The previous issue of the Policyholder Advisor addressed the increase in companies’ mass tort liability likely to result from the Obama administration’s ending of Federal preemption, as well as the insurance strategies that could help cover those risks. In this space, we want to briefly highlight two other legal changes that can increase your company’s liability risks — one already enacted and one under consideration by the current Administration and Congress.
The “Lily Ledbetter Fair Pay Act” and Its Insurance Implications
The Lilly Ledbetter Fair Pay Act of 2009, signed by President Obama earlier this year, effectively overturns a Supreme Court decision and significantly extends the time by which employees can sue their employers for pay discrimination. The Supreme Court ruled in 2007 that the statute of limitations for asserting a wage difference discrimination claim began to run from the initial decision to pay a female worker less money than a male counterpart, even if the pay disparity continued for years. Ledbetter v. Goodyear Tire & Rubber Co.
The Ledbetter Act effectively restarts the applicable 180 (or 300) day statute of limitations clock each time a worker receives a paycheck which reflects a pay disparity. Thus, each paycheck could become the basis of a potential discriminatory violation of law, greatly extending the time in which a worker may bring a discriminatory pay claim against the employer. Moreover, although the Ledbetter case dealt only with sex-based pay disparity, the new law also includes claims based on protected characteristics such as race, age, religion and disability. Successful claimants can recover up to two years of back pay from the date the discrimination charge is filed.
Employers should consider whether their employment practices liability insurance (EPLI) policies adequately cover the new risks created by the Ledbetter Act (other liability policies are likely to exclude employment claims). Because EPLI policies are generally sold on a claims-made basis, you should review to determine if your retroactive date extends back far enough to cover claims based on events that occurred several years or even decades ago.
In addition, some EPLI policies exclude or limits coverage for lost wages and back pay, except under sometimes limited circumstances. Again, a review of your policy can put you in a position to purchase improved coverage in the future.
Negating “Stoneridge”
In late July, Senator Arlen Specter of Pennsylvania introduced the “Liability for Aiding and Abetting Securities Violations Act of 2009.” The bill was co-sponsored by two other Democratic Senators, and is largely viewed as a legislative overturning of the 2007 Supreme Court decision Stoneridge Investment Partners v. Scientific-Atlanta.
Stoneridge involved a claim by shareholders of Charter Communications against companies that did business with Charter, alleging that certain transactions were structured to inflate Charter’s cash flow in order to meet earnings expectations for a fiscal quarter.
The defendant counterparties, Scientific-Atlanta and Motorola, argued that they could not be held liable for aiding and abetting securities fraud under an earlier Supreme Court decision, Central Bank of Denver. The plaintiff shareholders attempted to evade the limitation on aiding and abetting liability by alleging that Scientific-Atlanta and Motorola were not merely aiding and abetting, but active participants in a securities fraud scheme. The Supreme Court affirmed the dismissal of the claims against Scientific-Atlanta and Motorola but, in doing so, it arguably narrowed the protection offered to third-parties under Central Bank, and ruled in favor of the defendants because the plaintiffs could not claim reliance, a necessary element of their securities fraud claim.
Specter’s bill would potentially overturn Stoneridge and even Central Bank, and significantly expand the number of entities that shareholders could target in securities fraud cases. It would place greater risk on all counterparties to transactions with companies that later suffer earnings shortfalls, as well as accounting, financial, and legal advisors to those same companies.
Many D&O and professional liability policies have special coverages and provisions applicable to claims involving securities issued by the policyholder. If Specter’s bill passes, policyholders should consider whether their polices provide adequate protection for claims involving the securities of other entities. In addition, in the first few years after such a law is passed there is often a surge in expensive litigation that determines the scope of the law. Even if a claim against you is dismissed, such litigation could be costly. Policyholders should check whether their policies require defense costs to be advanced or reimbursed after the fact. Other provisions worth noting are exclusions for fraudulent and willful conduct, which should have clauses indicating they will only apply If the allegations are proven by judgment.
Prudent planning can help to manage the risks of increased liabilities under new laws.