Executive Perspective: As Management Liability Risks Intensify, Underwriters Are Digging Deeper
The #MeToo movement may not be making daily headlines anymore, but its impact is still being felt acutely in the form of ongoing employment practices liability claims and legislation. Meanwhile, other bias and harassment claims and lawsuits over unfair business practices are keeping a sharp edge on the risks faced by businesses and directors and officers.
“Fiduciary liability has been heating up, with lots and lots of ERISA fee cases over the last several years,” said Rhonda Prussack, Senior Vice President and Head of Fiduciary and Employment Practices Liability at Berkshire Hathaway Specialty Insurance.
“On the EPLI side, of course, everybody’s familiar with #MeToo. So these are very interesting times. These cases really aren’t going away anytime soon.”
As product leader for both fiduciary liability and employment practices liability, Prussack has a broad perspective on the legal and regulatory trends and challenges of most concern for underwriters as well as insureds.
Prussack spoke with Risk & Insurance® about the liability exposures she’s watching closely right now, as well as what underwriters and the courts have their sights set on.
Risk & Insurance: What does the EPLI landscape look like in the post-#MeToo legal environment?
The #MeToo movement doesn’t appear to be receding into the background, and it has triggered the passage and the proposal of new laws, federally and state by state — even at the local level. For instance, the state of New York just recently passed sweeping new laws, a number of which have already taken effect.
What #MeToo is also triggering are claims related to equal pay for equal work or equal pay for equivalent work. And we’re seeing #MeToo really sweeping the globe. So whereas before, as underwriters, we would heavily discount EPLI exposures overseas, we can’t reflexively do that anymore. While still not nearly as significant as they are in the U.S., there’s some pretty meaningful litigation going on right now. Take for example in the UK, which has some major litigation related to equal pay issues.
R&I: What’s making these cases more challenging from an underwriting perspective?
The #MeToo cases are getting harder and more expensive to defend and to settle, in part because litigants better understand their rights. And in many places, statutes of limitations to file harassment suits have been extended, so aggrieved parties have a lot more time to bring these suits.
For instance, in New York, the timeframe to report sexual harassment is expanding from one year to three years. We’re seeing similar changes around the country.
Our underwriting of the #MeToo exposure has changed as well. It’s no longer enough just to determine how many employees the company has, how many are in California, how many are part-time versus full-time.
We’re also now underwriting to more subtle things, like the culture of the organization. Is there a cult of personality within the organization where the CEO has a certain brash or aggressive character or promotes a “bro” culture? We’re looking at the makeup, the composition of the Board of Directors. Is it all male, or is there perhaps a single female? And what role does the one female director have?
We’re seeing women landing roles on Boards of Directors and as high-level executives. But they’re not necessarily overseeing business operations or sales, and instead have roles like “Head of Human Resources” or “General Counsel.” These are some of the new issues we underwrite to now, and that’s a big change.
R&I: What else have underwriters been looking more closely at?
Obviously we look at claims history. It’s not uncommon, especially in a large company, to see individual claims for discrimination, for harassment, and so forth. But traditionally it’s been common for underwriters to not give too much weight to individual claims if nothing was paid, or if the claims didn’t pierce the retention.
Now we’re looking more closely at those small claims. We’re trying to identify patterns. Are the claims coming out of one particular factory or one location of our insured? Are there a lot more of one type of claim, be it sexual-harassment claims or age-discrimination claims or other types? So we’re looking for patterns in litigation, even if the suits ended in relatively small settlements that fell below the retention.
R&I: You mentioned these cases are getting more expensive. How worrisome is that trend?
What we are seeing now are some plaintiff’s lawyers who advertise heavily and are making big names for themselves. They’re tough and aggressive and have had some well-publicized, large settlements. Should they get involved in any of these claims, settlement negotiations will likely be more protracted, difficult, and costly. It makes having a highly competent and well-regarded claims team like BHSI’s all that more important.
R&I: What else concerns you from an EPLI perspective?
With all the attention that #MeToo is getting, we shouldn’t forget — and underwriters can’t forget — that other types of claims are still out there. Race, age, pregnancy, religion, and national-origin claims are being filed at a record clip. It’s been widely reported that there’s been a substantial uptick in racial and religious bias incidents outside of the workplace; it is not a stretch to worry that such incidents will occur within the workplace as well.
