Pricing Employment Practices Liability Exposures Brian Z. Brown, F.C.A.S., and Chad C. Karls

Transcription

1 Pricing Empoyment Practices Liabiity Exposures Brian Z. Brown, F.C.A.S., and Chad C. Kars 203

2 ING E-TY Em Over the past ten years the insurance industry has deveoped and introduced an Empoyment Practices Liabiity (EPL) poicy to cover empoyers against aegations of wrongfu empoyment practices (discrimination, sexua harassment or wrongfu termination). The demand for EPL coverage has increased dramaticay in recent years due to: The significant rise in the number of caims aeging discrimination, sexua harassment or wrongfu termination against.empoyers; and The empoyment practices excusion added to many mainstream insurance poicies, carifying some insurance carriers position that it was never their intent to cover EPL. This paper is divided into seven sections, The first section is an introduction and briefy summarizes countrywide EPL caims statistics and trends based on data pubished by the Equa Empoyment Opportunity Commission (EEOC). The next section defines wrongfu empoyment practices. Insurance coverage issues surrounding wrongfu empoyment actions under mainstream insurance poicies is discussed in the third section. The fourth section describes the EPL poicy and the obstaces that actuaries face in pricing the product. The current rating methodoogy for EPL, as contained in pubicy avaiabe rate fiings is discussed in the next section. The sixth section describes a new pricing method which we deveoped to price the EPL poicy based on data avaiabe from the EEOC. We aso describe 204

3 some of the various EEOC databases and pubications. The fina section provides our concusion. BIOGRAPHY Brian Brown is a Feow of the Casuaty Actuaria Society, a Member of the American Academy of Actuaries and a Consuting Actuary in the Miwaukee office of Miiman & Robertson, Inc. Brian is the chairperson of the CLRS Committee and has a Bacheors degree in Economics from Iinois State University. Brian has priced the EPL exposure for a number of cients and has aso pubished a paper in Best s Review on EPL. Chad is with the Miwaukee office of Miiman & Robertson, Inc. He joined the firm in 1993 after receiving his bacheors degree in actuaria science from the University of Wisconsin - Madison. His area of expertise is property and casuaty insurance, particuary ratemaking, oss reserve anaysis, and financia panning. Chad has assisted in the pricing of EPL coverage both for stand aone poicies as We as in the form of an endorsement to existittg poicies. ACKNOWLEDGMENTS The authors woud ike to acknowedge the encouragement, advice and review provided by Coin Suttie of Empoyers Reinsurance Corporation and Pau Keuer of Miiman & Robertson, Inc. as we as the CAS Continuing Education Committee s Review Team. We woud aso ike to thank Rosie Poeer and Karen Ahrendt for their assistance. 205

4 G EMPLOP EXPOSUR,ES 1. INTRODUCTION Over the past ten years the insurance industry has deveoped and introduced an Empoyment Practices Liabiity (EPL) poicy to cover empoyers against aegations of wrongfu empoyment practices, such as discrimination, sexua harassment or wrongfu termination. The EPL poicy typicay provides coverage to the corporation, directors and officers and empoyees for wrongfu empoyment practices. The poicies in genera aso incude a duty to defend the insured. The demand for EPL coverage has increased dramaticay in recent years due to two factors: The significant rise in the number of EPL caims (we beieve this is in part due to the passage of the Civi Rights Act of 1991 which aows for increased recovery of damages incuding punitive damages); and The empoyment practices excusion added to many mainstream insurance poicies. Thus empoyers today face more exposure and potentiay ess coverage, uness they purchase a specific stand aone EPL poicy or an EPL endorsement which is usuay attached to a D&O poicy. The number of charges tied with the Equa Empoyment Opportunity Commission (EEOC) aeging wrongfu empoyment practices against empoyers continues to rise every year. Amost a empoyment practices caims begin with a charge fied with the EEOC. 206

5 The foowing graph dispays the number of charges (aeging wrongfu empoyment practices) fied with the EEOC from fisca year 1984 to fisca year As the above graph dispays, the number of caims fied remained reativey constant from 1984 to 1991; however, since 1991 the number of caims fied has increased at an annua rate of approximatey 10%. Additionay, the average monetary benefit per person has increased dramaticay in recent years. The foowing graph dispays the average monetary benefit by fisca year from the EEOC Enforcement Statistics: 207

6 I AVERAGE MONETARY BENEFITS The growth in the number of caims and average awards can be attributed to many factors incuding greater pubic awareness resuting from the Carence Thomas hearings, increased media attention as we as the increase in corporate consoidations and downsizings. Additionay, significant expansion of civi rights egisation (Civi Rights Act of 1991) and empoyment aw both on a state and nationa eve aong with severa arge jury awards in cases invoving sexua harassment has increased empoyment reated caims. For exampe, in the case of J&&s vs. Baker, a jury awarded over $7.1 miion in punitive damages to a ega secretary, Rena Weeks, for her caim of sexua harassment against the aw firm of Baker & McKenzie, even though Weeks was ony awarded $50,000 in compensatory damages. Incuding cass action caims and punitive damage awards, additionay cass action awards are aocated to each individua paintiff. 208

