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Danger! Strong Currents. Severe Undertow. This warning ought to be posted in the managing office of every modern law firm because the waters of the legal profession are fraught with peril when it comes to employment practices. No matter how placid these waters may appear on the surface, a squall can quickly take shape and engulf the firm. The courts have precipitated a flood of employment cases in recent years. Under Title VII, employers are subject to vicarious liability for a hostile environment created by a supervisor with authority over the employee. Strict liability may be imposed when the supervisor harassment culminates in tangible adverse employment action, i.e., discharge, demotion, undesirable reassignment. The employer’s conduct need not be egregious for punitive damages to be assessed. The courts’ expanded interpretation of discrimination laws has led the Equal Employment Opportunity Commission (EEOC) to take a more aggressive approach in investigating claims, finding probable cause, negotiating benefits, and filing suits against employers. Employment issues now represent 30 percent of all civil litigation in the United States. And according to the Department of Labor, plaintiffs win 41 percent of all employment-related litigation (bench and jury), with an average verdict exceeding $450,000. Discrimination protection is not restricted to Title VII. State and city laws have expanded liability to include sexual orientation, marital status, matriculation, personal appearance, and age — just to name a few. Though large public companies have garnered most of the press generated by huge discrimination verdicts and settlements, many smaller, privately held businesses have also been hit with multimillion-dollar claims and judgments. HIGHER STANDARD FOR LAWYERS Because employment discrimination liability takes root in an organization’s supervisory apparatus, law firms are fertile breeding grounds. And lawyers are often held to a higher standard of conduct. In one New York case, the supervisory dynamic between a male senior partner and a female associate developed into a claim of sexual harassment and a jury award of $300,000 against the firm. The judge noted that the harasser was not a “mere” employee but a partner whose conduct was attributable to the partnership, even if the other partners didn’t know about it. After awarding punitive damages of $50,000 against the partner, the judge excoriated him for behavior that was “especially reprehensible in an attorney charged with upholding the dignity of the legal profession.” Changes in the legal profession over the past 20 years correlates with changes in employment practices liability (EPL) risk exposure. In contrast to the mostly white, male environment of the past, today legal and support staffs are a diverse group, which has given rise to allegations of sexual harassment and racism, as well as homophobia, xenophobia, and ageism. A recent American Bar Association study concluded that female lawyers, who now account for about a third of the country’s lawyers, face major barriers, including unconscious stereotyping, inadequate access to support networks, and sexual harassment. These barriers are EPL claims waiting to happen. Other studies revealed that two-thirds of female lawyers in private-practice law firms reported either experiencing or observing sexual harassment by male superiors and colleagues, and that African-American associates are less satisfied with their jobs than their white, Asian, and Hispanic colleagues. PERILS OF PARTNERSHIPS Partnership is another major area of EPL risk. In a 1984 case against King & Spalding, the Supreme Court held that the right to be considered for partnership is a privilege of employment protected by Title VII, especially since law firms explicitly use the prospect of partnership to induce young lawyers to join the firm. This career track rewards the best and brightest associates, but also creates risks for firms. Partnership is not unlike membership in a private club: Both are exclusive and involve subjective factors like politics and interpersonal relations. Federal, state, and local discrimination statutes have become a panacea for the unfairness and imperfections of a subjective decision-making process — and empathetic juries often perceive unfairness as discrimination. A pending suit against New Orleans’ Phelps Dunbar illustrates the problem. An African-American associate claimed he was pressured to transfer to the firm’s tort and insurance section because those cases are generally tried before predominantly black juries. The associate refused and was later told that he had no chance of making partner. His complaint alleged constructive discharge in retaliation for refusing the transfer. Retaliation claims like this one have doubled over the last decade and account for about 25 percent of all charges filed with the EEOC. Partners are also a source of EPL risks for law firms. The EEOC is attempting to redefine the traditional definition of partner so that partners can sue for discriminatory conduct. In an action against Sidley Austin, the EEOC alleges that the firm engaged in age bias when it demoted 32 partners to either senior counsel or of counsel. Precedent holds that partners in a firm are owners rather than employees, but this case may create a new class of potential plaintiffs. A potential type of EPL exposure for firms is seen in the $45 million lawsuit recently brought against Pillsbury Winthrop and its managing partner, chair, and vice-chair by a former partner alleging defamation and interference with business relations, among other claims. The suit stems from a press release by the firm’s chair stating that the partner was investigated for sexual harassment complaints and concluded there was a “reasonable likelihood that harassment ha[d] occurred.” The complaint alleges that Pillsbury’s motive was to undermine the plaintiff’s partnership at Latham & Watkins to counter the perception that his departure would be regarded as a major loss to Pillsbury. COSTS RUN HIGH Most EPL cases result in confidential settlements, so it’s not known exactly how many law firms have been sued by employees or partners and how much has been spent to resolve them. Generally, the benefits of settling EPL claims outweigh the time, publicity, and effort involved in litigating the matter. Here are just a few of the cases that firms have litigated and lost: • A former secretary accused her supervisors of sexual harassment, retaliation, and breach of contract. The claim went to arbitration, where