The Risk Taker Roundup

1. The Risk Taker Roundup

2. Welcome Mike Hay Director of Risk Assessment and Loss Prevention / Information Resources, State Office of Risk Management

3. Opening Remarks Jonathan D. Bow Executive Director and State Risk Manager State Office of Risk Management

4. Introductions Mike Hay Director of Risk Assessment and Loss Prevention / Information Resources, State Office of Risk Management Kallman Consulting Services

5. The Risk Taker Roundup Conference DiscussiononEmployment Practices Liability Hosted by the Texas State Office of Risk Management Phil Norton President Gallagher Strategic Risk Solutions May 25, 2006

6. Employment Practices Liability:The Exposure and its Trends • Legal and Legislative Developments • Class Action EPL Claims • D&O Derivative Actions Following EPL Claims • Trends toward Catastrophic Loss • EPL Insurance Coverage Trends

7. Factors Influencing EPL Losses 1. The Older Workers Benefit Protection Act of 1990 and The Age of Discrimination in Employment Act of 1967 2. The Civil Rights Act of 1991 3. The American with Disabilities Act of 1990 (effective 1992) 4. The Family and Medical Leave Act (1993) 5. The U.S. Supreme Court decision in Harris versus Forklift Systems, Inc. (November 3, 1993) 6. Class Action EPL Claims 7. Market Capitalization Drop 8. Derivative Action Possibilities 9. Typical Claims Costs are Significant 10. Catastrophic Claims are Becoming More Likely

8. EPL Perils to consider • Wrongful Termination (actual and constructive) • Breach of Employment Contract • Discrimination • Harassment (sexual and workplace) • Failure to Employ/Promote • Wrongful Discipline or Wrongful Demotion • Failure to Grant Tenure • Negligent Evaluation • Invasion of Privacy and False Imprisonment • Employment Related Misrepresentation • Defamation or Employment Related Libel/Slander • Wrongful Infliction of Emotional Distress • Retaliation (including whistleblower)

9. Tracking EEOC Charge Filings

10. The Gallagher Database on EPL Claims • Research on Public Information - not client data • Focus on Large Losses - $1MM or more • Approaching $5 Billion of Claim Costs in database • All Losses are Post-1991 [Civil Rights Act] • Mixture of Settlements and Verdicts • Jurisdiction: half State Courts; half Federal

11. Large EPL Claims By Industry

12. Large EPL Claims by Type of Claim

13. Top 10 States for Large EPL Claims Note: numbers are percentages

14. Punitive Damages & EPL Claims • About one-third of top $2.5 BL in large losses are due to punitive damages • Of largest 150 claims, about half have punitive damages assigned • Average percentage of full award that is punitive is about 35% for all large losses, but closer to 70%, if a punitive award is present!

15. Title VII Age Discrimination in Employment Act Americans with Disabilities Act Pregnancy Discrimination Act Equal Pay Act Family and Medical Leave Act Title IX State Fair Employment Practice Statutes Whistleblower Laws Municipal Statutes and Regulations Breach of Contract Wrongful Termination Negligent and Intentional Infliction of Emotional Distress Defamation Invasion of Privacy Tortious Interference with Contract Harassment Assault and Battery Negligent Hiring/Supervision Fraud and Misrepresentation Statutes & Law Supporting EPL Claims Statutory Common Law

16. Voice of America CALPERS Coca Cola Texaco State Farm Interstate Brands Lucky Stores Shoney’s Publix Home Depot Microsoft Farmers Insurance Denny’s Miller Brewing Triton Energy Proctor & Gamble Mitsubishi Baker & McKenzie Tishman Construction General Dynamics Hughes Aircraft UPS AT&T Alabama DOT Some EPL Cases of Significance

17. Trends in EPL Insurance • The EPL exposure, including potential for catastrophic loss, has increased significantly since 1991 • Pricing started high (1992/1993) then declined (1997), rose again (2001-2003) and is now declining again • Meanwhile, EPL coverage has been greatly improved: • sometimes packaged with Loss Control consulting • punitive damages covered • no downsizing exclusion • bilateral discovery offered • no “intentional acts” exclusion • simpler reporting requirements often available • flexible selection of defense firms may be possible • third-party claim coverage

18. The EPL Marketplace Today • Cycle of Capacity starting to turn up • 1992 to 1997, 1998 to 2003, 2004 - 2009… • Until recently, Loss Ratios historically > 100% • Carriers took action in 2003 with: • Increased deductibles! • Premium adjustments • Coverage fine-tuning Risk Management, Insurance and Loss Control are more important than ever!

