The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

Every now and then, I run across a case that makes me stop and say, “What?” I had that experience recently when I read the September 21, 2011 opinion of Middle District of Tennessee Judge John T. Nixon in an insurance coverage dispute involving Cracker Barrel Old Country Store, Inc. In the opinion, which can be found here, Judge Nixon held, applying Tennessee law and based on the policy language involved, that an EEOC lawsuit brought following employees’ discrimination charges was not a “Claim” within the meaning of the EPL insurance policy at issue.

Background

Between December 1999 and March 2001, ten of the company’s employees filed charges alleging sexual or racial discrimination against the company with the Illinois Department of Human Rights and the EEOC. The company later provided notice of these charges to its EPL insurer. Thereafter, the EEOC brought suit against the company for multiple alleged violations of federal civil rights laws. The EEOC’s lawsuit arose from allegations of harassment and discrimination against former and current employees of the company, including the original ten charging parties. The company provided its EPL insurer with notice of claim relating to the EEOC lawsuit. The company later entered into a settlement decree with the EEOC, which designated $2 million to be placed in a settlement fund. The company incurred over $700,000 in defending the EEOC lawsuit.

The company sought coverage from its EPL insurer in connection with the EEOC lawsuit, seeking inter alia, reimbursement for its defense expenses. The carrier -- in reliance on the Policy’s definition of the term “claim” as “a civil administrative of arbitration proceeding commenced by service of a complaint or charge, which is brought by any past, present or prospective employee(s) of the ‘insured entity’ against any ‘insured’” – took the position that the policy did not cover the EEOC lawsuit. The company filed a declaratory judgment action and the parties filed cross-motions for summary judgment.

The September 21 Opinion

In his September 21 opinion, Judge Nixon granted the carrier’s summary judgment motion and denied that of the company. The carrier had argued that the EEOC lawsuit was not a “claim” within the meaning of the EPL policy because it was not brought by a past, present or prospective employee of the company. The company argued that the definition should be understood to mean that the proceeding must merely be commenced by a complaint or charge by an employee.

In ruling for the carrier, Judge Nixon found that the definition of “claim” in the carrier’s policy is
“not ambiguous” and that “the definition of a ‘claim’ has a clear meaning that a covered proceeding must be brought by an employee.” Even though the EEOC lawsuit followed from the employees filing of charges, the EEOC lawsuit “was not ‘commenced by the service of’ a charge, according to the plain meaning of that language, even though it may have arisen because of previous administrative charges.” The fact that “the EEOC charges on which the EEOC partially based its decision to bring a lawsuit were brought by Plaintiff’s employees is irrelevant.” Judge Nixon held that because “the EEOC lawsuit was not brought by an employee,” the lawsuit is “not a ‘claim’ under the Policies.” Accordingly, he ruled that the carrier did not have a duty to indemnify the company for the settlement amount or for the company’s costs of defense.

Discussion

I think most readers’ initial reaction to this ruling will be surprise (at a minimum). The general expectation would be that the possibility of an EEOC lawsuit is among the very reasons companies buy EPL insurance. Indeed, as Judge Nixon noted in his opinion, the plaintiffs in this case argued that the insurance companies position that an EEOC lawsuit is not a covered claim “flies in the face of common sense,” as the company had purchased the EPL insurance “to protect itself from exactly the type of liability that results from EEOC actions,” which is, the plaintiff contended the “very purpose” of the coverage.

But what may seem like a surprising outcome may be nothing more that a reflection of the unusual wording in this policy. In his opinion, Judge Nixon noted that he had reviewed the language of EPL policies involved in other cases and that he had “found no instances where the relevant definition restricted claims to those ‘brought by an employee.’”

Indeed, my own quick review of the EPL policies of several other carriers show that many policies do not, as Judge Nixon noted, limit who must bring an otherwise covered claim. Other policies specifically include actions brought by the EEOC within the definition of claim, while yet others include the EEOC within the definition of a “claimant” whose action represents a “claim” under the policy. Many policies also allow that a claim may be brought “by or on behalf of” an employee. Judge Nixon found that in the absence of these kinds of provisions in the policy here, he could not interpret the provision as if it included that type of language, and that he “cannot find ambiguity where none exists merely because plaintiffs did not bargain for coverage that is expected.”

If nothing else, this outcome underscores the critical importance of policy wording. Where coverage for something as basic to EPL insurance as an EEOC lawsuit depends on the presence or absence of crucial words, policyholders must take steps to protect themselves, and in particular policyholders must enlist in their acquisition of insurance knowledgeable and experienced insurance professionals capable of ensuring that the policy language is matched to the policyholders’ needs and expectations. And while you wouldn’t think it would be necessary, it looks as if one item that should be attended to with particular care is to make sure that the EPL policy’s terms encompass EEOC lawsuit within the scope of covered claims.

