First party property coverage is for damage to a policyholder’s own property, not for damage caused to the property of others. First party property coverage comes in two basic types: Named Perils Policies and All-Risk Policies. First party property coverage policies are where most policy holders find their business interruption coverage.
Business interruption coverage typically covers physical damage at an insured location that results from a covered peril and causes business income loss. There are two types of business interruptions: Partial and Total. In the last 15 years, many more policies cover partial interruptions. These policies will pay for lost income (after offsets for cost avoidance) that would have been earned during the period of restoration. The period covered is until the premises are or should have been restored to operation. Also, a financial allowance is often available to hire an outside CPA to calculate the loss.
Guest Liability Claims
The most common types of hotel guest liability claims are: slips and falls, exposure or contact with something that injures, being struck by or against something. These three causes account for more than half of all hotel guest liability claims. Such claims are often covered by a comprehensive policy sold as Commercial General Liability (CGL) insurance.
Third party coverage in the form of CGL insurance is coverage for a policyholder’s liability to others. This coverage can pay for the cost of lawsuits brought against the policyholder. If a claim is potentially covered and not excluded by the policy, the insurance company will pay for a lawyer to defend the policyholder. If a claim is actually covered, the insurance company will also pay the policyholder’s liability after trial or settlement.
A CGL policy has a limit of liability. For a policyholder facing a claim, there are usually two limits that are relevant: 1) the “per occurrence” (sometimes “per claim”) limit; and 2) the“aggregate” limit. Note: defense costs are usually outside the limit of liability.
CGL policies typically require that the policyholder give prompt notice of a potentially covered claim and that the policyholder cooperate with the insurance company in its investigation of the claim and its defense of the policyholder. Insurance companies sometimes threaten to deny coverage if they do not get all the cooperation they want. But there are limits on the extent of the policy holder’s duty to cooperate: there is no duty to cooperate after a denial of coverage and a defense under a reservation of rights can limit the extent of the duty to cooperate. Policy holders should be mindful of privilege issues as well. CGL policies have exclusions from coverage that apply in certain circumstances.
Workers Compensation Claims
The most common type of workers compensation claims are: being struck by or against something, slips and falls, and manual materials handling. These three causes account for more than two-thirds of all workers comp claims. The insurance available for such claims is usually confined to workers compensation insurance. A policyholder can reduce workers comp claims with the following techniques: perform pre-employment checks/physicals; limit housekeepers to cleaning 15 rooms per day; require employees to use equipment and procedures that reduce injuries (mattress lifters, light vacuum cleaners, proper work shoes, cart load limits); implement are turn to work program.
Conclusion
The most common claims in the hospitality industry usually have corresponding insurance coverage that will soften the blow. Assess your risk and make sure you have the right coverage to manage it. If you have difficulties with an insurance company after a claim, seek advice and counsel about how to proceed.
About AndersonKill
Anderson Kill was founded in 1969 on the principles of integrity, excellence in the practice of law, and straightforward solutions to complex legal issues. The firm’s attorneys approach engagements aggressively, and have earned a reputation for combining corporate polish with pugnacity. Based in New York City, the firm also has offices in Philadelphia, PA, Stamford, CT, Washington, DC, Newark, NJ and Los Angeles, CA, but the attorneys travel around the country and around the world to handle all types of matters. Anderson Kill attorneys work together, leveraging creativity and legal and business acumen to deliver cost-effective resolutions to clients’ problems. Many of the firm’s professionals are recognized experts in their practice areas, leaders and active participants in professional associations, and are frequently invited to speak to business organizations.
In the storms’ aftermath, businesses in the affected areas of Texas, Louisiana, Florida, Puerto Rico and the Virgin Islands should be vigilant in pursuing insurance recoveries. That entails assessing not only the physical damage to their property but also income losses stemming from flooded and blocked roads and bridges, interruptions of shipping and air transport, evacuations, and closures by civil authority.
Businesses suffering from supply chain disruptions, both in the areas of immediate impact and throughout the United States, should look to their property insurance policies for contingent business interruption coverage, triggered when policyholders lose revenue due to the effect of property damage on a supplier or customer.
Business interruption insurance covers businesses for losses in income stemming from unavoidable disruptions to their regular operations as a result of damage to property. In addition to coverage resulting from damage to the policyholder’s own property, “BI” coverage also may be triggered by circumstances including utility service interruption, a government evacuation order or a substantial impairment in access to a business’s premises. Many property policies also provide “extended business interruption” coverage that begins when the property is fully repaired and ends when operations are ramped up to their pre-disaster level—though that extension typically is limited to 60 days.
