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Danger! Strong EPL Current! This warning should be posted in the managing office of every modern law firm, as the waters of the legal profession are fraught with peril concerning Employment Practices Liability (EPL). No matter how placid the employee waters may seem on the surface, an EPL squall can quickly form and engulf a firm. The courts have established a new standard for employer liability vis-�-vis the conduct of supervisors propelling a steady flow of EPL lawsuits. For example, the U.S. Supreme Court held employers subject to vicarious liability for an actionable hostile environment created by a supervisor with immediate (or successively higher) authority over the employee. [FOOTNOTE 1] This standard has subsequently been held applicable to all vicarious liability inquiries under Title VII. [FOOTNOTE 2] Caution is premised inasmuch as the current climate prefigures the ultimate in risk exposure — the application of strict liability to any sexual harassment case. [FOOTNOTE 3] LOW THRESHOLD Today, the threshold for Title VII liability is low, and an employer’s conduct need not be egregious to be assessed punitive damages. [FOOTNOTE 4] Further, plaintiffs are allowed punitive damages even if the jury awards only nominal damages. [FOOTNOTE 5] The high court has also ruled that front pay is not to be included in compensatory damages, thereby side-stepping the caps imposed under the Civil Rights Act of 1991. [FOOTNOTE 6] Buoyed by the expanded interpretation of discrimination laws, the Equal Employment Opportunity Commission (EEOC) has taken a more aggressive approach in investigating claims, finding probable cause, negotiating benefits, and filing suits. The EEOC reports that employee complaints have escalated to nearly 90,000 new charges a year. [FOOTNOTE 7] Employment issues now represent 30 percent of all civil litigation in the United States. [FOOTNOTE 8] This is cause for alarm — particularly considering that the Department of Labor has reported that plaintiffs win 41 percent of all employment-related litigation with an average verdict exceeding $450,000. Moreover, discrimination protection is not restricted to the verse of Title VII. State and city laws have expanded liability to include such characteristics as sexual orientation, marital status, matriculation, personal appearance, and people under the age of 40, to name a few. Many states and cities have uncapped compensatory and punitive damages which compliment and expand Title VII claims. A law firm is no safer from the EPL undertow than any other employer. Liability takes root in an organization’s supervisory apparatus; and law firms are fertile grounds, as they have many ostensible “supervisors” — managing partners supervise partners, partners supervise associates, senior associates supervise junior associates, associates supervise paralegals, all of whom supervise support staff. Moreover, lawyers are not only supervisors, they are officers of the court. And with this professional responsibility comes a higher standard of conduct. In a recent opinion, a judge suggested that “of all employers, lawyers can be expected to be most sensitive to charges of employment discrimination.” [FOOTNOTE 9] When the conduct of a law firm’s “supervisor” does not comport with such expectations, we have seen a different functional definition of EPL effectuated. ‘SIER’ In the matter of Sier v. Jacobs Persinger & Parker, the “supervisory” dynamic between senior partner and associate developed into a claim of sexual harassment, and in turn, a jury award of $300,000 against the firm. There, the judge noted that the harasser was not a “mere” employee, but a partner whose acts were 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 incongruent with an “officer of the court,” stating that this conduct was “especially reprehensible in an attorney charged with upholding the dignity of the legal profession.” [FOOTNOTE 10] The composition of the legal profession has also changed over the past 20 years correlating with changes in EPL risk exposure. Allegations of sexual harassment, racism, ageism, and misrepresentation are not issues sui generis to the corporate world. Today, lawyers and support staffs are a diverse group, and with respect to the predilection of the plaintiff’s bar, the modern law firm will ineluctably face employment discrimination claims and liability. In 2001, women comprised the majority of first-year law students and now account for about a third of the nation’s lawyers. [FOOTNOTE 11] This statistic warrants attention because it represents risk. A recent American Bar Association study concluded that female lawyers face major barriers, including unconscious stereotypes, inadequate access to support networks, and sexual harassment. [FOOTNOTE 12] Another study revealed that 66 percent of women lawyers employed in private-practice law firms reported either experiencing or observing sexual harassment by male superiors and colleagues. PARTNERSHIP EXPOSURE The career track within the legal profession predisposes law firms to even greater EPL risk than we find in the corporate world. In Hishon v. King & Spalding, the U.S. Supreme Court held that partnership consideration fell within the purview of Title VII protection when law firms explicitly used the prospect of ultimate partnership to induce young lawyers to join the firm. [FOOTNOTE 13] Most associates begin careers aspiring to make partner. It is the prospect of this achievement that serves to create risks unique to the modern law firm. Partnership in a law firm is tantamount to acceptance into a private club. However, when an invitation to join is subjective, membership in the club is exclusive. These membership decisions are not discriminative, per se, but from subjectivity and exclusivity, a wellspring