More than once, I have suggested that part of the obligation of those who counsel insurance buyers is to develop a sort of league table for carriers’ claims handling practices. The carriers’ awareness of the maintenance of league tables might possibly encourage the carriers -- in considering whether or not to assert a particular coverage position -- to consider not only whether or not a particular position is analytically justified, but also consider how it might look to the insurance marketplace if the carrier were to take that position. Insurance professionals that maintain a claims handling practices league table may find it highly relevant that the carrier in this case was willing to take the position it took in this case.

An October 2011 memo from the Lowenstein Sandler law firm discussing this case can be found here.

Thank You for Your Support: The D&O Diary has been nominated as among the candidates for the LexisNexis Top 25 Business Blogs of 2011. The actual selection of the Top 25 blogs will take place at a later date. Among the considerations that will go into the selection will be the comments posted on the LexisNexis Corporate & Securities Law Communities site about the nominee blogs . Each comment is counted as a vote toward the supported blog. To submit a comment, visitors need to log on to their free LexisNexis Communities account.  If you haven’t previously registered, you can do so for free by following this link. The comment box is at the very bottom of the blog nomination page. The comment period for nominations ends on October 25, 2011. 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Cases alleging violations of wage and hour laws have been a growing source of litigation activity in recent years. These cases present a variety of allegations, such as unpaid overtime, employee misclassification, and failure to pay minimum wage. A March 21, 2011 NERA Economic Consulting publication entitled “Recent Trends in Wage and Hour Settlements” takes a look at evolving settlement patterns in these cases. The report, which can be found here, contains a number of interesting observations and underscores the litigation risk that these cases present. The report’s findings have a number of important Employment Practices Liability implications, as discussed below.

The report examines 187 wage and hour case settlements reported between 2007 and 2010. The report notes in a footnote that the settlement data, derived from a number of sources, while inclusive of a large number of settlements, “is not likely to be comprehensive.” In addition, some potentially significant settlements were excluded due to incomplete information. Moreover, the settlement information regarding 48 of the 187 cases studied is confidential. For that reason, many of the observations in the study may be more a reflection of the data available that of the overall trends. Notwithstanding the possible data constraints, the report reflects a number of interesting observations.

Over the entire four year period of the study, the average settlement per case was $12.8 million and the median settlement was $4.3 million. However, these summary statistics “mask a large range of settlement values.” About 25% of all settlements were under $1 million, while about 20% settled for $20 million or more.

In addition, the report reflects a “sharp decrease “in both the average and median settlements in 2009 and 2010 relative to 2007 and 2008. This apparent difference may be a reflection of the data available. For example, in the first two years of the period there were very few reported settlements under $1 million, while in the last two years there was an increased proportion of these smaller settlements. The low number of these smaller settlements in the first two years “may be a result of data limitations.” The pattern in the data could be explained “if lower-value settlements were systematically less publicized in earlier years’”

Of course, the relative absence of lower settlements in the two earlier years may also reflect “differences in the underlying characteristics” of the cases during that period. The study does reflect that the nature of the cases shifted in the second two years of the study period. There were more overtime and off-the-clock allegations in the second two years and relatively fewer misclassification cases in those years than in 2007 and 2008. The report notes that “cases with overtime allegations tend to settle for lower amounts,” when controlling for other factors.

Two specific factors seem most determinative of settlement size, the number of class members participating and the duration of the class period. The number of plaintiffs involved in the cases varied widely, with about 80 cases involving fewer that 1,000 plaintiffs while six cases had more than 100,000 plaintiffs. The average per-plaintiff settlement amount was $5,700 and the median amount was $3,500. The average settlement amount per year of the class period was $1.2 million. The average settlement amount per plaintiff-year was about $1,000. Consistent with the overall settlement trends, the average per plaintiff settlement and the average per year settlement amount declined in the second two years of the four year study period.  

Discussion

The NERA study provides a detailed if not entirely comprehensive overview of the severity risks associated with these kinds of cases. It is apparent that the settlements examined in the NERA study were largely class or at least mass actions involving large numbers of plaintiffs acting collectively. Nevertheless the per plaintiff settlement data may be useful in assessing wage and hour cases that are not presented as collective actions.

The study certainly does underscore the seriousness that wage and hour collective actions may represent to employers. The settlement amounts obviously do not include the costs that the various defendant companies incurred in defending these actions. But taking the additional if not precisely known costs of defense in account, it is clear that these kinds of cases represent a serious exposure for the defendant companies.

