Social accountability drives complex D&O/EPLI market in 2019
Watch your step: employment practice liability insurance and directors and officers insurance are more needed and sought after than ever.
In the fall of 2017, the #MeToo movement took off, bringing attention — and notoriety — to the widespread problem of sexual harassment and assault in the workplace. As a result of this and similar social accountability movements, employment practice liability insurance (EPLI) and directors and officers (D&O) insurance are more needed and sought after than ever in 2019.
Although initial allegations posted in social media focused on the entertainment industry, sexual misconduct on the part of those in positions of power has occurred across businesses and organizations in the private and public sector alike. U.S. Equal Employment Opportunity Commission (EEOC) data reveal that there was a more than 50% increase in suits challenging sexual harassment in fiscal year 2018 over 2017. Overall, the EEOC recovered nearly $70 million for sexual-harassment victims through litigation and administrative enforcement in FY2018, up from $47.5 million in FY2017.
“For private and non-profit companies, the wrongful employment practices that currently hold the highest claim frequencies are sexual harassment, wage-and-hour, and third-party/ADA violations,” says Heather Schaaf, underwriting director for Management Liability at Burns & Wilcox. She notes that for publicly traded companies, sexual harassment and pregnancy discrimination are the leaders in claim severity, as they can be high-profile cases under public scrutiny.
Schaaf attributes differences among EPLI claims for private vs. public vs. nonprofit risks to the type of employees that are hired by or work for the company, along with the class of business. According to Schaaf:
- Public companies may be more probable to have class-action suits due to size.
- Nonprofits are more likely to have claims due to a lack of sophisticated human resource practices.
- Private companies experience differing claims from differing classes of workers. For example, while employees in finance or law are high earners, farm labor contractors are more likely to file wage-and-hour claims.
She points out that it is important to note not only the types of allegations but also the classes of business, corporate structure and venue where these claims are being litigated.
John Grise, senior vice president at Worldwide Facilities, LLC, observes that the EPLI market is experiencing a wide variety of sexual harassment and discrimination cases. “We are also seeing a slight uptick in immigration claims and a significant amount of wage-and-hour claims, which have become a prevalent cause of loss,” he says.
As far as retention and premiums in EP/D&O insurance go, Schaaf has seen increases for both retention and premium developments, along with a tightening of coverage offered among carriers. She believes carriers are responding to an uptick in claims frequency and severity by increasing per-claim retention and overall policy premiums. In response to claims that the coverage was not originally intended for, they are strengthening policy language as well.
“D&O policy language varies from carrier to carrier, market segment to market segment, and company to company,” says Rob Yellen, D&O and Fiduciary Liability Insurance product leader at Willis Towers Watson, As a result, sorting through the implications of potentially related claims under claims-made insurance coverage has always been challenging.
“A company’s policy wording can even change from year to year, whether by endorsement or when a new policy form is introduced by the insurer,” he notes. “Even if the wording appears clear, the question of whether two or more claims relate is often a factual one. In applying facts to related-claims wording, it can sometimes seem that there is room for so many interpretations — at least one for every agenda among stakeholders.”
#MeToo and the D&O market
Across the board, insurance professionals agree that #MeToo issues are having a strong effect on the D&O liability insurance world. The practitioners we spoke with reported increased sexual harassment claims, along with a handful of “reverse” sexual harassment claims, that is, when the alleged harasser is female and the victim is male. Kelly Thoerig, US EPLI product leader at Marsh, notes that this type of claim appears to have actually increased post-#MeToo, probably due to sexual harassment claims activity surging across the board. No one we spoke to, however, reported seeing more same-sex claims.
Grise says that the #MeToo movement has not necessarily increased exposures of sexual harassment (given that sexual harassment has been a longstanding issue in the workplace). However, the movement has certainly brought about a heightened awareness and lack of tolerance for misconduct in the workplace on the part of women and men alike. “The major impact regarding #MeToo is still focused on the EPLI coverage part contained in both the private company and nonprofit D&O markets,” he says.
Yellen points out that the effectiveness of #MeToo and other movements has proven the concept that individuals and companies can be held accountable through “structured and unstructured” campaigns powered by social media. These social-media campaigns “can get results and do so much more swiftly than the courts. Litigation, on the other hand, can cost millions and take years to get a result. No doubt about it, social accountability has changed the face of D&O risk forever,” he says.
For public companies, Yellen observes, social accountability has the power to take historically minor events and elevate them to become financially material within a matter of hours. “That’s a game changer. We have seen securities class actions, derivative claims, executive terminations, and regulatory enforcement and investigations all result from a social accountability crisis — including those that have been associated with #MeToo. So, from a D&O liability perspective, this exposure can really make a difference.”
Within the last two years, Burns & Wilcox has seen a significant rise in claims tied to the #MeToo movement and mergers and acquisitions, among others. “Mergers ands acquisitions and management decisions in the healthcare arena, for example, are leading to an increase in antitrust and whistleblower claims,” says Schaaf. Because of heightened awareness of these issues, she expects to see more carriers providing solutions that offer broader language and definitions that give clients a well-rounded risk-management strategy.
