Employment practices in California is a known and growing concern for insurers, agents and employers, and that concern has some carriers ramping up rates dramatically or quietly pulling back from the area, say those familiar with the region’s market.
“Employment Practices in California is a known problem, and is where we are seeing rate increases of 20 percent and up,” said Richard B. Hagemeier, executive vice president of Pasadena, Calif.-based Bolton & Co.
The problem is more pronounced in Southern California say Hagemeier and other brokers, some of whom view this trend as an indication that the region’s market is hardening.
Another indicator: retentions are increasing, according to Hagemeier.
“At one time we would typically see retentions of $5,000, but in today’s market we are seeing a minimum of $10,000 and often $25,000 for accounts with no losses,” he said. “Accounts with claims activity can easily have a $50,000 and higher with some reaching $250,000.”
Joe Robuck, vice president of financial services and executive liability for Los Angeles, Calif.-based Worldwide Facilities Inc., said he has had to go out to market for his clients to increasingly more carriers – and even then he’s getting fewer responses.
“The private company D&O and employment practices liability marketplace is definitely firming,” Robuck said. “We wouldn’t call it a hard market yet, but it’s definitely firming.”
What we’re seeing, say Robuck, Hagemeier and others, is the impact of the recession playing itself out in the claims process.
“Most carriers offering (EPLI) up to and through that difficult time are now seeing those accident years close out,” Robuck said. “The years 2007, 2008, 2009 – those claims are starting to close out. Those carriers are realizing those losses were much worse than what they expected them to be.”
Chubb and CNA are two large carriers that have reacted in some way to the region’s worsening employment liability environment.
“In relation to Chubb, they advised us that they were taking a more restrictive approach to directors and officers and employment practices coverage for Los Angeles, Ventura and Orange counties back on Feb. 1,” Hagemeier said.
E-Risk Services Ltd., a large player in the small market executive liability – D&O, EPLI, fiduciary, crime – has historically had a competitive premium structure. However, E-Risk has also made some moves to protect itself from the region’s unruly employment liability market, according to Hagemeier.
“E-Risk/Scottsdale has executed a number of rate changes in the prior 18 months, with the most significant pricing changes in the EPLI side of their program, but the D&O has also increased recently,” Hagemeier said. “In addition to premium increases E-Risk has also been increasing client retentions in relation to the employment practices coverage.”
Chubb and CNA confirmed they are both raising rates on EPLI in Southern California, though neither said their D&O rates have been affected.
E-Risk executives said they are continuing to do strong business in both Northern and Southern California, but declined to comment further for this article as a matter of company policy.
One driver of these trends appears to be a jump in claims payouts, particularly in Southern California, that are being settled out over the last year or two following the impact of the recession.
Chubb, which acknowledge its EPLI rates are changing, said the region’s economy and the number and size of the lawsuits are driving the market fundamentals.
“Due to EPL loss trends in Orange, Ventura and Los Angeles counties showing a significant increase in risk, we are reducing the amount of EPL business we write for organizations that are domiciled in those counties,” according to a statement issued by Chubb spokesman Mark Schussel. “We hope that EPL loss trends will improve in the region, so that we may adjust our approach. This approach does not apply to any other regions of California.”
Edward McNally II, CNA’s national EPL practice leader for commercial and financial institutions, acknowledged the carrier has raised rates across the country – and in California in particular.
The carrier has also implemented stricter underwriting standards, McNally said.
In California CNA is targeting rates for 2013 that are double what the carrier is targeting nationwide. McNally declined to disclose what the rates are.
An indicator of employee-employer strife in the workplace may be charge statistics from the Equal Employment Opportunity Commission.
EEOC show charges for California started rising dramatically. That year the number of charges filed with the EEOC in California rose from 5,299 a year earlier to 6,577, and have been on the rise since. The latest numbers available show charges for 2012 in the state at 7,399, comprising 7.4 percent of all the charges in the U.S., according to EEOC. That’s the highest number for California since 2002, when it spiked at 7,917 charge receipts. The number of charges fell from that point to a low of 4,142 charges in 2005.
Trends from EEOC show the percentage of filings have increased dramatically over the last five years for charges related to retaliation and disability. Charge statistics show the percentage of disability claims rose 18.6 percent between 2007 and 2011 and retaliation claims rose 14.6 percent in that period.
Much of the change is being driven by new California laws, according to CNA’s McNally.
“All of this stuff came from new legislation passed at the state and federal level driving the increase in the number of charges,” he said.
McNally cites a host of regulations and laws that had an impact both nationwide and statewide, many of which came into effect on the heels of the recession: the 2008 amendments to the Americans with Disabilities Act, which among other things revised the definition of disability to more broadly encompass impairments; the Genetic Information Nondiscrimination Act of 2008; the 2008 amendment to Family and Medical Leave Act; and the Lilly Ledbetter Fair Pay Act of 2009.