7 II. PEF- OF 1 Most EPL poicies provide coverage for the foowing three types of caims: Discrimination Wrongfu termination and Sexua harassment. These acts are typicay currenty excuded from other insurance poicies (with the exception of coverage for Directors and Officers for certain actions under a D&O poicy). The appicabiity of other insurance poicies responding to wrongfu empoyment practices is discussed in the next section. Discrimination encompasses acts such as faiure to hire, faiure to promote, demotion, discrimination, and discriminatory surs or comments. Discrimination caims are usuay based on one or more of the foowing factors: race, coor, creed, natura origin, marita status, medica condition, sexua orientation, reigion, age, gender, physica and/or menta impairments or pregnancy. Discrimination is defined in severa federa statutes and these statutes form the basis for discrimination caims. The major appicabe statutes incude: Tite VII of the Civi Rights Act of 1964; Age Discrimination in Empoyment Act; Americans with Disabiities Act; 209

8 Basicay a of these acts prohibit different treatment (e.g., pay, promotion, hiring) for different casses of empoyees. The trend has been to expand rhe scope of the aw and the penaties associated with infractions. For exampe, the Age Discrimination in Empoyment Act added protection against age discrimination for persons as young as age 40. Further, the 1991 Civi Rights Act expanded the remedies avaiabe under other statutes (which in genera were imited to back pay, reinstatement and attorney s fees) to incude compensatory and punitive damages (with some imits) as we as jury trias. The second EPL coverage trigger, wrongfu termination, encompasses the act of terminating an empoyee in a manner which is against the aw. Most wrongfu termination caims aege a breach of an express or impied contract, a breach of an impied covenant of good faith and fair deaing, or a vioation of some pubic poicy (e.g., retaiatory discharge due to the empoyee fiing a workers compensation caim). The third coverage trigger, sexua harassment, incudes unwecome sexua advances, requests for sexua favors, or verba. visua, and/or physica conduct of a sexua nature which is made a condition of empoyment. In addition, harassment aegations may incude any conduct that 210

9 creates a work environment that interferes with job performance or creates an intimidating, hostie or offensive working environment. Sexua harassment caims have more than doubed since 1991, the year of the Carence Thomas hearings. Many abor aw attorneys beieve that the number of awsuits fied wi continue to increase. III. INSURANCE It appears that standard insurance poicies were not designed to cover wrongfu empoyment practices. As a resut, coverage has been found in some instances for EPL caims, but not consistenty. Insurance carriers, in genera, did not perceive empoyment practices iabiity caims to present a significant exposure unti the mid 1980 s. Prior to this time, most poicies did not address the EPL exposures, either through specific coverage provisions or specific excusions. Additionay, it was many insurance carriers beief that harassment and discrimination were intentiona acts and therefore not in the pubic s best interest to insure. However, whie the insurance industry was reuctant to acknowedge coverage, empoyers coud sometimes obtain at east defense coverage under either their commercia genera iabiity, workers compensation, directors & officers or umbrea poicies. Athough severa commercia insurance poicies potentiay can be used to cover a caim 211

10 aeging wrongfu empoyment practices, the abiity of most of these products to respond to EPL caims is imited by contract wording and the increased use of empoyment practices reated excusions... Commercia Genera &&h& Standard Commercia Genera Liabiity (CGL) poicies respond to caims which resut in bodiy injury or property damage, conditions rarey present in empoyment practices suits. However, some CGL poicies contain an endorsement covering persona injury. Persona injury is commony defmed to incude bodiy injury, menta injury, shock, sickness, disease, disabiity, invasion of privacy, fase imprisonment, emotiona distress, menta anguish, ibe, sander and defamation. These types of caims are often found in empoyment practices suits. Some courts have evoked coverage for EPL under the persona injury section of the endorsed CGL poicy. The CGL poicy aso provides a duty to defend which is broader than the duty to indemnify. Therefore, the insurer may be compeed to provide a defense in some cases where the duty to indemnify is ater found not to exist. This factor is significant as many EPL caims invove substantia ega costs even in cases where the empoyer is found not guity of wrongfu empoyment practices. Furthermore under Tite VII, if the paintiff prevais, the defendant may be required to pay part or a of the paintiffs ega costs. Because of the above factors, many insurers now routiney add an empoyment practices reated excusion to their CGL poicies, which forces insureds to seek EPL coverage under a different poicy. 212

11 The empoyers iabiity section of a workers compensation poicy incudes coverage for caims resuting from an empoyee s occupationa injury or disease which is not within the scope of the workers compensation aw. As coverage is restricted to caims invoving bodiy injury by accident or disease, coverage for EPL is rarey found under a workers compensation poicy. Additionay, a revision in 1992 to many workers compensation forms contained an EPL excusion to the empoyer s iabiity section. The D&O poicy appears to be the most ikey insurance product, other than EPL, in which a poicyhoder may find coverage. In genera, D&O poicies provide coverage for oss in connection with a caim against directors and officers for wrongfu acts in such capacity. However, the standard D&O form contains provisions excuding coverage for many empoyment reated caims. D&O poicies cover ony the directors and officers of a firm, whie many EPL suits invove managers, supervisors and other empoyees who woud not be covered under the D&O poicy. Aso, there is usuay no duty to defend under a D&O poicy rather, covered oss is determined at the end of the case. In addition, many D&O poicies do not provide coverage for the entity (corporation) and have an insured versus insured excusion. Thus, the foowing situations may not trigger coverage: A suit naming the business as a defendant; or A director or officer tiing a suit against another director or officer. 213