Contingent business interruption coverage is triggered when policyholders lose revenue after a property loss impacts one or more suppliers or customers. For example, businesses that rely upon specialty chemicals from the affected area may have to pay more for supplies, and companies that sell into the area, such as consumer products manufacturers and distributers, will suffer lost sales. While the business itself need not be physically damaged, it does need to have coverage for the type of damage that affected its suppliers, business partners or customers. For
example, a business must have flood coverage to file a contingent business interruption claim for losses triggered when a supplier is incapacitated by flood.
Whether the policyholder has the appropriate coverage for its own property that is needed to trigger contingent business interruption coverage can be a complicated issue. Many companies have flood insurance only for specifically designated flood zones. If the policyholder has substantial operations outside those zones, an insurance company might argue that it does not have the needed coverage to respond to a contingent business interruption loss stemming from floods in the Gulf or Puerto Rico.
Extra expense coverage applies to additional costs incurred by the policyholder as a result of damage to its property, and to costs incurred to mitigate economic losses. This coverage often is very broadly defined.
Contingent extra expense coverage applies when costs are incurred as a result of a business interruption caused by damage to the property of a supplier or customer. Like ordinary extra expense coverage, contingent extra expense insurance may be issued in one of two basic forms: 1) for extra expense to reduce loss and 2) for “pure” extra expense. The more common coverage insures only against extraordinary costs incurred to minimize or prevent a contingent business interruption loss. For example, following the destruction of a chemical manufacturing plant, a customer’s contingent coverage could be triggered by the need to purchase alternative ingredients at higher prices
than the lost supply.
POLICY PITFALLS: SUBLIMITS AND CONCURRENT CLAUSES
Many commercial property insurance policies provide different sublimits for losses caused by “flood” “storm surge” and “named storms.” How the policy defines these key terms can be critical in determining the amount recoverable for the policyholder’s loss.
In the aftermath of a major storm, damage caused by wind or wind-driven rain, storm surge or flood can be difficult to distinguish. For policyholders lacking flood coverage, insurance companies often invoke “anti-concurrent causation clauses” to deny any coverage at all if flooding occurred. Some state courts, however, have held that if the “efficient proximate cause” of damage is covered—that is the dominant cause—then the claim is covered. Also, anti-concurrent causation clauses should not be applied to property that is damaged by a covered cause, such as wind and rain, and later subjected an excluded cause, such as flood, which causes no additional damage. For this reason it is often important to determine the sequence of events and cause of damage to each item in the property loss claim.
CAREFUL COVERAGE EVALUATION
Calculating the full range of business income loss from property damage, disruption of the surrounding area, and closures by order of civil authority is a complex task. It begins with a careful evaluation of your insurance coverage, taking into account the interplay between the various coverages, exclusions and sublimits which may apply to your claim. Then, develop a plan to drive the claim adjustment to a prompt resolution. In that regard, make clear to the insurance companies the adverse impact that a delay in payment will have on your company, and document everything that occurs—or does not occur—in the adjustment process so the insurers will know that a record is being made of their claims handling conduct.
In the aftermath of disaster, insurance can be a vital lifeline—but it is one that has to be actively seized, and in some cases strenuously climbed. Understanding your full range of coverage and thoroughly documenting your sources of loss are essential to maximizing the recovery owed under your insurance policies.
Authors
Finley Harckham is a senior litigation shareholder in the New York office of Anderson Kill where he regularly represents and advises corporate policyholders and other entities in insurance coverage matters. His areas of particular focus include property loss, business interruption, directors and officers liability, construction, professional liability, aviation liability, cyber and general liability claims.
Marshall Gilinsky is a shareholder in the New York office of Anderson Kill. During his 20-year career representing policyholders, he has recovered hundreds of millions of dollars for his clients, successfully litigating disputed claims under a variety of insurance products, including property and business interruption insurance, commercial general liability insurance, errors and omissions insurance, and directors and officers insurance.