of liability forms. EPL risk is attendant to partnership development of racially/ethnically/gender diverse associates. The risk to the law firm arises from an inherent tension between the goal of all discrimination law and our society’s commitment to free decision-making by the private sector in economic affairs. The matter of King v. Phelps Dunbar illustrates this tension. The pending case involves a black associate claiming he was pressured to transfer to the firm’s tort and insurance section presumably because those cases are generally tried before a predominately black jury. The associate refused and was told at his performance evaluation that there was no chance of making partner. He subsequently alleged constructive discharge in retaliation for refusing the transfer. [FOOTNOTE 14] This case also illustrates an emerging pattern in retaliation claims, which have doubled over the last decade and account for one-quarter of all charges filed with the EEOC. [FOOTNOTE 15] In yet another of matter with profound employment law significance, the EEOC is attempting to redefine the traditional meaning of partner and, in effect, broaden its scope and reach. In its action against Sidley, Austin, Brown & Wood, the agency alleges the firm engaged in age bias when it demoted 32 partners to either “senior counsel” or “of counsel.” [FOOTNOTE 16] If the EEOC prevails, partners may be allowed to sue the firm despite any impediments imposed by the existence of a partnership agreement. There is also the recent $45 million lawsuit 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, stemming from a press statement by the firm’s chair stating that the partner was investigated for sexual harassment complaints and “concluded there was a reasonable likelihood that harassment has occurred.” [FOOTNOTE 17] EPL INSURANCE EPLI 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 (EEOC or state agency), or lawsuit brought by a past, present or prospective employee/partner. The policies generally cover “prior acts.” EPLI policies usually cover the law firm; all partners and associates; all paralegals and staff. The types of claims insured against include wrongful termination, discrimination; harassment; failure to employ/promote to partner; wrongful infliction of emotional distress; work place torts such as employment-related defamation; negligent evaluations; wrongful deprivation of career opportunity; and employment-related misrepresentation. Covered losses include judgments, settlements, defense costs, front and backpay, and compensatory and punitive damages (where insurable by law). Some carriers can offer separate coverage with an offshore wraparound policy in a jurisdiction like Bermuda, which does not prohibit such coverage. [FOOTNOTE 18] The EPLI policies generally exclude coverage for acts that could be covered under other policies, such as ERISA, COBRA, bodily injury, and professional. EPLI also excludes violations of federal, state and local statutes requiring specific notice or the payment of wages/overtime (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 in the instance of such claims. A feature unique to some law firm EPLI policies is that the firm can choose its own defense counsel and be reimbursed at reasonable rates for that jurisdiction. Moreover, several of these policies allow the law firm to represent itself in the defense of claims at a rate discounted by an amount generally considered to be the firms “profit factor.” Some carriers also offer third-party coverage for discrimination and harassment claims brought by clients, vendors, or other individuals. The policies also tend to have claims reporting thresholds that are equal to half the retention. This allows the firm to report only those claims that are likely to exhaust a sizeable self-insured retention and can also prevent the asserting of “late notice” defenses by the insurer. Since most claims settle before trial, a primary function of EPLI policies is to participate in the settlement of the claim. As stated earlier, funds from EPLI policies not only contribute to settlements above the retention, but they also pay for the defense costs in excess of the retention. Retentions on EPLI policies for law firms may range from $25,000 to $1 million depending on the size of the firm and the firm’s appetite to absorb risk. Large law firms of 500 or more employees (including partners) generally have limits of between $10 million to $25 million with retentions of $250,000 to $1 million. Midsize firms with fewer than 500 employees but more than 100 may have limits between $5 million to $10 million with retentions in the $25,000 to $250,000 range. A smaller firm will generally have rates commensurate with its 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,” [FOOTNOTE 19] which allows a carrier to limit its liability by capping settlement amounts. Some policies provide a “soft” hammer clause, in which the carrier and insured share the future loss 50-50 (which includes defense costs). Some carriers have a “soft” hammer at 70-30, in which the law firm is responsible for 30 percent of all defense costs, judgment or settlement above the retention and original settlement demand. CONCLUSION EPLI has traditionally served as a life preserver for the corporate world. 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. However, the last few years have seen entry into the insurance marketplace of several companies and syndicates 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 unforgiving waters of employment law. Jonathan H. Kurens, an attorney, is the EPLI/Management Liability Product Manager for the Professional Services Group at Aon. Brendan F. Walsh, a third-year law student at the University of Maine, assisted in the preparation of this article.

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