12 Umbrea iabiity poicies provide broad coverage for acts of ibe, sander, defamation, and fase arrest, which are the types of caims often found in wrongfu empoyment practices suits. However, umbrea poicies increasingy excude empoyment reated acts as insurers are making it cear that it wasn t their intention to incude coverage for wrongfu empoyment practices. Thus, coverage under these poicy forms is no more certain than under the other forms described above. IV. EMPLOYMENT PRACUCES LIABILITY IEPU The growth in the number of EPL caims and the coverage gaps discussed above ed to the deveopment of a reativey new insurance poicy or endorsement, EPL. The EPL poicy is designed to provide coverage to the entity, its empoyees (with some imited exceptions) and its directors and officers for caims of sexua harassment, discrimination, and wrongfu discharge. EPL poicies are generay written on a caims-made basis. Actuaries and underwriters face many obstaces in pricing these reativey new EPL products incuding, but not imited to, the foowing: Historica data may be sparse or non-existent; Current and future frequency and severity trends are difficut to estimate; and Few pubicy avaiabe rate fiings exist. 214

13 Many companies have not historicay separatey identified EPL caims in their interna databases and even the ones that have identified such caims usuay do not have a sufficient number to produce credibe rate indications. Additionay, many fums which historicay have not written the coverage are now interested in offering this coverage, due to the increased demand for the coverage from their insureds. As discussed previousy, recent caim information from the EEOC indicates that the number of charges fied annuay has been increasing at 10%. Furthermore, it appears that the average cost per caim (severity) is aso increasing between 5% and 10% annuay. Another factor to consider in projecting future year s caim costs is the expansion of certain statutes and increased jury awareness resuting in the trend towards arger jury awards. Therefore, with a doube digit pure premium trend and recent factors eading one to beieve that the trend wi continue to increase, the uncertainty surrounding future projections is substantia. The third factor hampering the deveopment of credibe rates is the ack of pubicy avaiabe rate fiings or industry data. Many insurance carriers write this product on an excess and surpus ines basis and therefore do not fie rates with state insurance departments. Additionay, the rate fiings that are avaiabe generay do not contain any significant oss experience. v. CURRENT The most common variabe upon which carriers determine the basic premium charge is the 215

14 size of the empoyer. Specificay, most carriers use the number of empoyees as the primary rating variabe in deveoping the premium charge for EPL coverage. Furthermore, the margina rates appied to each empoyee decrease as the number of empoyees increase. The foowing tabe provides an exampe of what an insurance company s EPL rating structure may ook ike: Number of Empoyees Rate per Empoyee First 50 $400 Next 100 Next Each Above II Hypothetica Exampe Most carriers aso impose a minimum premium amount either expicity stated in doars or by setting a minimum number of empoyees needed for coverage. The decreasing rate by empoyee size is based on the theory that arger empoyers have more effective human resource departments. The human resource departments, and in particuar the existence of an interna grievance procedure, reduces the exposure because caims are handed in-house before the potentia paintiff hires an attorney and fies a awsuit. This theory has been confirmed in discussions with abor aw attorneys. In addition to basing the premium charge on the number of empoyees, most carriers aso aow the insured to seect among various: 216

15 Liits of coverage; Deductibe amounts; and Coinsurance percentages. covw The imits of coverage offered by insurance carriers varies from the basic imits option ($25,000/%25,000) up to $25;000,000/$25,OCO,000. In addition, it appears that certain carriers target arge empoyers (500 pus empoyees) whereas other carriers target smaer sized empoyers (ess than 200 empoyees). Perhaps the most important distinction made with respect to imits of coverage is that in a the fiings we reviewed, defense costs were incuded within the imits of coverage and thus the costs associated with defending a caim erode the imit of coverage afforded to the insured. This is an important consideration given that it has been estimated that approximatey onethird of the tota costs associated with EPL coverage can be attributed to the defense of caims. Most EPL carriers require that insureds participate in their oss experience via the use of., I.. deductibes. The size of the deductibes generay offered ranges from as ow as $2,5tkper caim to as much as $50,000 or $100,000 per caim. In addition most deductibe options appy to defense costs as we as indemnity costs. Thus, the insurance company is not providing any first doar defense coverage which is important given the significance of defense costs. 217

