Employment Practices Liability in 2002 Escalating Exposures

1. Employment Practices Liability in 2002Escalating Exposures Who is in the gun sights of the Plaintiff’s bar?

2. Overview • Evolution of coverage and climate since 1992 • Class action complaints continue to rise • Plaintiff’s bar experiment with new extortion tactics • EEOC & OFCCP continue aggressive stance • Layoffs are at a record pace • EPLI insurers must react

3. Evolution of EPLI Coverage • 1992 stand alone EPLI coverage created • On year earlier Congress amended Title VII: impacts • Contrast in plaintiff bar stance on EPL in 2002 vs 1992 • What have these changes meant for Employers Loss experience in the employment arena?

4. What Is the Basis of the Discrimination? • Majority of our class action complaints allege discrimination based on race • Next category is gender • Age discrimination allegations are common in outsourcing and downsizing claims

5. What Is Alleged? • A pattern & practice of discrimination in: • Hiring • Wrongful terminations • Glass ceiling or promotions • Job assignments • Training opportunities • Compensation or pay

6. Who Are Some of the Key Players in the Plaintiffs Bar? • Saperstein Goldstein Demchak & Baller • Mehri & Skalet • Gordon, Silberman, Wiggins & Childs • Leiff Cabraser Heimann & Bernstein • Sprenger & Lang • Johnnie Cochran • Leeds, Morelli & Brown • Willie Gary

7. Emerging or Current Tactics • Class action cases • Traditional high profile litigation seeking settlements for big dollars > Saperstein, Gordon Silberman, Sprenger & Lang • Social reform • Litigation trend against high profile defendants to set an example and change behavior > Cyrus Mehri • Multiple Claimant or Mass actions • Group based litigation > Leeds, Morelli & Willie Gary

8. Emerging or Current Tactics • Multiple claimant or mass actions • Represent a group of 30 - 100 claimants all in the same protected class • They have various discrimination impacts • Threaten high publicity litigation on a class or individual basis • Offer to settle out with the group via a negotiated process to air each individual’s complaints • Offer to make a positive statement about the employer

9. How Do the Employers React? • Class actions — we will fight, we don’t discriminate, ultimately most settle • Social Reform — Cyrus Mehri does his homework. Most will settle for big dollars and will enact ongoing training, monitoring and oversight • Mass actions — Most opt to settle under the heat of the negative publicity

10. What Is New at the EEOC? • New EEOC Chairperson Cari M. Dominguez • Pulling back litigation authority from their field offices — Litigation as last line of defense • More mediation, settlement and conciliation with employers as opposed to litigation • Still aggressively pursuing discrimination in the workplace, but focused on prevention • OFCCP audits aggressively target compensation issues

11. Current Economic Impacts • Significant merger & acquisition activity, which often results in layoffs • Expense driven downsizing and outsourcing • Displaced workers looking for evidence of adverse discriminatory impacts • We expect a possible surge in age and race discrimination claims

12. New Evidence of Increased EPL Case Costs • 1/23/02 Press release regarding Jury Verdict Research Study for 2000 cases • 44% increase over 1999 for median awards in EPL cases • $218,000 median for discrimination and retaliation claims • 7 year (1994-2000) Median by type: • Sex: $100,000 Race: $120,951 • Disability: $175,001 Age: $268,928 • Plaintiff recovery rates: All EPL: 67% • Race Discrimination: 62% Sex Discrimination: 69%

13. What Has Carrier’s Experience Been? • Unfavorable accident year trend • What is driving losses: • Size: Large employers are huge targets • Location: CA, MA, NY, NJ, GA, FL, MI, southern TX. Coasts and cities are tougher • Industry: Retail, technology, telecom, transportation • Significant new trend: image conscious or publicly traded

14. How do Underwriters Respond? • More intensive underwriting: • Are our Insured’s prepared to defend themselves? • Do they regularly assess and track their diversity trends? • Do they review diversity trends in hiring, promotions, compensation, job assignments, training opportunities and terminations? • Are they a Federal contractor? Have they had any OFCCP audits lately? What have the results been? Can we review their required affirmative action plans? • Does their size or public image attract the plaintiff’s bar?

15. How do Underwriter’s Respond? • For large and image sensitive clients we need to address the following issues: • Require experienced class action or mass action defense counsel • Greater Insured participation in losses via significant class or mass action deductibles and co-participation in losses via significant co-insurance • The mass action deductible actually provides more certainty to the Insured as opposed to current policies • Remedy inadequate pricing via rate increases

16. What Other Creative Solutions Can be considered? • Finite risk deals for the primary or burn layer exposure • Captive Insurance to fund for large self insured retentions • Quota share line slip approaches to spread the carriers exposure up out of the primary or burn layer