Changing exposures and concerns for directors and officers of private and nonprofit companies
Last month, insurance professionals gathered in New York to attend the Professional Liability Underwriting Society’s D&O symposium, where attendees gained insight into the most recent developments in management liability products. Industry experts weighed in on a variety of topics. The following is a summary of some noted trends in the private and nonprofit sectors that emanated from the symposium with respect to two types of management liability coverages—employment practices liability insurance (EPLI) and directors’ and officers’ (D&O) insurance.
Like most organizations, the risk management strategies of private and nonprofit companies typically include coverage related to both employment practices and the decisions of top executives made in their capacities as officers or directors. EPLI protects companies from lawsuits brought by workers who take legal action against the company for alleged violations of their rights as employees. The majority of claims made against private and nonprofit companies fall into this category. D&O insurance provides coverage for negligent acts, omissions or misleading statements committed by directors and officers of a company that result in a lawsuit being filed against the company.
Employment practices liability insurance trends
Historically, EPLI claims most frequently involved allegations of harassment and discrimination. However, in recent years, the number of employees alleging that they have been the victims of retaliation at the hands of their employers has reached an all-time high. The Equal Employment Opportunity Commission (EEOC) has stepped up its awareness efforts and made it easier for employees to file administrative complaints. At the same time, the judicial system has lessened the burden for employees to initiate and maintain retaliation claims. This combination of circumstances underscores the need for EPLI underwriters to effectively anticipate and address the risk associated with retaliation litigation.
Ban the box:
A new litigation risk that is likely to implicate EPLI coverage stems from an emerging movement known as “ban the box.” Ban the box laws prohibit employers from asking about a prospective employee’s criminal history at the onset of the job application process. Instead, such inquiries may only occur after the applicant passes an initial employment screening. The EEOC believes that such legislation addresses a form of systemic discrimination that disproportionately prevents minorities and low income individuals from securing employment for which they would otherwise be qualified. Today, approximately 100 cities and counties across twenty-one states have adopted some form of ban the box law.
Earlier this year, the Obama administration took executive action which amends the EEOC’s form EEO-1. The EEO-1 is a compliance survey mandated by federal statute and regulations that collects company employment data regarding race/ethnicity, gender and job category. Beginning in 2017, the form will require employers with 100 or more employees to submit information about employee salaries. While the EEOC indicated that it will use this information to create compensation benchmarks based on industry and geographic area, it is widely believed that the agency could initiate investigations and litigation based on suspected disparities in salary between employees of differing race, ethnicity or gender.
False Claims Act claims:
One of the most discussed exposure points in D&O insurance is the federal False Claims Act (FCA). The FCA imposes liability on companies that defraud governmental programs by knowingly overcharging for services rendered. Liability under the FCA can subject a company to excessive penalties (between $5,500 and $11,000 for each false claim, and three times the actual damages sustained by the government). Third parties (typically employees of the offending company) that have information regarding false or fraudulent claims submitted to the government can file qui tam actions under the FCA. Even if the so-called “whistleblower” has not been personally harmed by the defendant’s conduct, he or she is recognized as having legal standing to sue. The federal government may either intervene and take over the action brought by the whistleblower, or decline to do so. Even if the government declines to intervene, the whistleblower may proceed with the action alone. Whether or not the government intervenes in an action can have a direct effect on whether a D&O insurer must cover a company’s liability under the FCA. Courts are split as to whether coverage exclusions for lawsuits brought by a federal or state governmental entity and exclusions apply to a qui tam lawsuit in which the government has declined to intervene.
Telephone Consumer Protection Act claims:
With growing frequency in recent years, plaintiff’s attorneys have invoked an old statute to allege breaches by companies of consumer privacy. The Telephone Consumer Protection Act (TCPA) was passed in 1991 to provide consumer protection against unsolicited telemarketing. The Act includes a private right of action under which a plaintiff can recover up to $500 per violation. Like the FCA, plaintiffs can be awarded treble damages for willful or knowing violations of the TCPA. The volume of litigation under the TCPA (the Act includes a private right of action under which a plaintiff can recover up to $500 per violation and treble damages for willful or knowing violations) has inevitably led to insurance coverage questions. In the past, TCPA defendants sought coverage for the claims under their commercial general liability (CGL) policies. As it has become common to exclude TCPA-related claims from CGL policies, claims alleging invasion of privacy violations have become increasingly prevalent in the D&O claims environment. Carriers should consider their risks and, where appropriate, carefully craft TCPA exclusions.
In the past couple of years, a tremendous amount of change has occurred with respect to the exposure commonly covered by EPLI and D&O policies. In light of these trends, and the escalating potential for liability facing private and nonprofit companies, it may be necessary for carriers to reconsider common EPLI and D&O policy language and limits. Carriers are also wise, to the extent possible, to educate management liability policyholders on the mitigation and elimination of these new exposures through practical and common-sense governance practices.
Noteworthy links from the past two weeks
- The WSJ reported that financial advisors are worried that the new Department of Labor fiduciary rule relating to retirement savings will have a negative effect on the industry and investors
[The Wall Street Journal]
- The SEC fined AIG broker-dealer units for allegedly steering investors to more expensive mutual funds [Law360]
- The Pennsylvania Insurance Commissioner held a public hearing on Long-Term Care insurance rate increases on March 10, 2016
[Pennsylvania Government Agency, Philly.com]
- The National Association of Insurance Commissioners released a data security model law for public comment [Mondaq]
- LexisNexis is offering insurers big data analytics that let them know when their customers and prospects are facing a major life event [CBS News]
Property and Casualty
- Microcaptive parents and managers have been targeted for scrutiny by the IRS [Business Insurance]
- A National Association of Insurance Commissioners committee began laying the groundwork for proposing reforms for the National Flood Insurance Program [A.M. Best]
- Meanwhile, the House Financial Services Committee unanimously approved the Flood Insurance Market Parity and Modernization Act [Business Insurance]
- Florida and Tennessee made further moves related to unclaimed life insurance benefits [The Palm Beach Post, TN Department of Commerce & Insurance]
- The court-appointed trustee of Life Partners Holdings said the company perpetrated a "historic" fraud [Law360]
- The California Department of Insurance adopted robust network adequacy regulations [Dentons]
- The federal government announced that it will start rating health insurance plans by network size [The New York Times]
- Membership in unregulated "healthcare sharing ministries" which are exempted from the Affordable Care Act grew [The New York Times]
- Republican Senators issued a report critical of the Affordable Care Act CO-OP program [Law360, The Washington Post]
- Utah's Insurance Commissioner, Todd Kiser, offered a post-mortem on Utah's failed CO-OP [Utah Business]
- Chinese authorities cracked down on the purchase of overseas insurance policies as a way to move money out of the country
[The Wall Street Journal]