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EPLI symposium Panelists field mock EPLI claim By Phil Zinkewicz As a stand-alone product, employment practices liability insurance (EPLI) is not yet 25 years old, yet it continues to be a subject of major interest and major concern in the professional liability insurance industry. On one hand, employment practices liability has the potential of generating significant premium dollars. On the other, without proper risk management tools, EPLI could represent a source of significant claims payouts on the part of insurers. Today’s employers, both large and small, face exposures to employee lawsuits alleging sexual harassment, gender discrimination, national origin discrimination, disabilities discrimination and age discrimination, among other areas. Age discrimination is of particular concern as baby boomers approach retirement years. That generation’s numbers alone could mean myriad lawsuits alleging unlawful dismissal or misuse or abuse of retirement funds. In April 2006, the Professional Liability Underwriting Society (PLUS) hosted a symposium on EPLI in New York. The day-and-a-half meeting included sessions on subjects such as: avoiding potential conflicts of interests between insureds and defense counsel; emerging trends in fiduciary liability; funding and under-funding employee benefit plans; and EPLI underwriting trends. One panel, titled “An EPL Risk Management and Insurance Smorgasbord: From Soup to Nuts,” featured various segments of the EPLI market—a broker, underwriter, risk management consultant and claims expert—who discussed EPLI from their own perspectives. Moderated by Scott R. Schaffer, a partner of Wilson Elser Moskowitz Edelman & Dicker in New York, the panel included: Paul Burschinger of Marsh & McLennan in San Francisco; Jay Karp, second vice president of St. Paul Travelers in New York; Randall Krause, CEO of yourHRdepartment of Los Angeles; and Richard Rupp, senior vice president of Professional Indemnity Agency in San Francisco. Schaffer asked the panelists to confront a “mock” EPLI claim and to demonstrate how they each would approach this fictitious claim in their professional capacities. The mock claim was presented to the panelists in two parts. The first part dealt with the exposure itself and its insurability. The fictitious exposure was described this way: Five Star Hotels, Inc. (“Five Star”), is a privately held California corporation, which owns and/or operates six luxury hotels, each with a golf course and an ocean beach. Two of these are located in California and a third is in Florida. Five Star enjoys an excellent reputation for the award-winning designs of its properties, as well as for great service and amenities. Five Star is looking to expand along the Sunbelt and, as a first step, is operating three hotels, for, and under the name of, a national hotel chain, Deluxe Hotels, Inc. Three of these hotels are located in the central business districts of: Phoenix, Arizona; Houston, Texas; and Mobile, Alabama. Five Star has 600 full-time employees and 750 part-time employees across six properties. The workers at the three Deluxe Hotels are all employees of Five Star. The three Five Star resorts have a seasonal workforce, which causes the turnover rate to peak at 75%. The panel was then informed of Five Star’s claims history. A “wage and hour” class action claim was brought on behalf of the housekeeping staff of 350 employees at the two California resort hotels owned and operated by Five Star. It was alleged that these employees of a certain national origin were not paid the same rate as, and not paid overtime like, employees of different nationalities. It was also alleged that they were the subject of retaliatory treatment for having initially complained to the California administrative agencies. This claim is still pending. Over the years, there have also been 15 individual charges of discrimination filed with the EEOC and/or state administrative agencies. These charges are unrelated to each other, and there were never more than a couple of charges filed in regard to any one property in any given year. In the main, these charges alleged national origin and gender discrimination, and sexual harassment. They were all resolved at the administrative level with a finding of no reasonable cause to believe the allegations were true, or a relatively nominal settlement and conciliation agreement. Of the “right to sue” letters that were issued, only one private civil action was initiated in Palm Beach County, Florida. In that claim, a gay male masseur alleged that he was propositioned and groped by the female manager of the resort’s spa. The manager vehemently denied the allegations, and discovery failed to produce a single witness to the alleged encounter. The claim settled at mediation, after a motion for summary judgment was filed, for the sum of $50,000. Five Star Hotels incurred $75,000 in legal fees and costs in defending the claim to a resolution. Five Star’s present EPL insurer has determined to non-renew the account for various “underwriting reasons.” Having been given that background, Burschinger of Marsh, and Rupp of Professional Indemnity were asked to play the roles of the broker trying to replace the account and the underwriter considering taking the risk on, respectively. Krause of yourHRdepartment, presented