Employee Litigation

Some Surprising States Lead in Employment Litigation Lawsuits

An analysis of EEOC data pinpoints states with risks of employee lawsuits higher than the national average.
By: | November 18, 2015 • 6 min read

Small and mid-sized businesses continue to get hit with employment practices lawsuits – with hot spots scattered across the country, according to the “2015 Hiscox Guide to Employee Lawsuits” report released last month by the Bermuda-based specialist insurer.

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Companies based in New Mexico face the greatest risk nationwide, with a 66 percent higher chance of facing an employee charge than the national average, according to Hiscox’s analysis of data on employment charge activity from the U.S. Equal Employment Opportunity Commission and its state counterparts.

Other states and jurisdictions where employers are at a high risk of employee charges include Washington, D.C. (65 percent above the national average), Nevada (47 percent), Alabama (41 percent), California (40 percent), Mississippi (39 percent), Delaware (35 percent), Illinois (34 percent), Arkansas (22 percent) and Tennessee (20 percent).

Natalie Douglass, senior managing director, management liability practice at Arthur J. Gallagher & Co. in St. Louis, said the study results were “interesting and a little bit surprising.”

“When we think about employment risk, we tend to focus on severity of litigation to come up with hot spots like California or Florida. It’s a little surprising to see states like New Mexico or Alabama when we focus on charge frequency.” — Natalie Douglass, senior managing director, management liability practice, Arthur J. Gallagher & Co.

“When we think about employment risk, we tend to focus on severity of litigation to come up with hot spots like California or Florida,” Douglass said. “It’s a little surprising to see states like New Mexico or Alabama when we focus on charge frequency.”

The reason was that Hiscox adjusted the EEOC data for employer population, she said. For example, states like New Mexico and Alabama have between 1 percent and 3 percent of the total charges in 2014, but adjusting for the states’ employer population, “the data is shown in a new light.”

“From an insurance perspective, larger employers aren’t going to be as affected by increased charge frequency, as their retentions are likely large enough to address those claims,” Douglass said.

“The bigger impact will be with small employers, increasing their need for insurance, and also loss prevention measures in that segment.”

Laws Difficult to Navigate

Bertrand Spunberg, practice leader, executive risks at Hiscox USA, said that “some states … can be very difficult to navigate because their fairness laws are often broader than the federal law, so employers must commit themselves to comply with these state laws to a higher standard.

“Every business should expect a very real exposure from these lawsuits.” — Bertrand Spunberg, practice leader, executive risks, Hiscox USA

“But that’s a tall order for smaller companies that don’t have the resources and expertise to keep track and comply with changes in state laws; insurance can help protect them so they won’t be caught off guard,” Spunberg said.

Indeed, one in five small and mid-sized businesses will face employment charges with an average cost to defend of $125,000, which includes expenses such as attorney’s fees and settlement costs, according to Hiscox claims data for firms with under 500 employees.

For those that did have insurance coverage, the average deductible was $35,000, compared to the $90,000 balance paid out by their insurance company.

The median judgment for cases that go to trial was approximately $200,000 for employment lawsuits adjudicated by the courts, while one in four cases resulted in a judgment of $500,000 or more.

“Every business should expect a very real exposure from these lawsuits,” Spunberg said.

Robert Hale, a partner at Goodwin Proctor LP in Boston, said that there was no one explanation for why certain states have a spike in employment litigation, compared to the rest of the country “as it is clear that there are significant differences in both the legal landscape and the cultural and employment settings among these different states.”

“Bottom line, the reality is that we’re living in a time of transition in employment law, and if you are not paying attention, you’re going to get into trouble.” — Karl Lindegren, partner, Fisher & Phillips LLP

“If it were simply a matter of the degree to which there’s protective legislation for employees, then some of the Northeastern states would be in the mix,” Hale said.

Class-Action Litigation Risks

Of particular concern are cases involving independent contractors and classification of employees for overtime pay eligibility, he said.

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Unlike most other areas of employment law risk, these create a risk of class-action litigation. Because of the number of employees affected, the costs associated with making a determination in those areas is potentially much greater than the cost for an employer that makes an individual employee termination decision.

Hale said there has been a “sea change” in the past 15 to 20 years regarding the purchase of employment practices liability insurance to cover the risks of employment litigation. It was a rare product for many years, he said, but now it’s a common part of any business insurance portfolio.

“The result is that the insurance companies have created a significant amount of market pressure on the employment litigation defense bar and, frankly, insurers have been able to use that market power to decrease rates charged by defense practitioners,” he said.

“That has affected the market for those legal services even for matters that are not covered by insurance.”

Tom Hams, managing director with Aon’s financial services group in Chicago, said his firm continues to see a real focus on disability claims, “which is the hardest charging area right now and the focus of the EEOC.”

“Employers have to be very sensitive around the issue of accommodations and when taking employment actions involving employees who are perceived to have disabilities.” — Tom Hams, managing director, Aon financial services group

“Employers have to be very sensitive around the issue of accommodations and when taking employment actions involving employees who are perceived to have disabilities,” Hams said.

There is also a “huge trend” of lawsuits alleging violations of the Fair Credit Reporting Act, and “if an attorney can find one job application with any kind of flaw, they can turn it into a mass or class-action suit,” he said.

Moreover, “ban the box” — eliminating questions about criminal background in job applications — has become a hot topic because of changes in federal, state and local laws challenging the practice.

“As a result of the ‘ban the box’ and FCRA activity, employers should make sure they have their job applications reviewed by their counsel to make sure they are doing the right thing,” Hams said.

Training is a Necessity

Brian Weiss, vice president, regional leader, FINEX claims at Willis in New York City, said there has been an overall slight downward moment in employment practice claims – it’s “certainly not as high as right around the financial crash, but still elevated.”

“It’s going to take some time before we get to pre-crash numbers, but slowly and steadily we may get there,” Weiss said. “I’ll be curious after this study if we’ll see carriers seek sublimits and sub-retentions in those jurisdictions.”

For Wiess’ clients that have high concentrations in high-risk areas, he recommended they make a special point to train both managers and employees. Many law firms, he said, offer conduct training at employer sites.

He noted that some state laws may lead to higher claims or particular claim trends. For example, in Alabama, there has been from a 1 percent to 5 percent spike of total EEOC color discrimination claims over the past 5 years, as well as a spike in religion discrimination claims, from 2 percent to 5 percent of total national claims over the same time period.

“So if you have a high number of employers in one of these states, you need to train to the laws and standards of that state,” Weiss said. “At the very least, managers need to have a thorough understanding of the applicable laws in these jurisdictions.”

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“Bottom line,” said Karl Lindegren, a partner of Fisher & Phillips LLP in California, “the reality is that we’re living in a time of transition in employment law, and if you are not paying attention, you’re going to get into trouble.

“If you continue to do what you thought you were always able to do regarding the Fair Credit Reporting Act and background checks, then you will get into trouble. What I tell my clients is that if they do the right thing and treat people the right way, it will go a long way to winning a lawsuit, and even avoiding a lawsuit.”

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]