The typical Employment Practices Liability (EPL) insurance policy contains exclusions for wage and hour cases. The usual carrier explanation for these exclusions is something along the lines that insurance for this liability would create a moral hazard, as it might otherwise encourage employers to withhold pay owed to employees with the idea of shifting the compensation expense to the insurer. A June 2010 National Underwriter article discussing EPL coverage issues involving these types of claims can be found here.

But while the liability for these cases is typically excluded, EPL policies increasingly include some defense cost protection for these kinds of claims, often on a sublimited basis. The NERA report underscores the seriousness of these kinds of claims, which in turn highlights the importance for the defendant companies of mounting an effective defense. For that reason, the inclusion of the defense cost coverage for wage and hour claims, even if sublimited and even if subject to a self insured retention, could represent a valuable coverage extension for insured companies.

It is important to note that not all EPL policies contain this coverage extension, and that some carriers will provide this extension only upon request. This issue represents one more reason why it is critically important for insurance buyers to retain knowledgeable and experienced brokers in their insurance purchases.  

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Every now and then, I read a court opinion on a coverage issue, and though I can understand how the court reached its decision, I still find the outcome surprising and troubling. A January 19, 2010 per curiam opinion from the Connecticut Supreme Court (here) involving a coverage dispute under an Employment Practices Liability (EPL) policy presents a recent example of this kind of decision. The court’s analysis is internally logical, but I suspect the outcome would surprise most EPL policyholders and even many insurance practitioners. The decision may have important implications for the placement and administration of EPL insurance.

Background and the Connecticut Supreme Court’s Decision

National Waste Associates was purchased an EPL policy for the period February 15, 2007 to February 15, 2009. On May 12, 2007, a former employee brought a wrongful discharge action against National Waste. National Waste submitted the claim to its EPL carrier. The carrier refused to provide a defense or to indemnify the firm. National Waste filed a lawsuit seeking a judicial declaration of coverage.

The carrier took the position that coverage was precluded by the EPL policy’s prior or pending action exclusion. The exclusion provides that the policy does not provide coverage for any claim "based upon, arising out of, [etc.] … any fact, circumstance, situation, transaction, event or wrongful act underlying or alleged in any prior or pending civil, criminal or administrative or regulatory proceeding."

The carrier contended that the prior or pending action exclusion had been triggered by the proceedings the employee had brought in 2005 to obtain unemployment benefits. As later recited by the Connecticut Supreme Court in its review of the case, the former employee had claimed, both in pursuing unemployment benefits and in the later wrongful discharge action, that she had been wrongfully discharged after resisting National Waste’s alleged invasion of her privacy.

The trial court agreed with the carrier that the unemployment benefit proceedings clearly constituted prior "administrative proceedings" within the meaning of the policy and granted the carrier’s motion for summary judgment. National Waste appealed.

In its January 19 per curiam opinion, the Connecticut Supreme Court affirmed the trial court, adopting the trial court’s reasoning.

Discussion

The court’s reasoning is straightforward and internally logical, particularly if the unemployment benefits proceeding is, as seems to be the case, fairly characterized as an "administrative proceeding" within the meaning of the policy.

But as noted in a January 21, 2010 memorandum about the ruling from the Murtha Cullina law firm entitled "Employment Practices Liability Insurance: Surprise Coverage Interpretation" (here), the outcome "no doubt shocked" the employer. The law firm memo identifies the sharp distinction between, for example the circumstances that might be involved had the former employee raised an EEOC charge of discrimination in a prior period, and the circumstances actually presented, with the former employee’s prior filing of proceedings for unemployment benefits.

As the law firm memo observes:

Unemployment compensation claims are not only very common, but they are typically handled very differently by employers. (For example, employers rarely if ever engage legal counsel to attend unemployment compensation hearings.) The standard for denying unemployment benefits is so high that employers often do not even contest the claims. Even if they do contest, most former employees who lose their jobs for any reason collect benefits. If fact, a claim for unemployment benefits is not even really a claim "against" the employer – it is a claim for state benefits that are funded by a tax on all employers. Moreover no EPLI policy provides coverage for unemployment claims.

In light of all of these practical circumstances, it would come as an unexpected and inexplicable revelation to most employers to learn that an unemployment benefits claims in one policy period could preclude coverage for an employment practices claim in another period. The implication is that the employer has to notify their EPL carrier of the unemployment benefits claim in order to preserve EPL coverage if the former employed later files an employment practices claim.

Most employers would be completely astonished to learn that their EPL carrier expects to be provided with notice of unemployment benefits proceedings. Indeed the revelation of this expectation is so unanticipated that it has the feel of a trap for the unwary.

