, coverage may or may not be extended to the entity. You can get coverage extended to the entity in a D&O form today, but you have to make sure that is the case.”
Some problematic exclusions, according to Lopez, would include a “prior knowledge exclusion,” which is different than a prior-act exclusion, where it says, “if you had any knowledge of any incident we are going to exclude that claim.”
Intentional acts exclusions are also problematic in the mind of Lopez because wrongful terminations and the quid pro quo sexual harassment are all intentional acts.
“My suggestion to agents and brokers is find the best coverage you can. You have all these common law torts and statutes and exclusions and as we said earlier, there are some 40 markets out there and only one or two markets cover the FSLA. Make sure the policy covers all the federal statutes we talked about and all the common law issues. Make sure it covers all types of employees-temps, volunteers, etc. Look for an all-risk form so you know you are offering your clients the best that is out there,” Lopez said.
“The nice thing about an EPL policy is that we are offering our clients, not just a policy, but there are a lot of value added services that come long with it for no extra charge,” he added.
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Shand Morahan’s Henry Lopez with IJ’s Mitch Dunford
Unfortunately no two policies are the same. So it is up to you to decide which is best for your client.