16 The coinsurance provision is another way for the insured to reduce the basic premium charge as we as satisfy the insurance company s desire to have the insured participate financiay in its oss experience. The coinsurance percentages again vary depending on the size of the insurance company s target market and ranged from 0.0% to 25.0%. When underwriting an EPL poicy the insurance company may take into account more than just the empoyer s size and oss history. Because the coverage is very broad, many other variabes are used in the underwriting process? Financia strength; Location of Business; Corporate Downsizing pans for the future; Are interna dispute resoution procedures in pace?; Are educationa seminars/handbooks given to new empoyees?; Is an Empoyee Handbook in pace which ceary defines:. Empoyment At Wi contract and not Guaranteed Empoyment;. What constitutes sexua harassment; b Procedures to foow to fie an EPL compaint; 9 Has management been educated on company procedures with respect to: 2Based on a presentation entited Wrongfu Empoyment Practices Caims: Are we covered for this? by Muzzette Hi and Pau Matusek. 218

17 . Hiring/Firing; and b Promotion/Demotion. In addition to the empoyer specific criteria depicted above, it is generay beieved that certain industries aso pose a greater EPL exposure. The industries that may pose a greater EPL exposure incude: Governmenta Entities; Law Firms; Heath Care Deivery Entities; Educationa Entities; Banking; and Other Industries with highy compensated empoyees. The next section wi focus on a new approach which we have deveoped to rate the EPL exposure. Our approach suppements the current approach with data and experience pubished by the EEOC to determine rates. VI. G EPLWX EEOC D&I,4 We have deveoped a new approach to price the EPL product based on data avaiabe from the EEOC. The rates derived from our approach can then be refined based on discussions with abor aw attorneys. underwriters, and comparisons with rate fiings of other companies. We 219

18 beieve that it is necessary to utiize an outside data source to price EPL due to the ack of historica insurance company data. The EEOC coects information on charges of discrimination fied by individuas in a the EEOC fied offices and in comparabe state agencies. Before fiing an EPL-reated awsuit (e.g., under Tite VII, Americans with Disabiities Act, Age Discrimination in Empoyment Act) an empoyee must first fie a discrimination charge with the EEOC or comparabe state agency (note the EEOC aso coects the state agency data). In some cases, the EEOC wi pursue the case against the empoyer, and in other cases the EEOC wi issue a right-to-sue etter which aides the empoyee if he/she pans to fie a awsuit. Therefore, the EEOC coects caim count information on most EPL type charges. Notabe exceptions woud be charges handed under a union coective bargaining agreement (if ess than 15 members) and some federa empoyees. The EEOC in its Annua Report pubishes tota charges broken out by basis of discrimination (e.g., race, reigion, sex, etc.) Furthermore, paintiff attorneys often aege severa charges in connection with each act of discrimination. For exampe, an individua may aege race, sex and age discrimination (for a tota of three charges) even though there is actuay ony one caim fied. Therefore, the number of caims wi be ess than the number of charges. Because of this, the number of charges must be converted to the number of caims (as discussed ater, the severity amounts are per caim). For iustrative purposes, we wi use statistics from Coorado and Iinois as an exampe. The foowing tabe dispays charges by year for fisca years for each state: 220

19 In order to derive a frequency estimate (number of caims per empoyee), we must: Convert the number of charges to individua caims; and Divide the number of caims by the exposure unit ( e.g., number of individuas empoyed in the state). For the first adjustment, we compared the number of countrywide charges from the EEOC Annua Report to the number of receipts (caims) from the EEOC Enforcement Statistics Reports. The number of caims reative to the number of charges has averaged about 80% for fisca years At this time we were ony abe to cacuate this conversion ratio on a countrywide basis as the EEOC Enforcement Statistics Reports did not contain the avaiabe data on a state by state basis. To the extent this ratio varies by state our methodoogy currenty ignores this impact. Incudes caims fied with state agencies. 221

20 The second adjustment invoves estimating the statewide exposure (number of individuas empoyed in the state). From the Census Bureau we have popuation statistics by state. These popuation statistics can be adjusted to estimate the number of individuas empoyed (we estimated that 50% of the popuation is empoyed for, iustrative purposes). The foowing tabe dispays the estimated frequency figures for Coorado and Iinois. When pricing 1996 poicies, we aso need to refect the historica trend in frequency. The frequency in Coorado increased from 1.43 caims per empoyees in 1991 to 1.77 in 1993 for an increase of roughy 11% per year. This compares to a countrywide trend of approximatey 8% over the same two year period. Comparabe figutes for Iinois impy an annua trend of If the anayst were to average the individua state s trend estimate with the countrywide trend estimate, a 9.5% frequency Using data pubished in the 1995 Statistica Abstract of the United States, 115th Edition, one can estimate the percent of the popuation empoyed on a state by state basis. It shoud be noted that we are pricing a caims-made poicy. We have assumed that the empoyer woud be notified at about the same time as the empoyee fied a charge with the EEOC. We have aso assumed that a caims are reported in the year in which they occur. 222

