Tight budgets are nothing new for public entities, but now several economic and litigation trends make managing finances—and risk—even harder.
Revenue streams are stressed by minimal gains from property and sales taxes and constraints of conservative state and local fiscal policies. Decreased budgets mean schools and municipalities have to decide where to spend their dollars, leading to potential gaps and vulnerabilities. Buy new textbooks, provide more training, or purchase additional insurance coverage?
In this environment of budget limitations, trends in employment practices liability claims are adding to the challenges.
Regulations like the American with Disabilities Act (ADA) and Family and Medical Leave Act (FMLA) provide important protections for employees and help create fairness and equality in the workplace. If an employer is not compliant with these and other discrimination regulations, an employee can file a charge with the Equal Employment Opportunity Commission (EEOC). For the second year in a row, the number of charges have increased—in 2016, the EEOC brought 91,503 workplace discrimination charges against private, state and local government and federal workplaces, fining them a total of $482 million.
“Age discrimination, harassment, wrongful termination, and failure to promote are all sources of employment practices liability (EPL) claims,” said Susan Kostro, Chief Underwriting Officer, Public Entities Practice, Liberty Mutual Insurance. “These regulations help to protect employees and maintain a safe workplace, but addressing the claims can have a substantial financial impact on an organization.”
Even if a school or municipality has processes to help ensure it maintains compliance, situations with employees alleging discrimination will likely arise, some of which may turn into employment practice liability lawsuits and costly claims.
Schools and municipalities have some protection from these claims through sovereign immunity, which traditionally limits the situations and circumstances under which a public entity can be held liable. However, the circumstances in which immunity may apply appear to be narrowing in some states, increasing potential exposure for public entities.
The cost of defending a claim is also increasing.
Tort caps limiting the amount of damages that can be awarded to claimants have risen. According to an 2014 Advisen report, defense costs alone for EPL claims can reach as high as $300,000.
For a school or municipality, whose main focus is to serve its community, claims of harassment or discrimination can do much more reputational harm if those allegations become public.
“A local government needs to fight hard to get back in constituents’ good graces and regain trust,” Kostro said.
These factors can add to liability and make it more difficult to mitigate risks within existing financial constraints. It’s imperative for public entities to identify and resolve problems early before they evolve into claims.
Many schools and municipalities are self-insured, sometimes participating in risk pools. But these entities may miss out on the risk control services that come with coverage from an insurer with specialized expertise in the industry. For example, Liberty Mutual offers customers a variety of training and resources in areas such as school violence, emergency planning, and school bus and classroom safety.
The company’s HR Risk Management Service program, offered through a third-party partner, includes a toll-free helpline and website to help public entity risk managers be proactive and resolve potential employment issues before they turn into claims.
“Risk managers can learn, for example, how to put together a thorough employee handbook, which can help to clarify hiring and employment practices and establish a reference should claims arise,” Kostro said.
For a more consultative, one-on-one experience, clients can use the 24/7 helpline to speak to legal professionals and get help in navigating through some of the issues they may face.
“Through the helpline, risk managers have free and unlimited access to legal professionals each with expertise in this field, in his or her particular state,” Kostro said. “This is critical, because standards can vary state by state.”
The helpline is anonymous and private, which encourages a candid exchange of information.
“It’s like having an attorney on retainer without having to pay the retention,” Kostro said
This new service can help extend available resources, especially in those schools and governments where risk management and human resources are shared responsibilities.
A risk manager may call the helpline if, for example, a teacher reports feeling harassed. Or if a government employee threatens to sue for wrongful termination after being laid off.
“Before that complaint snowballs into a claim, the risk professional can seek advice to determine how best to work with the employee to resolve the issue, and better evaluate liability and next steps,” Kostro said.
“Access to this advice means that public entity risk managers don’t have to make the choice between hiring a lawyer and buying new school supplies.”
Offering the new HR Risk Management Service website and helpline is just one example of how Liberty Mutual works with clients to address their key exposures.
“We’re not just providing coverage; we’re here to help our clients manage their most challenging issues and lower the total cost of risk,” Kostro said.
Buying an EPL policy provides access to the preventive resources and expert guidance so risk managers can mitigate their exposures without any added cost.
“Insurance protection is just one piece of the risk management puzzle that ultimately helps public entities maintain professional and safe work environments so that they can continue to serve their communities,” Kostro said.
Choosing the right insurer that provides a holistic risk management solution can ultimately enable schools and governments to better manage their resources and avoid potentially unnecessary claim costs.
To learn more about Liberty Mutual’s coverage and services for public entities, visit https://business.libertymutualgroup.com/business-insurance/industries/public-entity-insurance-coverage.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.
Boards of directors could face a fresh wave of directors and officers (D&O) claims following the introduction of tough new cybersecurity rules for financial institutions by The New York State Department of Financial Services (DFS).
Prompted by recent high profile cyber attacks on JPMorgan Chase, Sony, Target, and others, the state regulations are the first of their kind and went into effect on March 1.