]]>Once a finding of contempt is made by the court, it has broad discretion to act not only coercively to enforce the order, but to place the aggrieved party in the same position they would have occupied but for the failure of compliance by the contemptuous actor. This is a remarkably powerful tool. For instance, if a party is required to comply with a certain request for documents, the attorney might consider the ultimate intention or use that the documents intended to serve. Would the documents have likely proven liability? If so, perhaps a persuasive argument to the court that failure to comply with an order to provide such documents should be met with a ruling in your client’s favor for liability. Would the documents have been used to establish a valuation for the company? If so, perhaps the appropriate remedy would be that you receive a more lenient standard on the manner and methods in which you prove damage. Would the order have securitized a judgment for you by requiring a township to perform a certain action that would raise the capital to fund a judgment in the event an appeal is granted? If so, perhaps your clients are best served by seeking to have an escrow account mandated with the funds deposited into it. Would receiving certain books and records permit you to prove the value of an enterprise and exit in an efficient public market? Perhaps you should compel the company that has not provided you the documents to repurchase the shares from you at fair value — providing you the same exit you would have otherwise had through arm’s-length market transactions where the information withheld is available.
We regularly consider the potential to use contempt not just as a mechanism to enforce the underlying order but to advance our client’s interest. After all, simply seeking to coerce compliance costs money and takes time to get what you should have already had in the first place. If you are going to pursue contempt, the best use of those legal dollars and muscle may well be to push past what you had been seeking in the short term (e.g., documents) and get to what you were really after (e.g., a finding of liability, remedies, damages or security).
Authors
David Graff, Shareholder – Anderson Kill
Matthew J. Silverstein, Attorney – Anderson Kill
Under the previous overtime regulations, last updated in 2004, employees had to meet certain job duties tests to qualify as executive, administrative, professional, outside sales and computer employees and be paid a fixed annual salary of at least $23,660 ($455 per week), in order to be exempt from the Fair Labor Standard Act’s requirement that overtime be paid at the rate of time-and-a-half for all hours worked over 40 in a work week. The final rule just issued retains the “duties” test, but raises the standard salaried employee exemption threshold to $47,476 per year ($913 per week). That’s more than double the current threshold under the FLSA white collar exemptions. The salary threshold will be automatically updated every three years, so that it remains at the 40th percentile of earnings of full-time salaried employees benchmark, according to a statement released by the White House.
Who is Affected
According to a fact sheet released by the White House, the new rule is expected to extend overtime protections to 4.2 million more American workers (277,998 in New York; 131,854 in New Jersey; and 46,321 in Connecticut) who are not currently eligible for overtime under federal law, and increase workers’ wages by $12 billion over the next 10 years.
The final rule also raises the overtime eligibility annual salary threshold for highly compensated workers (who must meet only a minimal duties test) from $100,000 to $134,004, the annual equivalent of the 90th percentile of full-time salaried workers nationally.
Duties Test
The final rule makes no change to the existing “duties” test for executive, professional, administrative, outside sales and computer professionals exemptions.
However, the “salary” basis test is amended to permit employers to use nondiscretionary bonus and incentive payments (including commissions) to satisfy up to 10 percent of the new salary threshold levels.
Employees paid on an hourly basis are (depending on the duties performed) eligible for overtime regardless of their pay level.
Political Backdrop
In March 2014, the Obama administration directed Secretary of Labor Thomas Perez to “modernize and streamline” the rules for exemption from overtime and minimum wage, and increase the number of overtime eligible employees. The Obama administration initially proposed raising the overtime exemption salary threshold to $50,440 per year ($970 per week). That level was reduced by about $3,000 in the final rule. The proposed overtime rule received over 270,000 comments during the comment period which ended in September, 2015, primarily from business and employer groups contending that the new rules will actually have negative consequences for employees and that employers would seek to control overtime costs by reducing hours worked and limiting opportunities for long-term advancement.
Effective Date
The effective date of the final rule is December 1, 2016. There is no retroactivity. The initial increases to the standard salary level (from $455 to $913 per week) and highly compensated requirement (from $100,000 to $134,004 per year) will be effective then. Future automatic updates will occur every three years beginning January 1, 2020.
For an attorney unfamiliar with the nuances of insurance policies and the claims process, a broker can provide invaluable support – if the broker is explicitly tasked with helping the company assess its coverage needs and analyze policies purporting to provide it. Not all brokers are equipped to perform these tasks, and not all policyholders want them to. Counsel’s first task, then, is to determine what kind of broker support is needed and to make sure that the appropriate broker is bound by contract to provide it. A written agreement that addresses the scope of services provided is essential.
To determine that scope, counsel needs a full grasp of the core tasks in which the broker may (or may not) be called upon to assist (for an outline of those tasks, see Insurance Due Diligence below).
Spell Out the Broker’s Role
Misunderstanding about what exactly is expected of a broker is far more likely in the absence of a written contract. The contract should not only identify the lines of coverage the broker is authorized to procure, but also clearly indicate whether the broker is expected to provide advice and expertise to assist the client in their selection of insurance or handling of claims, and to provide other services, as opposed to simply serving in the role of an order taker who shops for what the client has asked for.