21 trend woud be appied in Coorado and a 6.5% frequency trend in Iinois. Thus from the above tabe, the average frequency in Coorado of 1.62 is projected to increase to 2.32 for The frequency of 1.29 in Iinois is projected to increase to The next statistic needed to derive pure premiums is the severity or average cost per caim. The EEOC Genera Counse s Annua Report summarizes awsuits handed by the various EEOC District Offtce8. The attached exhibit 1 summarizes information from the fisca year 1993 report for the Chicago District office. The information is broken out into: Suits fied by statute and issue (e.g., race, sex); and Suits resoved by statute and issue. Additionay, for the suits resoved, the actua judgment amount is recorded. The Chicago District office resoved 26 awsuits during fisca year 1993 and recovered approximatey $1,370,000 in monetary benefits for empoyees aeging empoyment discrimination. qhe EEOC coects and pubishes actua verdicts (incuding the amount of the verdict) when EEOC attorneys prosecute the caim. However the vast majority of EPL caims sette prior to tria or without EEOC attorney invovement. Therefore EEOC wi ony have verdict information on a subset of a caims. Based on discussions with attorneys, we expect that the EEOC coected verdicts woud represent, in genera, the average to above average settement in terms of amount of award (sma caims or zero doar verdicts woud be under-represented). This phenomenon is somewhat offset by the fact that we are estimating severities from a cosed caim database in an environment where the underying caims popuation is growing (which. woud tend to understate the utimate severity due to arger caims propensity to sette ater than smaer caims). The 26 awsuits resoved excude 7 subpena enforcement actions. Aso, the attached exhibit dispays the fact that severa issues are aeged per awsuit. For exampe, on page 4 of Exhibit I in the first case under 2.Sex. one paintiff aeged retaiation, faiure to promote, and iega 223

22 The foowing tabe dispays the monetary verdicts for the 26 caims. discharge. 224

23 II Tota I $ I As can be seen from the above tabe, 8 of the 26 suits invoved no monetary award against the defendant. However, as wi be discussed ater, the defendant most ikey spent a considerabe amount in ega fees to resove the case. Aso the distribution of actua awards by amount is rather wide with verdicts ranging between $3,500 and $460,000. For a EEOC offkes in tota the resoutions during fisca year 1993 ranged between $100 and $20 miion. The EEOC has 23 districts offices and resoved 427 suits in fisca 1993 and 626 suits in fsca As mentioned previousy, the awsuits prosecuted and resoved by the EEOC represents a sma percentage of a awsuits. In most cases, awsuits are prosecuted by the paintiff through the use of independent ega counse (not EEOC staff attorneys). However, the caims must generay first be fied with the EEOC (so these independenty prosecuted caims are wunted in the frequency projections). Labor aw attorneys beieve that chums handed by EEOC woud not be systematicay biased (with the possibe exception of an unrepresentative ow number of caims which woud cose 225

24 without a payment). Therefore, the EEOC caim verdicts can be used to construct a caims severity distribution. However, severa adjustments might be required before the distribution is constructed. First, the individua caims must to be adjusted to a cost eve expected to prevai for caims reported in For exampe, an EEOC caim which setted in 1993 but was reported in 1991 woud be adjusted for 5 years of caims cost infation trend. This adjustment is significant as tota caim costs are recenty increasing between 5% and 10% annuays. The EEOC individua caim awards contain both the date the awsuit was resoved as we as the date the awsuit was fied. When trending the awards, to derive an average severity for caims to be reported in the prospective poicy period (reca most EPL coverage is on a caims-made basis), the EEOC awards ordinariy woud be trended from the date the caim is fied to the average effective date of the prospective poicy period. However, to offset the under representation of sma verdicts mentioned above, the anayst may decide to ignore the trend from the date the caim is fied to the date the caim is setted and ony refect the trend from the date setted. In genera there is a reativey short ag (ess than 2 years) between the date the suit is fied and the date the suit is resoved. Second, ega expenses need to be incorporated into the expected pure premium. Our *This trend rate incudes a caims and awards (e.g., cass action caims and punitive damages). If the insurer were to excude punitive damages and ony appy one imit to cass action caims the trend rate may be ower. 226

25 methodoogy incorporates ega expenses through an average oading onto the oss ony pure premium. Third, if the company s poicy excudes punitive damages then punitive damages need to be excuded from the EEOC awards. Oftentimes, punitive damages wi not be separatey identified so that caims with a punitive damage award may need to be competey excuded. Fourth, if a separate imit appies to each person in a cass action awsuit the EEOC awards must be adjusted to a per person amount. Currenty, the awards are per occurrence (a individua awards are aggregated in cass action settements). Once the caims are trended to 1996 (an adjustment for deveopment on open caims is not needed as the EEOC caims are a cosed) a severity distribution can be constructed9. As mentioned above, defense costs must be incorporated into our expected pure premium. The foowing methods can be used to seect a oading for ega fees: Discussion with abor aw attorneys regarding the average cost to defend a caim (costs wi vary substantiay depending on whether the caim is resoved at an EEOC hearing, settes quicky, settes after substantia tria preparation, or goes fuy through 9Severa actuaria papers outine methods which can be used to construct severity distributions. For exampe, see A Practica Guide to the Singe Parameter Pareto Distribution PCAS, LXXU, 1985, pp by Stephen W. Phibrick. 227

26 a tria). Depending on the type of caims, ega costs coud vary between $5,000 and $100,000 or more; Patios of ega fees to osses for other coverages (D&O, products etc.). This ratio coud then be mutipied by the seected severity from the EEOC data; and Experience of the company (if the company has written EPL poicies). Another consideration which needs to be incorporated is that the defendant may be responsibe for paying successfu paintiffs ega costs in some cases (e.g., Tite VII cases). The foowing tabe dispays a projected pure premium per empoyee in Coorado and Iinois for caims reported in 1996: 228

