Not So Golden State

California leads the national trend of growing risks for employers, and points to the need for employment practices liability insurance.

By Bertrand Spunberg and Christopher McNulty

California has a history of being a trendsetter, and what starts in the Golden State often spreads across the country. Should this prove true on the employment litigation front, California is at the forefront of a worrisome trend that has seen businesses become increasingly exposed to litigation by employees.

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Employers need to be aware of the employment exposures they face, the need for increased risk management and the appropriate insurance to address these risks, specifically, employment practices liability insurance (EPLI). Producers need to monitor the trend and even take it as an opportunity to educate clients and prospects.

Some of the macro forces contributing to the heightened employment litigation risk in California are not California-specific.

Widespread economic challenges across the country, for example, continue to contribute to consistently high unemployment levels in California, which in turn has created an environment that has proven favorable to employment practices litigation. A ramp up in both federal regulatory activity and employee-friendly legislative developments in recent years has also contributed to the increase in employment practices litigation.

Between 2006 and 2011, the total number of complaints filed with the Equal Employment Opportunity Commission (EEOC) increased nearly 32 percent, from more than 75,000 to nearly 100,000 -- the highest number in the commission's 46 years.

In fiscal year 2011, the EEOC recovered $365 million on behalf of plaintiffs, also a record amount. It is worth noting that in fiscal year 2011, California ranked third in the list of states with the highest number of EEOC complaints (7,166 complaints), behind Florida and Texas (with 8,088 and 9,950 EEOC complaints respectively).

On the legislative front, by amending the definition of disability, the Americans with Disabilities Amendments Act of 2008 significantly increased the pool of potential plaintiffs. Under the Act, disability is defined "in favor of broad coverage of individuals to the maximum extent permitted by the terms of the ADA and generally [... without] requir[ing] extensive analysis."

Those macro forces and federal figures tell only part of the story. A look at the number of employment complaints filed at the state level highlights the unique landscape in California.

HYPERACTIVE COURTS

In 2011, California logged 18,335 employment complaints at the state level, up 20 percent from the 2006-2010 yearly average, according to California's Department of Fair Employment and Housing (DFEH).

That number dwarfs the number of federal complaints filed in California, which is substantially higher than the number of state complaints filed in Florida (891 in 2010) and Texas (1,269 in 2011). While state-level complaints in California have increased, the number of state employment complaints in Florida and Texas has been decreasing.

Why is California seeing such an uptick in complaints filed at the state level?

One of the reasons is the employee-friendly nature of California law in the area of disability discrimination. Discrimination cases filed at the state level in California are brought under the Fair Employment and Housing Act (FEHA).

FEHA applies to a broader swath of businesses, covering any company with five employees, versus a 15-employee minimum for cases brought under federal law as outlined in Title VII of the Civil Rights Act.

California also defines disability more broadly than federal law. The threshold for qualifying is set at any limitation of a major life activity if it makes achieving that activity "difficult," as opposed to an impairment that "substantially limits one or more life activity" as required at the federal level.

There are no caps in California on punitive damages under FEHA, including back pay, front pay and lost benefits limiting recovery. Time restrictions for filing are also more favorable for employees in California.

Federal law typically requires the employee to file an administrative complaint with the EEOC within 180 days from the date of the discriminatory violation; California's FEHA gives the employee one year to file a complaint with the California DFEH.

Lastly, California made it much easier to bring complaints with the advent of online "right to sue" letters, making the process less cumbersome for plaintiffs. Claims filed online now account for about a quarter of all cases, according to the DFEH.

Anecdotal evidence suggests that these trends are driving increased employment practices liability insurance filings. As a result, the EPLI insurance market in California is showing signs of firming. Pricing and retentions are on the rise, and insurers are growing increasingly selective.

In the face of increasing exposure, risk managers and human resource professionals in California, and around the country, must be proactive in maintaining best in class employment practices and procedures.

In today's environment, however, vigilance alone may not be sufficient. When a claim comes in, a robust team comprised of trusted and experienced attorneys, brokers and insurers should be aligned for the business' defense.

BERTRAND SPUNBERG is senior vice president, management liability, with Hiscox USA, and CHRISTOPHER MCNULTY is head of claims for the Management Liability Division of Hiscox USA. They can be reached at riskletters@lrp.com.

October 11, 2012

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