Such clarity is important not only so the parties to the contract have a clear understanding of their roles but also to indicate where responsibility lies if the insurance that is obtained or the broker services provided turn out to not meet the client’s needs. In many jurisdictions, there is a legal presumption that a broker is merely an order taker who owes no duty to the client beyond procuring the insurance coverage that was requested or reporting an inability to do so. Further, a burden is often placed upon the client to read and understand the policies that have been obtained for them, even if the client has no expertise in insurance. These presumptions have resulted in many clients, who believed they were entitled to rely upon the expertise and advice of the broker, finding that they have no legal recourse when their coverage turns out to not be what they expected.
All too often companies fail to avail themselves of the expertise required to expedite and maximize a claim
That predicament can often be avoided by entering into a written contract with the broker that establishes the type of special relationship some courts find necessary in order to impose liability upon a broker for obtaining inadequate or unsuitable insurance. The agreement should specify that the client is relying upon the advice and expertise of the broker and that the broker’s agreement to assume that role is a material consideration in being retained. The broker may require a fee in order to assume the role of advisor, and if so, the client must decide whether it is worth the cost.
Insurance Due Diligence
While a broker can provide vital assistance in the purchase of insurance and pursuit of claims, it’s ultimately up to in-house counsel to vet insurance contracts and to hold insurance companies to their responsibilities at claim time. That entails executing the tasks outlined below, with or without close assistance from a broker.
Before coverage is bound:Counsel should analyze the contracts being offered with the company’s major liability and loss exposures in mind. Insurance policies for businesses are typically complex, lengthy contracts written in arcane language, with many exclusions that take away with the left hand much of the coverage seemingly proffered with the right. Many of the key provisions found in standard form policies have been interpreted by the courts and are best understood in light of that case law.
Most policies consist largely of standard forms, many of which remain unchanged from year to year. The broker can be asked to identify all changes in coverage. Moreover, excess policies often “follow form” to primary policies. So reviewing higher-layer policies in a tower of insurance is typically far less involved than gaining an understanding of primary policies. Care must be taken, however, to ensure that excess policies do not have less advantageous terms, if possible, and that if they do, any policies at higher levels do not follow form to them.
Choice of law and arbitration: Many commercial insurance policies contain problematic choice-of-law provisions. The insurance companies’ favorite choice is New York law, which is worse for policyholders than the laws of most other states in certain respects. For example, under New York law, in most instances there is no cause of action available to corporations for an insurance company’s bad faith.
Many insurance policies contain mandatory arbitration clauses. Counsel should carefully weigh the advantages and disadvantages of litigation versus arbitration and review the specifics of any arbitration provision in policies under consideration.
Policyholders receive at least two potential benefits from resolving their coverage disputes through litigation instead of arbitration. First, all courts in the U.S. apply rules of insurance policy interpretation that are favorable in some respects to policyholders as the party that did not draft the contract. Most notably, insurance policy coverage granting provisions are to be construed broadly while exclusions are to be viewed narrowly, and ambiguities are to be resolved in favor of coverage. These rules are applied in some arbitrations, but their use is specifically prohibited under certain arbitration clauses, and in general, arbitrators are granted broad latitude under the law to depart from a strict application of legal precedent.
Manuscript provisions: Many insurance policies contain both standard forms and “manuscript provisions” drafted for a particular policyholder. Counsel should be involved in the negotiation of manuscript provisions for two reasons. First, such provisions must clearly reflect the agreement of the parties, since if a dispute arises over their meaning, the policyholder may not be entitled to application of the reasonable expectations doctrine, which holds that the insurance company provides the contract wording and must be held accountable for any ambiguity. Second, the participation of counsel in the company’s evaluation and drafting of such provisions might provide attorney-client privilege or attorney work product protection against disclosure of internal communications in a coverage action over the meaning of a manuscript provision.
Review applications: Counsel’s role is also vital in the insurance application process. It is important to ensure complete disclosure in insurance applications because material omissions can result in rescission of the insurance policy. Applications for insurance policies typically require disclosure of known claims, losses and risk exposures. Often, in-house counsel are particularly knowledgeable about those items and may be able to identify omissions in the disclosures prepared by risk management.
Evaluate coverage: Large and complex insurance claims almost inevitably involve issues of contract interpretation and other matters for which the policyholder requires legal expertise.