she was awarded $14,000 for lost income and emotional distress. The California law firm rejected the arbitrator’s decision, so the case went on to trial. The jury awarded the former secretary $260,000. • In separate cases, a Philadelphia law firm’s insurer paid two settlements of $200,000 and $249,000 to an attorney and her secretary, respectively, relating to allegations of sex discrimination and harassment, along with retaliation against the firm and its managing partner. • A Massachusetts firm agreed to pay $100,000 to five former employees who alleged racial and sexual harassment, and to adopt a policy to prohibit sexual harassment approved by the EEOC and provide anti-harassment training. • A federal jury awarded $80,000 in damages to a female lawyer who claimed that her supervisor, a male partner, had sexually harassed her and that the Maryland firm did nothing to stop the harassment. • A female lawyer who alleged sexual harassment by a male partner and a sexually hostile work environment was awarded $95,000 in damages. The cumulative cost of EPL exposure warrants serious concern. Besides jury awards and attorney fees (if the plaintiff prevails), defending employment claims comes at great expense. Even when a claim is settled, defense costs can amount to several hundred thousand dollars. Besides the costs of defending and resolving such suits, the collateral damage to a firm’s morale, to its reputation within the legal community, and to relations with clients will be just as costly. Clients will disassociate themselves from law firms with too much bad publicity, and top law students might also shy away. HOW EPL INSURANCE WORKS EPL insurance is customarily written as a claims-made policy form, which means that coverage is triggered by the assertion of a claim during a policy period. A claim is generally defined as a demand (oral or written), administrative charge (by the EEOC, Office of Federal Contract Compliance Program, or state agency), or a lawsuit brought by a past, present, or prospective employee or partner. Policies generally cover prior acts, and usually cover the firm; all directors and officers; all partners and associates; all paralegals and support staff. The types of claims insured against include wrongful termination; discrimination; harassment; failure to employ/promote to partner; wrongful infliction of emotional distress; and such workplace torts as employment-related defamation, negligent evaluations, wrongful deprivation of career opportunity, and employment-related misrepresentation. Covered losses include judgments, settlements, defense costs, front and back pay, and compensatory and punitive damages (where insurable by law). EPLI policies generally exclude coverage for acts that could be covered under other policies, such as ERISA (except 510 violations) and COBRA (covered by fiduciary insurance); bodily injury (covered by general liability insurance); professional services (covered by malpractice or professional liability insurance). EPLI also excludes violations of federal, state, and local statutes that require specific notice and excludes the payment of wages and overtime (covered by the Fair Labor Standards Act). Some policies exclude coverage for claims arising out of breach of a written contract, while other carriers will pay the defense costs relating to such claims. Most policies exclude claims arising out of partnership agreements or allocation of shares, but some policies will provide a defense for such claims. A special feature of some law firm EPLI policies is that there is no “duty to defend,” which is similar to directors and officers liability policies. This feature permits the firm to choose its own defense counsel and be reimbursed at reasonable rates for that jurisdiction. Several policies allow the law firm to defend itself at a rate discounted by an amount generally considered to be the firm’s “profit factor.” Some carriers also offer third-party coverage for discrimination and harassment claims brought by clients, vendors, or other individuals. EPLI policies with deductibles exceeding $100,000 tend to have claims-reporting thresholds that are equal to half the deductible. This allows the firm to report only those claims that are likely to exhaust a sizable deductible and can also prevent the insurer from attempting to deny coverage for late notice. Since most claims settle before trial, a primary function of EPLI policies is to assist settlement. Funds from EPLI policies not only contribute to settlements above the deductible, but also pay for the defense costs when such costs exceed the deductible. Deductibles on EPLI policies for law firms may range from $25,000 to $1 million, depending on the size of the firm and its appetite to absorb risk. Firms with 500 or more employees (including partners) can have limits of $10 million to $25 million, with deductibles of $250,000 to $1 million. Midsize firms — those with fewer than 500 employees but more than 100 — may have limits between $5 million and $10 million, with deductibles in the $25,000 to $250,000 range. Smaller firms generally have deductibles and limits commensurate with the number of employees and risk exposure. Most insurers are still reluctant to allow law firms unrestricted control over the settlement process. Therefore, most policies include a “hammer clause,” which allows a carrier to limit its liability by capping settlement amounts. Usually, a “soft” hammer clause divides the future loss equally between carrier and insured (including defense costs). Some carriers have a soft hammer of 70-30, meaning that the firm is responsible for 30 percent of all defense costs, judgment, or settlement above the deductible and original settlement demand. For a long time, insurers tended to avoid writing this line of coverage for law firms due to the perception (whether correct or incorrect) that law firms pose too unique and dangerous a risk exposure. The last few years, several companies and syndicates have begun underwriting specifically tailored products that take into account the law firm’s unique risk profile. As a result, modern law firms are no longer forced to “swim at their own risk” in the dangerous waters of employment law. Jonathan H. Kurens, a former practicing lawyer, is the EPLI/management liability product manager for the Professional Services Group at Aon Risk Services Inc. of New York. He can be reached at [email protected]. The author wishes to thank Brendan F. Walsh, a third-year law student at the University of Maine, for his assistance with this article.

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