According to Sarah Downey, US D&O product leader at Marsh, the increase in litigation arising out of the #MeToo movement includes D&O-related claims such as securities class actions and derivative actions. Furthermore, she points out, corporate-focused claims are exposing companies to enormous costs, including drops in market capitalization and legal expenses for internal investigations, government proceedings, employment lawsuits, securities class actions, and shareholder derivative suits.
In response to the increase in D&O-related #MeToo filings, the D&O underwriting community is taking steps such as including EPLI-related questions in D&O underwriting meetings to assess the “tone at the top” regarding the culture of enforcing anti-harassment policies. “In general, because, in part, of the increase in litigation that includes the increase in D&O related #MeToo litigation, we are no longer seeing the same price decreases in the D&O market that we have grown accustomed to seeing with D&O pricing flattening out or increasing,” Downey notes.
Combined with other adverse loss trends, social accountability issues are putting profitability pressure on carriers and driving a firming market, Yellen believes that improved coverage is likely to come with a higher price tag this year. “The concern for D&O insurance is more than merely increased frequency of claims or loss severity,” he says. The challenge of social accountability can extend to problems with the mechanics of the Claims-Made and Reported insuring agreements that provide the foundation for so many of today’s D&O insurance policies.”
More complex health-related claims
Other increased EPL/D&O claims center on disability and health issues. For example, Marsh has noticed an uptick in disability discrimination claims premised on employee use of medical marijuana. “The trend of states legalizing recreational and/or medical marijuana at a time of growing normalization of attitudes toward marijuana use in general have left employers with significant challenges in navigating the ever-evolving attendant workplace issues,” Thoerig says. She explains that employers must grapple with navigating disability, accommodation, drug testing and workplace safety issues — to name just a few — in the absence of legislative or court guidance. Employers must also balance compliance with these complex laws with their duty to establish a safe and productive workplace. “New and proposed laws legalizing recreational and medical marijuana are sure to affect hiring, discipline and firing decisions in novel and important ways, and this is an issue we encourage our clients to continue to watch closely,” she stresses.
There has also been no slowdown in Americans with Disabilities Act (ADA) claims over websites, Thoerig adds. A “floodgate of litigation” alleges discrimination against the hearing- and vision-impaired due to alleged lack of accessibility of a company’s public-facing website.
“Website ADA claims now make up a significant proportion of all ADA lawsuit filings,” she says. And plaintiff theories of liability have moved beyond just websites to mobile apps and self-service kiosks. “EPLI policies that provide third-party liability coverage will typically provide at least defense expense coverage for these claims. The costs incurred to bring a property (whether physical or not) into compliance, however, is generally not an insurable loss. As the claims continue to evolve and more plaintiffs choose to pursue litigation, insureds have seen total loss amounts in excess of policy retentions,” Thoerig says.
Another health-related area that continues to generate discrimination claims is pregnancy. Thoerig says pregnancy discrimination claims are not making up a significant portion of the discrimination claims that Marsh is seeing, but the numbers appear to have remained relatively constant over the last few years.
Grise notes that given the need for workplaces to obtain and retain talent, Worldwide Facilities has seen increased flexibility on the part of employers to accommodate employees with maternity and paternity leave. “Although companies are trying to mitigate this type of claim, they still happen,” he says.
Case in point: Shortly after a company was told that an administrative assistant (paid well above market rates) was pregnant with complications, it hired another assistant and had the pregnant claimant train her. After the claimant trained the new employee, the company fired the claimant. The claimant alleged that her employment was wrongfully terminated based on disability and pregnancy discrimination. She was left without insurance for her pregnancy and could not find a job that paid anywhere near what her former employer paid her. The settlement and defense approached $1 million, Grise says.
Increase in age claims
People are living longer today than ever before. “According to data compiled by the Social Security Administration, today a man reaching the age of 65 can expect to live (on average) until age 84.3, and a woman reaching the age of 65 can expect to live (on average) until 86.6,” says Talene Carter, Employment Practices Liability thought and product leader at Willis Towers Watson.
Grise points out that the tail end of the baby boomer generation — roughly 10,000 people — reach retirement age each day. And many of them are delaying retirement. According to the Bureau of Labor Statistics, older workers are the fastest growing segment of the workforce. In fact, 20% of US workers today are 55 or older; by 2024, that will grow to 25%. And with growing numbers of older workers come more age discrimination claims. It’s not surprising then, when Grise notes that the percentage of age discrimination claims filed by individuals 65 and older doubled from 1990 to 2017.
Case in point: A 65-year-old accountant alleged that her employment was wrongfully terminated based on age discrimination. When she was fired, the company paid her six months’ severance but did not have her sign a release. She later filed suit, alleging that her wrongful termination based on poor performance was a pretext for age discrimination because her supervisor repeatedly made age-related comments in regard to how she worked; in addition, she had never received a poor review. The settlement and defense exceeded $75,000, Grise reports.
According to Thoerig, recent age discrimination cases she has observed are often presented in connection with a claim alleging discrimination based on another protected class, such as race or national origin.