27 3) Loading for Lega Fees (percentage of 2) ) Projected Pure Premium (1)x(2)x(3) $ $ The above pure premium may aso be adjusted for severa other factors considered to affect the exposure: The existence and effectiveness of the firms human resource department, incuding the strength of internaprocedures (e.g., existence of an interna grievance procedure for empoyees aeging discrimination): Labor aw attorneys generay beieve that interna prccedures can moderatey affect frequency and can dramaticay affect the severity of EPL reated caims. The severity reduction is argey attributabe to the fact that,some caims wi be resoved internay prior to the aeging party retaining an attorney and fiing a awsuit; OFor iustrative purposes, based on caims resoved in Fisca Year 1993 by the Chicago District Office. The average award in 1993 is $52,737. Trending this average award to 1996 at 5% per year resuts in a projected severity for 19% of approximatey $ The pure premiums in the above tabe are for the average size risk. If arger risks, due to better human resources practices, have a ower exposure, we woud expect these msureds to have a ower pure premium. Likewise. if smaer risks, due to the ack of a human resource department, have higher exposure, we woud expect a higher pure premium for these risks. In practice, the anayst may want to determnc an average severity from a arger database (perhaps countrywide) than that used in our iustration. which used information ony from the fisca year 1993 Chicago District O&e. As mentioned previousy, the EEOC pubishes the same data for a of its District Offices. ItBased on ALAE to oss for other iabiity as refected in Best s Aggregates and Averages. 229

28 Type of firm (manufacturing, governmenta, aw firm): Empoyees of some types of firms may have a greater probabiity of fiing an EPL caim. Additionay, back pay is a significant portion of some caims and as wages vary by type of firm, pure premiums may aso vary by type of firm; Management attitude: EPL is one ine of insurance where many of the acts creating caims are intentiona. Therefore training and an aggressive position by management with regard to reprimanding guity parties is expected to reduce exposure to oss; and Prior caims experience of the firm: Prior caims experience. as in other ines of insurance, may indicate greater exposure. / I VIII. CONC- Many attorneys and risk managers beieve that most, if not a. firms wi have Empoyment Practices Liabiity poicies within the next five to ten years. EPL exposures are increasing at the same time that insurers are more ceary defining that it was never their intent to provide coverage for wrongfu empoyment practices. Unti a credibe insurance caim database can be buit to price for the exposure, it may be necessary for actuaries to utiize data pubished by the EEOC and other industry sources to price EPL poicies. 230

29 Exhibit Page 1 CHICAGO DISTRICT OFFICE Chicago fied 31 awsuits. incuding 4 subpoena enforcement actions and I reporting/recordkeeping vioation. in tisca year 1993: of the suits fted on the merits, 21 were on behaf of an individua or individuas, and 5 on behaf of a cass. Of the suits fied on the merits. 15 were fied under Tite VII. I under the Americans with Disabiities Act. 7 under the ADEA. I under the Equa Pay Act, I under Tite VII and the AJEA. and I under Tite VII and the Equa Pay Act. Chicago resoved 33 awsuits, incuding 7 subpoena enforcement actions, in fisca year and recovered $ in monetary benefits for victims of empoyment discrimination. SUITS FILED A. Tiie VII 1. Race J.M. Jones Company and Supervaue. Inc. No I I6 (C.D. I. tied June 2 I. 1993) -- race (back): discharge. Midwesr Technica Consurants. Inc. No. 92-C-7652 (N.D. III.-ED fied November 19, 1992) -- race (back); faiure to hire. The Firs! Nafionai Bank o/chicago No. 93-C-0917 (N.D. III.-ED tied February I. 1993) -- race (back); discharge. 2. Sex Acorn ire dr Suppy No. 93-C-5981 (N.D. III.-ED tied September ) --sex (femae); sexua harassment. hostie and offensive work environment, consttuctive discharge. Adi. Inc. No. 93-C (N.D. III.-WD fied September ) -- sex (femae); discharge. Aidi. Inc. No. 93-C (N.D. III.-WD tied September ) -- sex (femae): discharge. Cayton Residenria Home. Inc. dba Coyron Home No. 93-C-5549 (N.D. I.-ED fied September IO. 1993) -- cass; sex (femae): sexua harassmet& hostie and offensive work environment, constructive discharge. Jernberg ndusrries. Inc. No. 92-C-8476 (N.D. I.-ED tied December ) -- cass; sex (femae); faiure to hire. Sen-Pop. Inc. dba Popeye s Famous Fried Chhzken No. 93-C-3403 (N.D. III.-ED fied June ) -- cass: sex (femae): sexua 86 OGC FY 93 Annua Repor 231