A coverage opinion from counsel should be obtained whenever an insurance company asserts, or it appears from the policy, that coverage may not be provided for an important claim. The application of insurance policy provisions to a particular claim is often unclear, and the meanings of numerous standard form clauses have been interpreted differently by the courts of different states. Therefore, determining which state’s law applies and researching applicable case law can be important to a coverage analysis. Moreover, whether an exclusion applies to a claim may depend upon a determination of the proximate cause of a loss, injury or damage – legal issues best addressed by counsel.
While brokers often have a productive role to play in the handling of the claim, they generally are not trained in insurance policy interpretation. They may be able to tell counsel how the insurance company typically handles the type of claim in question – but not how it should be handled.
The assistance of counsel is often needed to obtain a clear understanding of the insurance company’s coverage position because so-called reservation of rights letters often provide no meaningful information. Those letters typically lack any meaningful statement of facts relating to the claim and simply quote various insurance policy provisions as providing possible grounds for a denial, without explaining why they may be applicable. They also typically conclude with a blanket statement that the insurance company reserves all of its rights to deny coverage on any ground whatsoever. This type of letter is a self-serving effort to satisfy the insurance company’s obligation to promptly articulate the grounds upon which coverage may be denied, but it is deliberately vague in order not to limit its options. Policyholders need a clear and specific statement of any possible grounds for denial so they can provide additional information and assess their coverage. Counsel are often best equipped to demand meaningful coverage positions from insurance companies.
In conclusion, in-house counsel can help ensure that the insurance coverage purchased meets the company’s needs and that the protection paid for is not lost in the pursuit of a recovery. Brokers can provide vital assistance in fulfillment of these responsibilities, but their expertise is complementary to, not a substitute for, legal analysis and judgment.
]]>Co-authored by Diana Shafter Gliedman
Now that the first cases of Ebola in the United States have been treated and the country is for the moment Ebola-free, it’s easier than two months ago to maintain perspective. Ebola is difficult to contract, and widespread outbreaks in the United States remain unlikely. That said, the risk of being affected by Ebola remains a significant concern for businesses across the country and worldwide— especially hospitality businesses.
While every business is concerned with the safety of its workers and customers, the hospitality industry in particular needs to take prudent measures to mitigate potential financial losses stemming from Ebola or other infectious disease outbreaks, including a thorough review of the coverage provided by existing insurance policies.
Some insurance brokers and insurance companies are rushing to market policies specifically designed to cover Ebola-related losses. Companies at risk may want to consider buying such coverage, but they should first closely analyze whether existing policies provide adequate coverage. These may include policies providing business interruption, workers’ compensation, general liability, and D&O coverage. Below, we consider each in turn.
Business Interruption
Typically purchased as a component of a business’s property insurance, business interruption coverage is designed to protect businesses against lost profits due to disruptions to their operations. Contingent business interruption coverage may apply to losses stemming from similar disruptions to a company’s suppliers or customers — but usually only if the underlying cause of damage is covered with respect to the policyholder’s own property.
In most property policies, business interruption coverage is triggered when the policyholder suffers physical damage to insured property. Physical damage, however, can include contamination. Moreover, some policies, particularly those written for policyholders in the hospitality industry, expressly provide coverage for losses stemming from infectious diseases without requiring other physical damage to property. Further, many property policies include civil authority coverage, which is triggered when authorities limit access to an area in which a business is located, even if there is no physical damage to the policyholder’s premises.
Some brokerages are rushing to introduce business interruption coverage specifically for Ebola — which may or may not be redundant for businesses with some provision for infectious disease coverage. At the same time, certain insurance companies are warning that they plan to introduce exclusions for Ebola related losses on new and renewed coverage sold to policyholders with increased risk of such losses. In this environment, it is a good idea to review existing polices to confirm the scope of coverage already in place for these risks.
Workers’ Compensation
Virtually every state’s workers’ compensation statute provides that an employee is entitled to benefits for what is known as an “occupational disease.” To constitute an “occupational disease,” two conditions must be met: (1) the disease must be due to causes and conditions that are characteristic of and peculiar to a particular trade, occupation or employment; and (2) the disease cannot be an ordinary disease of life, to which the general public is equally exposed outside of employment.
While occupational diseases are covered and ordinary diseases generally are not, there are circumstances where the latter may be covered if a direct causal connection to the workplace can be established. Because Ebola is generally contracted only through contact with an infected person’s bodily fluids, the question of whether a worker contracted the disease in the course of employment may be more clear than with other diseases.
