REDUCING RISK. RAISING EXPECTATIONS. 1 State Office of Risk Management Employment Practices Trends Arthur J. Gallagher & Co. Phil Norton President Professional Liability Division July 26, 2011Austin, Texas

REDUCING RISK. RAISING EXPECTATIONS. 2 Factors Influencing EPL Losses 1. The Older Workers Benefit Protection Act of 1990 and The Age of Discrimination in Employment Act of The Civil Rights Act of The American with Disabilities Act of 1990 (effective 1992) 4.The Family and Medical Leave Act (1993) 5.The U.S. Supreme Court decision in Harris versus Forklift Systems, Inc. (November 3, 1993) 6.Class Action EPL Claims Impact of Walmart/Dukes case

REDUCING RISK. RAISING EXPECTATIONS. 3 EPL Perils to consider Retaliation (including whistleblower) Wrongful Termination (actual and constructive) Breach of Employment Contract Discrimination Harassment (sexual and workplace, including bullying) Failure to Employ/Promote/Educate Wrongful Discipline or Wrongful Demotion Failure to Grant Tenure Negligent Evaluation Invasion of Privacy and False Imprisonment Employment Related Misrepresentation Defamation or Employment Related Libel/Slander Wrongful Infliction of Emotional Distress

REDUCING RISK. RAISING EXPECTATIONS. 4 The Gallagher Database* on EPL Claims Research on Public Information - not client data Focus on Large Losses - $1MM or more All Losses are Post-1991 [Civil Rights Act] Mixture of Settlements and Verdicts Jurisdiction also mixed: ½ State Courts; ½ Federal *Note: Donation to Advisen

REDUCING RISK. RAISING EXPECTATIONS. 5 Large EPL Claims By Industry

REDUCING RISK. RAISING EXPECTATIONS. 6 Large EPL Claims by Type of Claim

REDUCING RISK. RAISING EXPECTATIONS. 7 Top 10 States for Large EPL Claims Note: numbers are percentages

REDUCING RISK. RAISING EXPECTATIONS. 8 Punitive Damages & EPL Claims About one-third of top $2.5 BL in large losses are due to punitive damages Of largest 150 claims, about half have punitive damages awarded Average percentage of full award that is punitive is about 35% for all large losses, but closer to 70%, if a punitive award is present

REDUCING RISK. RAISING EXPECTATIONS. 9 Statutes & Law Supporting EPL Claims Title VII Age Discrimination in Employment Act Americans with Disabilities Act Pregnancy Discrimination Act Equal Pay Act Family and Medical Leave Act Title IX Federal Fair Labor Standards Act State Fair Employment Practice Statutes Whistleblower Laws Municipal Statutes and Regulations Breach of Contract Wrongful Termination Negligent and Intentional Infliction of Emotional Distress Defamation Invasion of Privacy Tortious Interference with Contract Harassment Assault and Battery Negligent Hiring/Supervision Fraud and Misrepresentation StatutoryCommon Law

REDUCING RISK. RAISING EXPECTATIONS. 10 Classic EPL Cases of Significance Texaco State Farm Publix Home Depot Triton Energy Walmart Dennys Miller Brewing Proctor & Gamble Baker & McKenzie Tishman Construction Ashland Oil

REDUCING RISK. RAISING EXPECTATIONS. 11 Trends in EPL Insurance The EPL exposure, including potential for catastrophic loss, has increased significantly since 1991 Pricing started high (1992/1993) then declined (1997), rose again ( ) and then declined a few years before stabilizing into 2011 Meanwhile, EPL coverage has been greatly improved: – sometimes packaged with Loss Control consulting – punitive damages covered – no downsizing exclusion – bilateral discovery offered – no intentional acts exclusion – simpler reporting requirements often available – flexible selection of defense firms may be possible – third-party claim coverage

REDUCING RISK. RAISING EXPECTATIONS. 12 The EPL Marketplace Today Cycle of Capacity starting to turn up – 1992 to 1997, 1998 to 2003, 2004 to 2009, Note: Loss Ratios historically > 100% Carriers took action in 2003 with: – Increased deductibles – Premium adjustments – Coverage fine-tuning Risk Management, Insurance and Loss Control are more important than ever!

REDUCING RISK. RAISING EXPECTATIONS. 13 Strategic Planning Gallagher Tools: Loss Benchmarking Limits Analysis Loss Analysis Exposure Modeling Gap Analysis Terms / Conditions Program Updates Contract Language Customization State of the Market Design Manuscript Wording Employment Practices Liability PROGRAM DESIGN POLICY ANALYSIS LOSS QUANTIFICATION LOSS MITIGATION Claim analysis for internal trends Claim reporting procedures to carriers Use of outside law firms EEO- 1 review Human Resources policies and procedures Employee handbook Cash on Balance Sheet Inventories Acquisition Strategy RISK IDENTIFICATION

REDUCING RISK. RAISING EXPECTATIONS. 14 Loss Quantification - EPL Limits Analysis Peer Analysis: I ndependent survey results. Loss Modeling: Proprietary model using EEO1 data, etc. Historical Review: Considers EPL claims settled. Suggested: A weighted average to estimate exposure.

REDUCING RISK. RAISING EXPECTATIONS. 15 Sample EPL Exposure Models

REDUCING RISK. RAISING EXPECTATIONS. 16 The EPL Insurance Policy Who is covered? – Directors & Officers – All Full-time Employees – Temporary Employees and Volunteers – Independent Contractors – The Corporate Entity and Subsidiaries – Students (generally in a limited capacity)

REDUCING RISK. RAISING EXPECTATIONS. 17 Who can bring covered claims? Employees Students Applicants for hire EEOC State Agencies Directors Other individuals/entities acting on behalf

REDUCING RISK. RAISING EXPECTATIONS. 18 Potential Exclusions Strikes, Lockouts Downsizing Willful or Malicious Intent Willful failure to comply with law M/A activity Bankruptcy Class Actions Deliberate Fraud Prior Notice W. A. R. N. Benefits Due Employment Contracts Work Comp Claims OSHA Securities Violations Wage & Hour Claims

REDUCING RISK. RAISING EXPECTATIONS. 19 Some Coverages to Request Punitive Damages Back Pay Front Pay Pre/Post Judgment Interest Nonmonetary or Injunctive Relief No hammer on D&O; no more than 20% on EPL Ensure Unemployment Filings dont trigger exclusion thru P&P Amend Subrogation Clause Add minimal coverage for IP, Publishing, Wage & Hour State Amendatory inconsistent Extradition Coverage as applicable

REDUCING RISK. RAISING EXPECTATIONS. 20 Coverage Triggers Written Demand for Monetary Damages Civil Proceeding Arbitration Proceeding Administrative Proceeding Request for Toll of Statute of Limitations

REDUCING RISK. RAISING EXPECTATIONS. 21 Defense and Settlement Considerations Duty to Defend Panel Counsel Claims reporting threshold Right to Settle (especially Hammer Clause) Reporting – When and How

REDUCING RISK. RAISING EXPECTATIONS. 22 Rating EPL - The Exposure Base Number of Employees – U.S. versus Foreign – Full-time versus Part-time – Leased Employees – Students, if applicable – By state (especially CA, TX, and MI)

REDUCING RISK. RAISING EXPECTATIONS. 23 Other EPL Underwriting Factors The nature of the operations EEO-1 report Turnover Percentage of highly paid employees The quality of employment manuals and handbooks; the stated positions on the key practices and procedures Financial Condition M&A Activity Policy Wording Considerations Approach to Risk Management Litigation/Loss History - Claims experience is essential!