“California in particular was very heavily influenced by new state regulations,” McNally said.
California Labor Code 226, for example, outlines specifically what every employer must provide semimonthly, such as gross wages, total hours, all deductions.
If an employer is found guilty the plaintiffs have the right to seek damages, and that’s just one of many examples cited by Peter Taffae, with Executive Perils in Los Angeles among state laws and regulations impacting or about to impact EPLI in the state.
Effective Jan. 1, 2012, Assembly Bill 22 added a section to the Labor Code that limits employers or prospective employers’ use of credit report for employment purposes.
“This has been controversial,” Taffae said. “This year probably the most talked about is the laws governing social media. Assembly Bill 1844 prohibits employers from requiring or requesting employees and prospective employees to provide user names or passwords for their personal social media accounts. Another big one is Senate Bill 1255, which requires employers to provide specific on employees wage statement each time wages are paid. This has gotten a lot of attention because most people might not update their paystubs and the feeling is the attorneys are looking for companies that haven’t complied because of the class action potential.”
When he thinks about employment liability, the two things that come to mind for Taffae: plaintiff bar and wage and hour claims.
“We’ve been writing EPL since its inception in 1992 and we have never seen the volume and severity of claims,” Taffae said. “We are getting a couple dozen a month. The last three years a lot arose out of companies downsizing due to economy, now we are see litigation arising out of mergers and acquisitions. Claims are coming in even when there are no terminations, just hostile work environment or retaliation.”
He added, “And the plaintiffs’ bar has gotten a lot more sophisticated – we have even seen some security class action attorneys jump ship and move to employment practices. They are rope and doping the defendants – meaning they drive up defense costs with depos and discovery so the defendants cave and settle, an old securities class action strategy.”
As a lawyer battling these type of cases in the system, Michael B. Adreani of Roxborough, Pomerance, Nye & Adreani LLP in Woodland Hills, Calif., has seen firsthand how EPLI cases are becoming more frequent and plaintiffs’ attorneys are fighting them harder and seeking more compensation.
“I believe that some of this increased exposure on independent EPLI claims is due to plaintiffs’ firms working those individual cases up more, going after cases to get cases on the EPLI issue more than they used to,” Adreani said. “They are attacking these cases with more vigor than they were before.”
The reasons Adreani cites are threefold: class actions are becoming more challenging to take on and win, many judges haven’t been favoring plaintiffs as much as in past years in such cases, and the region’s court system is jammed with cases and the courts do not have enough supporting staff to handle the overrun.
“The class action route is becoming more difficult based on some case law and based on some judicial attitudes,” he said.
And to go just about any route in the court system in Southern California takes an increasing deal of patience.
In April, for example, Adreani said he filed a simple motion in a San Diego court.
“Our hearing date is in the middle of August,” he added. “That’s just to have one motion heard.”
He took another case in L.A. Superior Court in May, and a hearing was not set until January of next year.
In fact, things may get worse in L.A.’s court system. In June a new round of layoff notices were delivered to hundreds of L.A. County Court employees, on top of hundreds of cuts already made, all undertaken to trim down next year’s budget.
“With the backups in the courts and the layoffs in the courts, certain litigation, like class actions, have become an extremely lengthy ordeal,” Adreani said.
According to Adreani, to get around the muck of the court system many lawyers have begun to more readily agree to individual arbitration agreements – a process viewed by many insurers, insureds, regulators and others as a more favorable route to take than a lawsuit.
“In some ways the rush to have arbitration agreements might be backfiring and impacting EPLI premiums,” he said. “Even plaintiffs now are OK with arbitration.”
Kickstarting the region’s list of woes was clearly the sour economy, which most credit for causing more litigation from employees who lost their jobs. And not only were there more suits from employees out of work, but the amount of compensation being sought was higher as the unemployed were out of work longer.
The national unemployment rate was 5.0 percent in December 2007, a rate where it had been at or below for the previous 30 months, according to U.S. Bureau of Labor statistics. By recession’s end it was 9.5 percent in June 2009, and the rate continued to inch up in the months afterward, peaking at 10.0 percent in October 2009. Before that dreaded period the most recent months in history with unemployment rates in the double digits was in 1982 and 1983, according to BLS.
“Compared with previous recessions, the higher proportion of long-term unemployed (those unemployed for 27 weeks or longer) in the recent recession and its post-recession period is notable,” a BLS report states.
In fact, there are almost 4 million Americans who have been out of work for a year or more, nearly 30 percent of all unemployed, according to government statistics.
California was among those states with the highest unemployment rates, rising to well above 10 percent employment following the recession and staying at that level – the state’s rate is still at a lofty 9.0 percent, according to the most recent BLS data.
That lengthy time out of work resulted in lawsuits and settlements with higher payouts, according to CNA’s McNally.
Just how much higher those payouts were depended on a number of factors.