Those are difficult issues to underwrite to. I see companies try to do everything right – the right training, maintaining employee handbooks, and fostering a respectful work environment – and still have an employee or manager who behaves badly.
R&I: You mentioned that ERISA fee case are heating up in fiduciary liability space. What’s driving that?
We first started seeing these cases in the mid-2000s. There was one firm in the Midwest that started alleging that undisclosed, excessive and unnecessary recordkeeping and investment management fees were being charged to 401(k) plans and to their participants. They filed about a dozen suits, all against very large, household name companies with very large plans.
That firm had quite a lot of success. There were some significant settlements, with significant fees awarded, and that spawned a lot more litigation. At least 15 other firms have now joined the fray, and they’re no longer looking at fees just in billion-dollar-plus plans. We’re now seeing smaller plans, smaller companies being targeted.
R&I: What other wrinkles do you see in these cases?
There are some subsets of fee-related cases being brought against financial institutions, with an additional component of self-dealing allegations because the plans are invested in the financial institutions’ proprietary funds. Not only do they allege excessive fees, they also allege that these companies inappropriately profited from investing in their own fund lineups.
Yet another subset of fee cases relates to 403(b) plans, which are similar to 401(k) plans, but for certain nonprofit organizations, 501(c)(3) organizations. Universities and not-for-profit hospital organizations have seen quite a few fee suits.
We’re seeing smaller plans being hit, we’re seeing financial institutions being hit with proprietary fund allegations, and we’re seeing not-for-profit organizations being hit — it’s keeping underwriters busy.
R&I: What else is coming down the pike that could impact plan fiduciary exposure?
There are some cases of concern on the Supreme Court’s docket. IBM v. Jander has the Supreme Court revisiting the issue of having a publicly traded company’s stock in its own plans.
In Thole v. U.S. Bank, it’s mostly a question of whether a plan participant has standing to sue for losses to a plan caused by a breach of fiduciary duty. … if the plan participant cannot demonstrate loss or imminent risk of loss to themselves.
A third case, Intel Corp. Investment Policy Committee et al v. Sulyma, is also of interest. Under ERISA, if a plaintiff had actual knowledge of a breach of fiduciary duty, there’s a three year statute of limitations from the earliest time they had such knowledge, to bring suit.
In this case, Intel was able to show that the plaintiff had information well before that three-year statute of limitations. But the plaintiff said he either hadn’t read or couldn’t recall reading the information. So it’s an intriguing question of determining when the plan participant had “actual knowledge” if the organization distributed all the information, and the plan participant chose not to read it or can’t remember having read it.
It’s unusual for the Supreme Court to hear so many ERISA cases, and they may yet add one or two more to their docket. All of the cases could have meaningful implications for plans and plan sponsors.
R&I: Are there any common denominators in terms of where companies are getting tripped up, and what can other companies do to reduce their exposure?
There certainly are lessons learned from all this litigation. The best defense is if plan fiduciaries can demonstrate that they have robust fiduciary processes in place. Because that’s what this really boils down to. The plaintiffs are arguing that there was a breakdown in the fiduciary process, that there was no process, or that the plan fiduciary didn’t understand their role or didn’t follow the processes they were supposed to.
There’s absolutely nothing in ERISA that says that plan fiduciaries have to secure the cheapest recordkeeping fees or have to find the highest-performing investments … or that fiduciaries are supposed to have a crystal ball and know how investments are going to perform.
But what they are supposed to do is be thoughtful in their decision-making. They should be looking at fees, and should periodically see if they can renegotiate fees, whether that’s with their existing service providers, or whether they need to go out to the market and do a request for proposal and see if they can find lower-cost fees and/or improved services.
They also need to be looking at investments in the plan regularly and see how they’re performing, and have some procedure in place to determine whether and when an investment should be placed on a watch list or replaced. It’s really all about being thoughtful and understanding fiduciary duties. Having robust procedures helps in the defense in the event of a claim.
Companies with plans of a certain size — these multi-billion dollar plans — are just going to be a target by virtue of their size. But should a claim come in, if you can demonstrate that you have these processes and followed them, then there’s a good chance that you can ultimately prevail in a litigation. &