Commercial General Liability and Directors & Officers Liability Insurance
Commercial general liability insurance is designed to cover against claims alleging that the policyholder’s conduct caused bodily injury to the claimant, such as sickness or disease resulting from exposure to harmful conditions. Since most claims by sickened non-employees fit this description, commercial general liability coverage is a key source of protection.
It is possible that individuals other than those personally sickened, e.g., shareholders in companies adversely affected by an outbreak, could bring claims against companies or their executives based on allegations that management’s acts or omissions caused such claimants to suffer financial losses. Directors’ and Officers’ policies may respond to such claims. Although most D&O policies contain exclusions for claims alleging bodily injury, claims for financial damages are covered under D&O insurance. In most cases, the bodily injury exclusions should not come into play in financial claims (though some broadly written exclusions may prove problematic).
Read the Policy
For each type of insurance, coverage may depend in large part on language specific to the policy. Risk managers are urged to conduct a coverage analysis now to determine what coverage exists and whether to consider changes or additions.
]]>BROAD COVERAGE GRANTS, BUT NO UNIFORMITY
Employment practices liability insurance policies are not onesize-fits-all. They frequently are sold as manuscript policies and can have varying coverage terms and exclusions. This lack of uniformity requires a policyholder to carefully assess the most frequent or likely employment-related claims it may face and purchase the policy that best suits its needs. Nevertheless, EPLI policies typically provide coverage for a broad range of claims, including claims of discrimination based on race, age, gender or national origin, as well as claims alleging sexual harassment and wrongful termination.
Some EPLI policies also may provide coverage for claims alleging breach of employment contracts, defamation, failure to promote or negligent evaluation, wrongful discipline, and workplace torts. Wage-and-hour claims likely will be covered only by endorsement, as discussed below
Most EPLI policies also provide coverage for retaliation claims, which surpassed race-based discrimination claims in the past four years as the most frequently filed charge with the EEOC. Thus, hospitality employers can take some measure of comfort in knowing that types of claims that are becoming most frequent are covered under most standard EPLI policies.
Of course, EPLI policies are not without limitation. Commonly excluded claims include those arising under the National Labor Relations Act, the Worker Adjustment and Retraining Notification Act, and the Employee Retirement Income Security Act. Exclusions also include Occupational Safety and Health Association claims, claims for punitive damages, claims alleging intentional acts, and claims arising under workers’ compensation laws. These types of claims are common, and certain employers may be more susceptible to them than to covered claims. It is imperative to evaluate whether or not your company is likely to face the types of claims that are excluded from coverage in advance of purchasing your EPLI policy.
Traditionally, EPLI policies provide for indemnification as well as the defense of employment-related claims. The indemnification obligation is typically for amounts that the policyholder is “legally obligated” to pay in connection with a “wrongful employment act.” The term “wrongful employment act” often is defined in the policy and can vary widely from policy to policy. It therefore is imperative to understand exactly what is and is not a wrongful employment act under your specific policy.
DEFENSE COSTS LOOM LARGE—AND COVERAGE VARIES WIDELY
Typically, defense costs are included in and subject to the limits of insurance. The defense provisions of your EPLI policy may require your insurance company to defend the claims, or they simply may require that the insurance company pay for the cost of defending claims. Familiarity with the defense provisions is critical because often the cost of defense of employment-based lawsuits will be greater than the cost of any settlement, verdict or award.
WAGE AND HOUR, A LA CARTE
Recently, wage-and-hour class action lawsuits under the Fair Labor Standards Act and its state law equivalents increasing have become popular among class action law firms. Because wage-and-hour suits typically allege violations of the FLSA with regard to the method by which employees are paid, they are particularly problematic for many in industries that pay employees by the hour, including tips.
For employers with large workforces, the potential liability in these cases can be staggering, often in the tens to hundreds of millions of dollars. Moreover, claims arising under the FLSA traditionally have been excluded under many EPLI policies.
The proliferation of these class action wage-and-hour suits has resulted in a number of insurance companies selling an endorsement that provides coverage for wage-and-hour claims under the FLSA. Many of these endorsements do not provide indemnification and only provide coverage for defense costs, which easily can escalate and total in the millions of dollars. Although coverage of defense costs is of great benefit, policyholders must understand the scope of exactly what type of coverage they are purchasing for FLSA claims and wage-and-hour class action lawsuits.