The new rules require banks, insurers and other financial institutions to establish an enterprise-wide cybersecurity program and adopt a written policy that must be reviewed by the board and approved by a senior officer annually.
The regulation also requires the more than 3,000 financial services firms operating in the state to appoint a chief information security officer to oversee the program, to report possible breaches within 72 hours, and to ensure that third-party vendors meet the new standards.
Companies will have until September 1 to comply with most of the new requirements, and beginning February 15, 2018, they will have to submit an annual certification of compliance.
The responsibility for cybersecurity will now fall squarely on the board and senior management actively overseeing the entity’s overall program. Some experts fear that the D&O insurance market is far from prepared to absorb this risk.
“The new rules could raise compliance risks for financial institutions and, in turn, premiums and loss potential for D&O insurance underwriters,” warned Fitch Ratings in a statement. “If management and directors of financial institutions that experience future cyber incidents are subsequently found to be noncompliant with the New York regulations, then they will be more exposed to litigation that would be covered under professional liability policies.”
Judy Selby, managing director in BDO Consulting’s technology advisory services practice, said that while many directors and officers rely on a CISO to deal with cybersecurity, under the new rules the buck stops with the board.
“The common refrain I hear from directors and officers is ‘we have a great IT guy or CIO,’ and while it’s important to have them in place, as the board, they are ultimately responsible for cybersecurity oversight,” she said.
William Kelly, senior vice president, underwriting at Argo Pro, said that unknown cyber threats, untested policy language and developing case laws would all make it more difficult for the D&O market to respond accurately to any such new claims.
“Insurers will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure,” he said.
Going forward, said Larry Hamilton, partner at Mayer Brown, D&O underwriters also need to scrutinize a company’s compliance with the regulations.
“To the extent that this risk was not adequately taken into account in the first place in the underwriting of in-force D&O policies, there could be unanticipated additional exposure for the D&O insurers,” he said.
Michelle Lopilato, Hub International’s director of cyber and technology solutions, added that some carriers may offer more coverage, while others may pull back.
“How the markets react will evolve as we see how involved the department becomes in investigating and fining financial institutions for noncompliance and its result on the balance sheet and dividends,” she said.
Christopher Keegan, senior managing director at Beecher Carlson, said that by setting a benchmark, the new rules would make it easier for claimants to make a case that the company had been negligent.
“If stock prices drop, then this makes it easier for class action lawyers to make their cases in D&O situations,” he said. “As a result, D&O carriers may see an uptick in cases against their insureds and an easier path for plaintiffs to show that the company did not meet its duty of care.”
One area that regulators and plaintiffs might seize upon is the certification compliance requirement, according to Rob Yellen, executive vice president, D&O and fiduciary liability product leader, FINEX at Willis Towers Watson.
“A mere inaccuracy in a certification could result in criminal enforcement, in which case it would then become a boardroom issue,” he said.
A big grey area, however, said Shiraz Saeed, national practice leader for cyber risk at Starr Companies, is determining if a violation is a cyber or management liability issue in the first place.
“The complication arises when a company only has D&O coverage, but it doesn’t have a cyber policy and then they have to try and push all the claims down the D&O route, irrespective of their nature,” he said.
“Insurers, on their part, will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure.” — William Kelly, senior vice president, underwriting, Argo Pro
Jim McCue, managing director at Aon’s financial services group, said many small and mid-size businesses may struggle to comply with the new rules in time.
“It’s going to be a steep learning curve and a lot of work in terms of preparedness and the implementation of a highly detailed cyber security program, risk assessment and response plan, all by September 2017,” he said.
The new regulation also has the potential to impact third parties including accounting, law, IT and even maintenance and repair firms who have access to a company’s information systems and personal data, said Keegan.
“That can include everyone from IT vendors to the people who maintain the building’s air conditioning,” he said.
Others have followed New York’s lead, with similar regulations being considered across federal, state and non-governmental regulators.
The National Association of Insurance Commissioners’ Cyber-security Taskforce has proposed an insurance data security model law that establishes exclusive standards for data security and investigation, and notification of a breach of data security for insurance providers.
Once enacted, each state would be free to adopt the new law, however, “our main concern is if regulators in different states start to adopt different standards from each other,” said Alex Hageli, director, personal lines policy at the Property Casualty Insurers Association of America.
“It would only serve to make compliance harder, increase the cost of burden on companies, and at the end of the day it doesn’t really help anybody.”
Richard Morris, partner at law firm Herrick, Feinstein LLP, said companies need to review their current cybersecurity program with their chief technology officer or IT provider.
“Companies should assess whether their current technology budget is adequate and consider what investments will be required in 2017 to keep up with regulatory and market expectations,” he said. “They should also review and assess the adequacy of insurance policies with respect to coverages, deductibles and other limitations.”
Adam Hamm, former NAIC chair and MD of Protiviti’s risk and compliance practice, added: “With New York’s new cyber regulation, this is a sea change from where we were a couple of years ago and it’s soon going to become the new norm for regulating cyber security.” &