the view of the risk manager. Rupp pointed out that that many EPLI insurers are not interested in insuring the hospitality industry and certainly not in California, which he said leads the nation in EPLI lawsuits. However, he said that his firm specializes in hospitality exposures and that “California doesn’t scare us.” Therefore, he said that he was willing to take on the risk, provided that the price was right and that terms and conditions were satisfactory. “In underwriting an EPLI exposure, we look at the geography and we look at turnover,” he said. “We charge a higher premium for exposures in certain geographic areas. We look at things such as payroll and employee thefts. And, we would probably insist on an outside audit of the insured.” Negotiating on behalf of the client, Burschinger pointed out that, while there were 15 EPLI allegations against Five Star, only one resulted in a lawsuit and that one was settled for a nominal sum. He said that was a “pretty good” record. Regardless of that, Rupp said, the premium and conditions would be based on Professional Indemnity’s underwriting criteria. “We have found, for example, that in hotels in resort areas, allegations of sexual harassment against young managers were frequent. We would, therefore, insist that the insured’s hotel managers undergo a training program to prevent such incidents. We have also found that in many hotels, human resources expertise is present only at company headquarters, while branches do not have that expertise. We would insist that HR people in branch hotels receive the proper compliance training.” Having determined that an arrangement could be reached between the broker and underwriter, Krause then discussed what other services his firm could bring to the situation. He said that many insureds lack the HR expertise and do not address proper risk management techniques to prevent lawsuits. He said that HR compliance laws differ on a state-by-state basis. “We offer a sophisticated risk management approach for EPLI insureds that is program-specific and state-specific,” he said. “We offer a telephone hotline that is available to insureds from 10:00 a.m. New York time to 6:00 p.m. California time so that employers can call and ask about liability issues. Employees can also call the hotline and talk to a neutral third party if they feel they are victims of bad employment practices.” Assuming that an agreement was reached whereby Five Star was insured, in the second part of the session, Karp of St. Paul Travelers was asked how his company would deal with the following issue: Bridgett Johanson, a 25-year-old woman who works as a bartender in a swanky club at the Five Star resort in Palm Beach, files a charge of discrimination with the EEOC against Five Star, alleging gender discrimination, sexual harassment and a hostile work environment. She alleges that the manager of the club, Kristopher Kreep, a 50-year-old man, propositioned her repeatedly for sexual favors in returned for promised career advancement and that he made inappropriate comments concerning her physical appearance and intentionally brushed against her behind the bar on a nearly daily basis. It was further alleged that Bridgett consistently told Mr. Kreep that his attention was unwanted and that his behavior was offensive. She said that she consistently complained internally to Five Star’s Human Resources department, whose investigation was lacking in scope and detail, and failed to produce any corroborating evidence. Both Bridgett and Mr. Kreep remain employed with Five Star although they no longer work on the same shift. Five Star did not provide notice of the EEOC charge to its EPL insurer. The EEOC conducted an investigation and concluded that there was a reasonable cause to believe that the sexual harassment took place and then issued a “right to sue” letter. Bridget filed suit in the U.S. District Court for the Southern District of Florida against Five Star and Mr. Kreep. A mediator was brought in and offered a proposal in the amount of $150,000. The insurer wished to accept the proposal, but Five Star and Mr. Kreep did not. They were concerned that a settlement would set a poor precedent and that other employees would come forward to assert false claims. Karp said that the case was extremely complicated. “If this was our insured, since we write a claims-made policy for EPLI, we would want to know first when the claim occurred and reported. If it falls under the timeframe of our policy, of course we would defend. We would want to work very closely with the defense counsel, know their budget and find out the details of what exactly happened. We would also want to know the strategy of the defense counsel.” Asked about the fact that the insurer was willing to accept the offered settlement but the insured was not, Karp said that, in that kind of situation, the insurer would sit down with the insured and explain that the judgment could be significantly higher if they went to court. “I understand that the insured is worried that such a settlement could encourage other employees to sue, but the insured should realize that could happen if a lawsuit was found in the plaintiff’s behalf at a greater sum,” said Karp. “In addition, the defense costs might be a great deal more if it were prolonged into a court battle.” * |
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