Brokers agree that the biggest executive risk in California is employment practices liability, especially wage and hour claims in SoCal, where a crafty plaintiffs bar and liberal courts have conspired to push many carriers out when it comes to payroll coverage.
“Plaintiffs attorneys want to get to trial because they feel they can obtain significant judgments, which makes it difficult to get them to settle for less” in Southern California, said Paul Lefcourt, co-founder and management liability practice leader at wholesale brokerage Socius Insurance Services.
California stands out by almost any measure when it comes to the frequency and severity of EPL and D&O claims, Advisen data show. But W&H accounts for 40 percent of all EPL losses there, compared to an average of 28 percent for other states.
The data include cases brought against public and private companies in state jurisdictions that have involved losses since the early 1990s.
And settlement values of EPL cases in California outstrip—by as much as four times in some cases—those of other states, on average.
“No matter what your (loss) percentile is, the settlement is going to be larger in California,” said Jim Blinn, executive vice president at Advisen, speaking earlier this month at the 2015 Management Liability Insights Conference in San Francisco.
The average settlement for W&H claims in the state is more than $6 million, compared to $1.5 million in all other states combined. Settlements for age-discrimination average almost $8 million, compared to $2 million elsewhere.
While demand for W&H policies is still strong in California, carriers find that they’re “cutting a check for the full sub-limit” of coverage on claims, Lefcourt told Advisen. “Crafty plaintiffs lawyers are finding ways to get more than the sub-limit for defense at times.”
He added that with carriers leaving the state, the few new ones have not had to “undercut the market to get new business.”
Garrett Koehn, San Francisco-based president for the Northwestern US at wholesale broker CRC Insurance Group, told Advisen that the higher frequency and severity of employment-related claims in California has given EPLI equal weighting with D&O in most insurance programs.
In the mid-90s, when D&O coverage began to be widely offered, EPLI got “thrown in like French fries,” he said. “Now D&O is not exactly the fries, but they’re more like a slider.”
Retentions for EPLI have moved up, and carriers are in general avoiding wage and hour in California.
The state is also cracking down on issues related to pay, such as overtime and off-the-clock work, Koehn said. There is an abundance of the kinds of service employers most often involved in the cases in California, especially SoCal.
The environment has affected more than carriers and clients.
“Retail brokers can’t have a national implementation strategy” that includes a panel of six carriers, Koehn said. “What works great for Dallas and Chicago breaks down as soon as you get to California.”
A few carriers are looking at coming back.
“I’ve heard rumblings from a few that prices are where they need to be—though the market won’t be soft anytime soon,” he said.
The number of D&O claims against companies in California involving losses of more than $1 million beats the national average by a magnitude of four, Advisen data show.
California is also home to 27 percent of all claims in the US related to initial public offerings, with information technology accounting for the lion’s share, at 71 percent. Advisen data include IPOs held since 2000.
“If you’ve got a company IPO’d in California, there’s a higher probability of a lawsuit” over information about the offering, Blinn said.
You’re also more likely to get sued, he said, if you’re a company in California involved in a merger or acquisition.
In almost any given year since 2000, the percentage of M&As with follow-on litigation in the state has exceeded the national average, Advisen data show. In 2012, more than 80 percent of M&As drew claims, for example, compared to a US average of just under 40 percent.
And that’s in the present. For the future, a preponderance of high-tech industry could augur cyber security cases aimed at directors and officers, said Peter B. Morrison, a litigation partner in the Los Angeles office of Skadden, Arps, Slate, Meagher & Flom LLP.
Cyber security and data breach cases “being grappled with in real time” have been framed in terms of breach of fiduciary duty and pose a potentially growing risk to executives at the many technology companies in California, he told Advisen. His practice focuses on takeover and securities litigation.
“Some say California has a more robust regulatory regime than other states, and this can lead to higher risk profiles for directors and officers,” Morrison said. “The good news is that California law will look to Delaware law” when it comes to fiduciary breach of duty, which can help in a D&O defense.