As emerging technologies introduce new risks, and as wage and-hour class actions proliferate, employers face new vulnerabilities with regard to their employment practices. Although many aspects of EPLI policies are suited to meet the emerging trends and claims in employment litigation, policyholders only can maximize their EPLI coverage through a full analysis of available policies and understanding of the terms of their current coverage.
]]>Advisor or Order Taker? Spell It Out
First, confusion or misunderstanding about what exactly is expected of a broker is a commonplace occurrence, and is far more likely in the absence of a written contract. A clear statement of the scope of services to be provided will go a long way toward the client receiving the coverage and services they want. The contract should not only identify the lines of coverage the broker is authorized to procure, but also clearly indicate whether the broker is expected to provide advice and expertise to assist the client in their selection of insurance or handling of claims, and to provide other services, as opposed to simply serving in the role of an order taker who shops for what the client has asked for.
This is important not only so the parties to the contract have a clear understanding of their roles, but also to indicate where responsibility lies if the insurance that is obtained, or services provided by the broker, turn out to not meet the client’s needs. In many jurisdictions, there is a legal presumption that a broker is merely an order taker and owes no duty to its client beyond procuring the insurance coverage that was requested or reporting that it was unable to do so. Further, a burden is often placed upon the client to read and understand the policies that have been obtained for them, even if the client has no expertise in insurance.
These presumptions have resulted in many clients who believe they are entitled to rely upon the expertise and advice of the broker finding that they have no legal recourse when their coverage turns out to not be what they expected. That predicament can often be avoided by entering into a written contract with the broker, which establishes the type of “special relationship” that some courts find necessary in order to impose liability upon a broker for obtaining inadequate or unsuitable insurance. In that regard, the agreement should specify that the client is relying upon the advice and expertise of the broker, and that the broker’s agreement to assume that role was a material consideration in its being retained. The broker may require a fee in order to assume the role of advisor, and if so, the client must decide whether it is worth the cost. While paying a fee on top of commissions or a higher fee than would otherwise be the case might be a burden, it will assist in establishing a “special relationship” with the broker should that ever be necessary.
Know Thy Broker: Insured? Incented?
Second, it is important for clients who work with small- or medium-sized brokers to confirm that the broker has sufficient errors and omissions insurance to be able to pay a malpractice claim. A services agreement should specify that the broker has and will maintain certain limits of E&O coverage and, at least at the beginning of the relationship, the client should ask for a certificate of insurance demonstrating that level of coverage
Third, a services agreement should also clearly explain the compensation that will or may be received by the broker from all sources. Broker compensation may include fees paid directly by the client, commissions paid for the placement of a policy, and other fees and commissions paid by the insurance company, such as contingent commissions, overrides, management fees or other payments intended to reward the broker for generating business for an insurance company.
The full extent of the broker’s compensation may vary depending upon which insurance company provides the coverage and therefore may not be known at the time a services agreement is entered into. So, the agreement should spell out the agreed fees, and address whether the broker will also be entitled to commissions or other payments from insurance companies, and whether the client is to be given a credit for any such payments. The client should require that any commissions or other payments be fully disclosed at the time that coverage proposals are submitted by the broker, so that the broker’s economic incentive to recommend one proposal over another is clear.
What’s Your Responsibility?
Finally, the services agreement should be clear about what is expected from the client. Service agreements that impose onerous obligations upon the client should be avoided. For example, a standard client services agreement used by one of the large national brokers provides that the broker will provide advice and procure policies, but that the client must review the policies and the broker’s work for any mistakes.
That clause recently was relied upon by the broker to contest liability in a malpractice case where the client alleged they were required to procure policies that provide defense coverage but failed to do so. The court rejected the broker’s argument that the clause required the dismissal of the client’s broker malpractice action, but left open the possibility that it could form the basis of a defense based upon the client’s alleged contributory negligence in failing to catch the error. Obviously, clients should reject any provision in a services agreement that could be interpreted to make them responsible for the broker’s errors.
Conclusion
The relationship with an insurance broker is every bit as important as those with suppliers and others with whom the client will ordinarily have a written contract. A services agreement with your broker can go a long way toward ensuring a satisfactory relationship.
]]>Councilman Brad Lander, the sponsor of the law, explained the view of many consumer advocates that the use of credit checks in employment unfairly prevents law abiding citizens from obtaining employment due to student loans or medical bills that have ruined their credit and that the use of credit histories can have a disproportionately negative effect on low income and minority applicants. “Credit checks for employment unfairly lock New Yorkers out of jobs. There is no link that can be shown between credit history and job performance and now New York City reflects that fact,” stated Lander.