The message for policyholders and their advisors hoping to avoid the trap seems to be that companies should provide carriers with notice of every single instance where an employee or former employee seeks unemployment benefits. However, given the frequency of these types of proceedings, I suspect strongly that if policyholders gave notice of every instance where an employee or former employee is seeking unemployment benefits, the carriers would quickly find themselves drowning in paper. I doubt the carriers would really want what would ensue.

And regardless of what the carriers may want or even expect, it is a serious question whether, as a practical matter, it is fair to penalize companies for failing to take actions that the most companies would have no idea are required of them.

This may be one of those instances where the professional liability industry needs to come together to craft a solution to prevent an outcome that no one could possibly really want. (I have in mind the recent sequence of events where the D&O industry, in order to avert the consequences of an unexpected coverage decision, quickly took steps to try to eliminate the possibility of a carrier arguing that a Section 11 settlement did not represent covered "Loss.)

Maybe I am being optimistic, but perhaps policyholder representative and the carriers can find a solution that will ensure that EPL insurers will not take the position that an action for employment benefits is not a "claim" or an "administrative action" within the meaning of the policy.

I recognize that some readers may take exception, perhaps strong exception, to my analysis. I invite readers to submit their views using the comment feature on this blog.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

According to its January 6, 2010 press release (here), the U.S. Equal Employment Commission announced that near record numbers of workplace discrimination charges were filed with the agency in the fiscal year ending September 30, 2009. As reflected in the agency’s statistical presentation, there were 93,277 charges filed in FY 2009, which is the second-highest number the agency has recorded.

The highest annual number filings occurred in FY 2008, when 95,402 charges were filed. The FY 2009 filing levels were about 2.2% below the FY 2008 levels, but still well above any prior year. After 2008, the next closest year in terms of filing activity was FY 2002 (during the prior economic downturn), when there were 84,442 filings.

Consistent with recent historical trends, the most frequently alleged types of discrimination are race (36%), retaliation (36%) and sex-based discrimination. (A single charge filing may allege multiple types of discrimination.) Allegations based on age-based disability (up about 10%), religion (up 3%) and/or national origin (up 5%) hit record highs. Allegations of age-based discrimination reached the second-highest level ever.

The EEOC also reported that through its enforcement, mediation and litigation programs, the agency "recovered more than $376 million in monetary relief for thousands of discrimination victims."

The EEOC’s press release states that the "near-historic level of total discrimination charge filings [in FY 2009] may be due to multiple factors," including "greater accessibility of the EEOC to the public, economic conditions, increased diversity and demographic shifts in the labor force, [and] employees’ greater awareness of their rights under law."

The sustained record level of EEOC charge filings during the fiscal years 2008 and 2009 should be a matter of concern for every employer. These figures not only underscore the need for every employer to adopt and implement best employment practices, they also highlight the need for every employer to procure employment practices insurance as a critical and indispensible part of their insurance program.

The EEOC’s suggestion that the heightened level of filings of individual charges is due in part to the economic conditions and to employees’ greater awareness of their rights also suggests that, as the current economic downturn drags on, the elevated filing levels could continue for some time to come.

A January 6, 2010 National Law Journal article about the EEOC’s statistical release can be found here (registration required).

Another Securities Class Action Trial: We are all awaiting the outcome of the long running Vivendi trial, which is just wrapping up this week in the Southern District of New York. But while all eyes were on the Vivendi trial, few of us noted that another securities class action trial was going on in the Central District of California, in the American Mutual Funds Fee Litigation.

Kudos to Adam Savett of the Securities Litigation Watch blog, who first brought this development to my attention in his blog post here.

The case apparently went forward as a bench trial this past summer before Judge Gary Feess, whose December 28, 2009 post-trial Findings of Fact and Conclusions of Law can be found here. Essentially, the plaintiffs alleged that the defendants had violated the federal securities laws by charging excessive advisory and distribution fees. Judge Feess concluded that the plaintiffs had not sustained their burden of proving that the fees were so "disproportionately large" that they bore "no reasonable relationship" to the services, as the plaintiffs were required to show in order to prevail.

As the Securities Litigation Watch details here, there have now been 22 post-1996 securities class action lawsuit cases that have gone to trial (not counting Vivendi), eight of which involved post-PSLRA conduct and that have actually gone to verdict. Taking into account post-verdict motions and appeals, the current scoreboard on these post-PSLRA lawsuit verdicts (according to the SLW’s data) now reads: Defendants 5, Plaintiffs 3. (Soon to be updated, I suppose, after the Vivendi jury reaches a verdict.)

Andrew Longstreth’s January 6, 2009 American Lawyer article about the American Mutual Funds Fee Litigation verdict can be found here.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link