30 Exhibit Page 2 Chicago District O//ice -- Suits Fied and Suits Rcsovcd harassment. hostie and offensive work environment. See aso. beow. Lake Zurick Ace Hardware; Hamiton. Carver & Lee. 3. Retaiation Chicago Osreoparhic Hospiras and Medica Cenrers dba Chicago Oswoparhic Hospita and Medica Cenrer. and Myerscough Heathcare. Ld aikfa Myerscough Medica SraJing. Inc. No. 93C-3100 (N.D. Ik-ED fied May ) -- retaiation: assignment. Gen&y Company, inc. and MEI Saon Corporarion No. 93-C-3850 (N.D. BLED fied June ) -- retaiation: terms and conditions of empoyment. discharge ) -- reigion (Jehovah Witness); faiure to accommodate, invountary ayoff. 5. Naiona Origin See beow. Wiiam Rainey Harper Coege. 6. ReporiingRecordkeeping VioMtions Tkc Chicago Cub No. 92C-6910 (N.D. III.-ED fied October IS. 1992) -- recordkeeping vioation: faiure IO it EEO-I reports. B. ADRA City of Des Paint-s and Ciry of Des Paines Fire Deparrmenr No. 92-C-7328 (N.D. IL-ED fied November ) -- age (65); invountary retirement. Menopoiran Educariona Enterprises, Inc. and Leonard Bieber No. 93-C-2099 (N.D. BLED fied Apri ) -- retaiation; discharge. New Heighrs Consrrucrion Company, Inc. No. 93-C-5068 (N.D. Ik-ED fied August ) -- retaiation: faiure to reca. See aso. beow, Landau and Heyman. Inc. 4, Reigion Iona of Hungary, Inc. No. 92-C-6698 (N.D. BLED Bed October ) - cass: reigion (Judaism); faiure to accommodate, djscharge. Dukane Corporarion No. 92-C-8279 (N.D. III.-ED fied December ) - age (59); discharge. Egg Srore. Inc. No. 93-C-1950 (N.D. Ik-ED fied Apri I. 1993) -- age (62): discharge. Graham Hospita Association No (CD fied September ) -- age (over 65); benefits. Landor and Heyman. Inc. No. 93-C (N.D. I.-ED fied September ) -- age (64). retaiation: terms and conditions of empoyment, discharge. L.ea-Rona. Inc. Sheraton Chicago Hote & Towers No. 93-C-2950 (N.D. IL-ED fied May 14. No. 93-C-5918 (N.D. I.-ED fied September 1993) -- age (59): faiure to hire. OGC FY 93 Annua Rep&

31 Exhibit Page 3 Chicago District Ofice -- Sui/s Fied and Suits Resoved Saine County origin (PoishFiipinoRispanic): assignment. No. 93-CV-4126 (S.D. I-ED fied May 3. faiure IO hire. discharge: September 16, 1993) -- cass; age (over 40): faiure to hire fina judgment providing $42,520 in back pay and interest for I2 individuas. See aso, beow. Wiiam Rainey Harper Coege. Brakur Custom Cabinerry. Inc. and Kennerh Kurn C. Americans with Disabibies Act AX Security Investigations. Ltd.: AIC Inrernariona. Ltd. and Rum Vrdoyak No. 92-C-7330 (N.D. III.-ED fied November 5, 1992) -- disabiity (cancer): discharge. D. Equa Pay Ad Lokc Zurich Ace Hardware No. 93-C-2329 (N.D. I-ED fied Apri ) -- sex (femae); wages. No. 92-CV (N.D. I-ED fied Apri ) -- cass: race (back). sex (femae): faiure to hire, faiure IO recruit; February consent decree providing $46O.OOO in back pay for 75 individuas. Christie Lodge Associates. et a. No. 89-CV (N.D. I-ED fied March 24, 1989) -- cass; race (back); faiure to hire: September 23, 1993 consent decree providing S200,OOO in back pay for 89 individuas. E. Tite VII/ADEA Wiiam Rainey Harper Coege No. 93-C-4914 (N.D. III.-ED fied August ) -- age (40). nationa origin (non- Hispanic); faiure to hire. Conrincnra Air Transport Company, Inc. No. 92-C-3640 (N.D. I-ED fied June ) -- cass; race (back). nationa origin (Hispanic): discharge: March consent decree providing $48,OOO in back pay for three individuas. F. Tife VfEqua Pay ACI DOD1 Deveopmenrs. Inc.. er a. No. 92 C 3369 (N.D. III.-ED tied May 21. Hamibon. Carver & Lee 1992) -- race (back). reigion (Jehovah No. 93-C-4068 (N.D. III.-ED fied Juy 7. Witness): demotion, discharge: November ) -- sex (femae): wages settement agreement providing $9,500 in back pay for one individua. SUITS RESOLVED Metropoiran Managemenr. Inc. A. Ti!e VII No. 92-C-6078 (N.D. III.-ED fied September IO. 1992) -- race (back); discharge: March 1. Rae 9, 1993 consent decree providing $ in back pay for one individua. Andrew Corporation No. 81-C-4359 (N.D. III-ED fied Juy 31, Midwesr Technica Consurants. Inc. 1981) -- race (back). sex (femae), nationa No. 92-C-7652 (N.D. I-ED tied November 88 OGC FY 93 Annua Repor 233