The ban on credit checks does not apply to:
• police, law enforcement, public safety and other appointed positions subject to background investigations by the NYC Department of Investigation;
• bonded and financial services positions;
• non-clerical jobs providing access to trade secret or national security/intelligence information;
• jobs with signatory or fiduciary authority over funds valued at $10,000 or more;
• jobs where security clearance is required by any federal or state law; and
• positions allowing the employee access to modify digital security systems designed to prevent the unauthorized use of networks or databases.
The law adds New York City to a list that includes 10 states (California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington) and the city of Chicago, all of which currently ban the use of credit checks of job applicants. Chicago (and several of the states) allow credit checks to be performed for any job involving money handling.
According to a 2012 study by the Society for Human Resource Management, nearly half of all employers utilized credit checks in evaluating prospective employees. The stated rationale for those employers doing so, according to the SHRM study, is that an individual who acts responsibly with respect to his/her own finances tends to be a better performer.
The New York City law goes into effect on September 3, 2015, 120 days after being signed by Mayor de Blasio.
Aggrieved applicants and employees would have the full range of rights and remedies available to individuals asserting other rights under the NYC Human Rights Law.
New York City employers should look carefully at the scope of their credit and background check protocols to ensure that they are in compliance with the Stop Credit in Discrimination in Employment Act and/or fall within any of the new law’s exclusions, prior to September 3, 2015.
Please contact the author if you have any questions or require additional information.
Most hotels buy commercial general liability insurance to ensure that if they are sued by a third party, their insurance company will pay for the defense. Many hotel operators fail to recognize, however, that most liability policies provide the insurance company with the right, under certain circumstances, to control aspects of the defense of the underlying action, including whether and when to settle. It is crucial to know your rights and the rights of your insurance company when the prospect of settling a case arises.
Consent to Settle May Not Be “Unreasonably Withheld”
Most standard CGL provisions state that a policyholder may not enter into a settlement without an insurance company’s consent, stipulating that “[n]o Claims Expenses shall be incurred or settlements made, contractual obligations assumed or liability admitted with respect to any Claim without the Insurer’s written consent, which shall not be unreasonably withheld.” Other policies do away with the reasonableness requirement altogether. Some policies even purport to limit a policyholder’s ability to bring legal action against the insurance company seeking reimbursement for a settlement unless the settlement has been approved.
While these provisions make it clear that the policyholder must seek the insurance company’s consent before entering into a settlement with a plaintiff, courts generally do not permit an insurance company arbitrarily to withhold consent to a reasonable settlement. In Bogan v. Progressive Casualty Insurance Co., 521 N.E.2d 447 (Ohio 1988), a court ruled that an insurer may not avoid coverage by unreasonably refusing to consent to a settlement. In Traders & General Insurance Co. v. Rudco Oil & Gas Co., a court ruled that “[W]here the insured is clearly liable and the insurer refuses to make a settlement, thus protecting the insured from a possible judgment for damages in excess of the amount of the insurance, the refusal must be made in good faith and upon reasonable grounds for the belief that the amount required to effect a settlement is excessive.” 129 F.2d 621, 626-27 (10th Cir. 1942). Many courts have found this to be the rule of law even if the policy does not expressly state that consent will not be withheld unreasonably, because every policy contains an inherent, if unstated, duty of good faith and fair dealing.
Not All Refusals Are “Unreasonable”
While many courts hold that policyholders should not be bound by capricious or unreasonable refusals to settle, this does not negate the language of the “consent to settle” provision or the obligations it imposes. In Vincent Soybean & Grain Co. v. Lloyd’s Underwriters of London, 246 F.3d 1129 (8th Cir. 2001), the Court made it clear that an insurance company’s refusal to authorize a settlement does not in itself constitute bad faith, even if the policyholder keeps the insurance company fully informed and involved in settlement discussions. Policyholders Must Keep Their Insurance Companies Involved and Informed.
These cases make it clear that whether or not an insurance company has acted unreasonably by refusing to settle an action is highly fact specific. To protect their coverage, policyholders contemplating settlement must keep their insurance companies apprised of settlement negotiations, the circumstances of the underlying case, and justification for the settlement amount, preferably from defense counsel. Policyholders should also attempt to provide their insurance companies with sufficient time to review the settlement, raise questions, review relevant documents and speak with defense counsel. If the insurance company still refuses to authorize a settlement that defense counsel believes is advisable and advantageous under the circumstances, the policyholder may then seek to argue that consent was unreasonably withheld, and coverage for the settlement is not voided.
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