Despite the increase in the number of aging directors and officers, insurers are not reporting an increase in claims on the basis of mental capacity — for example, because an officer or director is showing signs of dementia or Alzheimer’s disease.
Religious, ethnic claims vary
Thoerig says that religious discrimination claims make up a very small percentage of overall EPLI claims. “Not to diminish the importance of guarding against these and all other claims premised on some form of discrimination, however, religious discrimination claims do not seem to have been particularly problematic for our client base or the EPLI markets that we work with.”
On the other hand, Grise finds religious or ethnic discrimination claims “are plentiful and happen more frequently than many other types of discrimination.”
Case in Point: A claimant alleged that she was not hired as a teacher based on religious discrimination. After the claimant was not offered the job, she found out that the school thought she was qualified yet refused to hire her because of her Mormon faith and the fear that she might impart her beliefs to the children. The defense and indemnity exceeded $40,000, Grise reports.
D&O claims: Costly and complex
Social accountability movements — with viral content posted on social media flagging alleged conduct that potentially spans years or decades — create tremendous challenges in sorting through D&O coverage issues. As a result, some claims may be enormously complex and potentially unsolvable, cautions Yellen. “The recent, high-profile executive conduct scandals, particularly those in the entertainment and hospitality industries, have imbued this related-claim challenge with new life. With decades-old alleged bad behavior (some tied to complaints, escalation and sometimes, settlements) coming to light, the D&O insurance industry has to wrestle with the possibility that, in the court of public opinion, there is no statute of limitations.”
The risk profile changes when claims that were formerly thought to be “resting peacefully” are escalated as alleged victims share their experiences through social media. Potential implications become considerably worse and more complex, Yellen says. Those disclosures motivate others to share their experiences, causing the process to gather both energy and speed as other claimants layer on. “Each such victim potentially has or had a claim and any or all of those claims may be related,” he says. “As more claimants speak up, the challenge of sorting through potential relation-back issues worsens.”
This risk is even more challenging for public companies, as this process can heighten the financial exposure.
Questions over claim timing, notice, and the relationship between claims under traditional claims-made D&O insurance coverage can leave even the most well-insured executives wondering which, if any, of their D&O insurance policies will protect them. “No insured wants to have to worry that they might have to fund their own defense as this coverage Gordian Knot is solved,” Yellen concludes.
D&O liability and cyber risk
More insurers are recognizing that D&O liability insurance coverage needs to address cybersecurity and data breach issues.
“Overall, cyber risk is starting to be seen as a fundamental part of an entity and also the responsibility of an officer,” observes Heather Schaaf, underwriting director of Management Liability at Burns & Wilcox. She points out that the European Union’s General Data Protection Regulation (GDPR) introduced the new role of the Global Protection Officer and, in response, companies are starting to adopt this position as a key role in their organization. “This initiative should lead companies to define the position and ensure that their officer meets the definition of a director in their policy,” Schaaf says.
Data breach events can be debilitating to a company, and its response to a cybersecurity event is crucial. “While a company can have a separate cyber policy to cover the event itself, D&O coverage can also be pulled in as support for large-scale breach events,” she says. The dangers are great if a breach is not managed properly or notice to the public is delayed, and can include such major issues as a drop in stock prices and security shareholder litigation. “For situations like these, breach of duty is the root cause — not the cyber event itself — and D&O coverage can be the protective solution.”
Reputational harm: The elephant in the room
Social accountability movements such as #MeToo have sparked a heightened need for directors and officers to ensure that their management and operations teams behave appropriately. With this comes “a requirement for boards to respond more immediately and swiftly in taking action to help prevent reputational harm to the organization,” stresses John Grise, senior vice president at Worldwide Facilities, LLC.
This harm can be far-reaching. As Rob Yellen, D&O and Fiduciary Liability Insurance product leader at Willis Towers Watson explains, “#MeToo issues are significantly affecting D&O risk and insurance across social media, which has empowered individuals and the masses to find their voices like never before. In addition, people are listening like never before. When unhappy voices can be heard by receptive ears, the impact can be much more powerful than complaints, regulatory enforcement or litigation. Social accountability, in today’s social media-fueled environment, can have a material impact in hours — maybe faster. Stock prices can fall hard and directors’ and officers’ reputations and jobs can be put in jeopardy.”
Heather Schaaf, underwriting director at Burns & Wilcox, warns that the risk of reputational harm isn’t being talked about enough when it comes to D&O liability. “Reputational harm is a growing issue for companies and is currently seen as a gap in some policies. A company’s response to a major event is known to have a lasting effect on how the public perceives them.”
To help maintain its reputation after a negative event, Schaaf recommends that an organization seek outside assistance to manage its response. A well-rounded D&O policy includes such coverage as a social media sub-limit, crisis event management, employment event expenses, and sub-limits to hire PR firms to help regulate firm events. “D&O insureds not only need to be worried about their personal assets when looking at their insurance coverage but they also should be exploring additional coverage options to protect their company and themselves from reputational harm,” Schaaf stresses.
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