32 Exhibit 1 Page 4. Chicogo DisWicf Office -- Suits Fied orrd Suis Resoved ) -- race (back): faiure IO hire: March sencmen agreement providing $ in back pay. from pay and prc-judgmenr interest for one individua. The Firsr Noriono Bank of Chicago No. 93-C-0917 (N.D. IL-ED icd February 1 I, 1993) -- race (back); discharge: September 27. I993 scttcmern agreement providing %29,ooO in back pay and compensatory damages for one individua. 2. Scr House of Binds and More, Inc.. t-1 a. No. 91-C-1091 (N.D. ILED fied February ) -- sex (femae). rcaiaion: faiure IO promote. discharge: February settemcm agrccmcm. charging party rejected monetary reief. Jernbcrg Inhrsrries. Inc. No. 92-C-8476 (N.D. III.-ED fied December ) -- cass: sex (femae): faiure 10 hire; September voun~aq dismissa. no monetary reief. Northwestern Stee & Wire. Inc. No. 92-C (N.D. III.-WD fied February ) -- sex (femae). pregnancy: faiure IO hire: Juy 16, 1993 consem decree providing %I 17,500 in back pay for one individua. E/gin Teachers Association No. 86 C 6775 (N.D. ILED fied September 9, 1986) -- sex (femae). pregnancy: benefits: Juy unfavorabe coun,ordcr. See aso. above. Andrew Corporation; Brakur Custom Cabinetry. Inc. and Kenneth KtNt.3 Kimwry Quairy Care No. 92 C 5001 (N.D. IL-ED fied Juy ) -- reigion (Wordwide Church of God): denia of unpaid eave of absence. constructive discharge: December 2 I consent decree providing $3.500 in back pay for one individua and notice posing. See aso. above. DOD1 Dcreopmenrs. Inc.. C a. 4. Reainion Cicogo Osteoparhic Hospitas and Medica Centers dba %hicago Osteopathic Hospita and Medica Cenrer. and Myerscough Heathcare. Ltd. aka Myerscough Medica Srofing. Inc. No. 93-C-3100 (N.D. U.-ED fied May ) -- retaiation: assignment: May consent decree providing $9.156 in back pay for one individua. Packaging Corporation of America No. 92-C-6557 (N.D. III.-ED fied September ) -- rcaiarion: faiure to promoe. discharge; Apri favorabe coun order. no monetary reief. Tivoi Enrerprises. Inc. No. 92-C-1031 (N.D. IL-ED fied February ) -- retaiation: discharge: October consent decree providing %12.ooO in back pay and interest for one individua and notice posting. Wash Trayor McHugh Consnucrion NO. 92-C-3639 (N.D. III.-ED fied June ) -- retaiation: faiure IO reca: January settement agreement providing OGC FY 93 Annua Repor!

33 Exhibir Page 5 Chicogo Didric Office -. Suifo Fied ond Suifs Resoved 517.C00 in back pay for IWO individuas. See aso. above. Hour of Sinds ond More. Inc.. cf a.: beow. Deere & Company. 5. Nationa Origin See above. Andrew Corpororion; Continenfo Air Tronsporr Company, Inc. D. ADEA Deere & Company No. 92-C-4036 (C.D. III.-RD.fied May 1 I. 1992) -- retaiation; faiure IO rehire; December consent decree providing S in back pay for one individua. Francis W. Porker Schoo No. 91 -C-4674 (N.D. III. fied Juy ) -- age (40 and over); faiu,re IO hire: Juy unfavorabe coun order. G-K-G. Inc.. er a. No. 89 C 8693 (N.D. III. fied December ) -- age (70): discharge; November IO. I992 order of dismissa. Sate of Iinois No. 86-C-7214 (N.D. I. fied September ) -- age (40 and over): faiure IO hire; October settemen agreement providing %25,ooO in back pay for five individuas. Swore of Iinois ond Frofcrno Order of Poice, Troopers Lodge No. 41 No. 92-C-2108 (if/ 92-C-2883, N.D. I.) (C.D. III. fied May ) -- cass; age (60); invountary retirement: February unfavorabe coun order. Spiege. Inc.. and Otro Versond GMBH NO. 90-C-6363 (N.D. III.-ED fied October 31, 1990) -- cass: age (over 40): discharge: May 14, 1993 sct~emcnr agreement providing $ in back pay for nine individuas. Spiege, Inc.. and Otto Versond GMBH No. WC-4208 (N.D. IL-ED fied Juy ) --cass: age (over 40): discharge: June 14, 1993 order of dismissa, no monetary reief. C. Americans with Disobiifies Act AIC Security Inves~igofions. Lrd.: AIC Internotiono. Ltd. and Rurh Vrdoyok No. 92-C-7330 (N.D. W-ED fied November ) -- disabiity (cancer): discharge: June jury verdict awarding 8222,000 in back pay. compensatory and punitive damages. Dukane Corporarion No. 92-C-8279 (N.D. IL-ED fied December 22, 1992) -- age (59); discharge: May consent decree providing $ in back pay and iquidated damages for one individua. 90 OGC FY 93 Annua Rep& 235

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