“The front pay damages run from when the wrongful employment practice occurs until the case is settled or goes to trial,” McNally said. “However, if the person finds another similar position between the wrongful employment practice and settlement-verdict, that mitigates the front pay damages at that point. Fewer opportunities in the job market have impacted that front pay damage mitigation. This is a trend that we have seen in our claim activity, and we have begun to track, but we don’t have an exact percentage difference at this point.”
The economy, a spate of new laws that directly impacted the workforce and employers, and high unemployment all added to the heavy impact the recession was having on EPLI, McNally said.
“All these of factors going in at the same time created the perfect storm across the country in terms of the change in the litigation environment,” McNally said.
Since the damages awarded and sought in cases are driven by what employees make, and there’s a higher cost of living Southern California has driven the cost of claims in the region higher, he added.
“We definitely see higher settlements and verdicts coming out of Southern California,” he said. “This is due to the types of industries which impacts the median wage, cost of living, socioeconomic factors impacting jury verdicts and defense counsel rates. This is another issue where we don’t have definitive data at this point, but it appears to be at least a 20 to 25 percent differential between Southern California and the rest of the state.”
How is this all playing out?
“We’re seeing some of our competitors completely exit the market in California,” McNally said. “That is not our position.”
While CNA is sticking to it, they are still left with explaining to agents that the rate hikes are to maintain solvency and a good operating position.
“We can’t charge what we charged four or five years ago if the claims are costing us 50 to 70 percent more money,” McNally said.
Comparing the state’s EPL climate to catastrophe modeling, he said that if storms are worse or more prevalent, then carriers must react.
“So in the EPL world we don’t have nine hurricanes any more, we got 12 every year,” he said.
Beside raising rates they have also initiated tougher underwriting standards, McNally said, adding, “We’re taking a very targeted approach.”
That targeted approach has altered the way Robuck of Worldwide does business.
Carriers aren’t just taking steps like increasing deductibles and retentions, and tightening up on terms and conditions, they are also reducing their up appetites for what risk they will take on.
Where a few years ago marketing to say seven or maybe even 10 carriers would be plenty for a customer, “now we’re having to go to market with 15 to 25 carriers to make sure we’re getting the insureds the best terms and conditions and the best possible price in the marketplace,” Robuck said.
And those few that do respond are hesitant to go forward, he added.
“We’re seeing carriers declining risks even if they have just one claim,” Robuck said. “We think that some carriers are taking a bit of a knee-jerk reaction.”
This is limiting what brokers can do for their clients, Bolton & Co.’s Hagemeier said.
“We’re not going to be able to bring as many carriers to the table to our clients at alternative options,” he said.
That means clients may go out to market more, said Hagemeier, who reported that had just lost an account when he agreed to be interviewed for this article.
For clients he’s looking to retain, he will look for competitive alternatives to validate the renewal pricing structure, but a double-digit percentage increase in premium is not news he wants to be bringing to those clients.
He could market the client as broadly as possible, or try things like getting a better deal by shifting coverage, Hagemeier said. Then added that “shifting coverage always has concerns.”
The problem there, he said, is if there is anything that could give rise to claim, it will be treated as a form of regulatory obligation.
If for instance there is an EEOC action that gets triggered in 60 days after the new policy is issued, and then 90 days later there is the EEOC notification, the first notice was under prior policy, so they can exclude the claim, he said.
“Transitioning carriers gets to be fairly risky,” he said. “There are a lot of underwriting questions that are out there.”
Rodney Choo, senior vice president and Risk Placement Inc. in San Francisco, and a former antitrust attorney, sees things a bit differently in Northern California.
Where Choo is the biggest change in the past year is in directors and officers insurance.
“We are probably in the first legitimate hard market within the D&O space in the last five or six years,” Choo said. “Starting Q1 of last year you really started to see things firm up.”
He added, “We have seen a significant increase in D&O claims.”
A lot of those claims were driven by lawsuits relating to companies under financial distress – bankruptcy is a large driver of D&O claims, and usually among the most severe D&O claims, of which there were plenty in the last few years, Choo noted.
However, Choo said he’s also been seeing a lot of business practices, and business conduct suits.
Section 17200 of the business and professions code, which allows a person to bring a civil lawsuit for deceptive or unfair business practices, is incredibly broad, so there are a great many frivolous lawsuits that continue come out of that, according to Choo.
He cites the example of the lawsuits against the Subway fast food chain because its foot-long sandwiches were measured by some consumers and found to come up an inch short. Recently the fast-food chain successfully lobbied to have the suits consolidated in the Eastern District of Wisconsin.
“A lot of D&O policies were actually picking these up,” Choo said. “Carriers were picking up claims and paying significant payments out that stuff they historically probably never intended to pick up.”
Choo and other brokers told Insurance Journal that the EPLI claims have also impacted D&O, as some of the more egregious suits have placed the liability on those who did the hiring, or on perceived bad management.
All of this has lead to, in the words of Choo, a “true hard market.”
He added, “It’s the real deal.”