19. Responsibility for EP Compliance

20. Risk Evaluation and Loss Control • comprehensive auditing systems may be available • Prevention versus Reduction: Insurance is still key! To preventEPL claims, you should review your: * Hiring Processes * Employee Procedures * Training Programs * Performance Evaluations * Termination Policies * HR Operations To reduce claims costs, you should review your: * Insurance and Risk Transfers * Claims Investigation * Claim File Management * Defense Controls * Timely Notification * Return to Work Programs

21. Appendix • Additional Information on EPL Risks

22. The EPL Insurance Policy • Who is covered? • Directors & Officers • All Full-time Employees • Temporary Employees and Volunteers • Independent Contractors • The Corporate Entity and Subsidiaries • Students in a limited capacity

23. Who can bring covered claims? • Employees • Students • Applicants for hire • EEOC • State Agencies • Directors • Other individuals/entities acting on behalf

24. Strikes, Lockouts Downsizing Willful or Malicious Intent Willful failure to comply with law M/A activity Bankruptcy Class Actions Deliberate Fraud W. A. R. N. Benefits Due Written or Express Employment Contract Workers Comp. Claims OSHA Securities Violations Potential Exclusions

25. Coverages to Request • Punitive Damages • Back Pay • Front Pay • Pre/Post Judgment Interest • Nonmonetary or Injunctive Relief

26. Coverage Triggers • Written Demand for Monetary Damages • Civil Proceeding • Arbitration Proceeding • Administrative Proceeding

27. Defense and Settlement Considerations • Duty to Defend? • Panel Counsel? • Claims reporting threshold • Right to Settle (esp. Hammer Clause) • Reporting – When and How

28. Rating EPL - The Exposure Base • Number of Employees • U.S. versus Foreign • Full-time versus Part-time • Leased Employees • By state (especially CA, TX, and MI)

29. Other EPL Underwriting Factors • The nature of the operations • EEO-1 report • Turnover • Percentage of highly paid employees • The quality of employment manuals and handbooks; the stated positions on the key practices and procedures • Financial Condition • M&A Activity • Policy Wording Considerations • Approach to Risk Management • Litigation/Loss History - Claims experience is essential!

30. Break

31. Public Officials Coverage / Cyber Risk Jean Moreau AIG

32. Security & Privacy Liability Nick EconomidisVice PresidentProfessional Liability DivisionAIG/National Union 215-255-6028 Nicholas.Economidis@aig.com Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

33. Security & Privacy LiabilityAgenda • Security & Privacy Exposures • Traditional Policy Forms • Security & Privacy Insurance Overview • Questions Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

34. In the News… 2005 Disclosures of Data: disclosed incidents in the United States potentially affect more than 57 million individuals Source: Identity Theft Resource Center http://www.IDtheftcenter.org Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

35. In the News… Data Breach Identity Theft Computer Hacking Stolen Laptop Lost Backup tapes Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

36. In the News… “The online trade in stolen financial data is thriving.” Countless Dens of Uncatchable Thieves April 3, 2006 New York Times Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

37. Typical Disclosure Incidents • Bank data theft: 700,000 exposed Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

38. Typical Disclosure Incidents • Major retailer: $16.5 million charge for losses due to a breach of computer security Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

39. Typical Disclosure Incidents • Theft of laptop containing employee records Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

40. Typical Disclosure Incidents • Social Security Numbers disclosed on mailing labels Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

41. Typical Disclosure Incidents • Website allows access to restricted information Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

42. Typical Disclosure Incidents • Financial information obtained from discarded records Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

43. Key Exposures… • Credit card information • Healthcare information • Personally identifiable information • - customers- employees • Business information of others • - Trade secrets Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

44. Covered by Insurance? • Commercial General Liability • Bodily Injury and Property Damage • Personal and Advertising Injury Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

45. Covered by Insurance? • Professional Liability • In the performance of professional services? • Personal injury exclusion? • Dishonest acts exclusion? Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

46. Security & Privacy Insurance! • Negligent handling of private or confidential information • Legal Liability • “Pay on Behalf of” basis • Duty to defend • Defense within limits • Defense cost coverage for certain regulatory actions (Subject to insurer’s consent) Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

47. Security & Privacy Insurance! • Wrongful Act -- • Failure of the insured’s (computer) security • Wrongful disclosure by an insured of privateinformation • An insured’s failure to protect private information • Vicarious liability of an insured for a failure toprotect personal information by vendors Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

48. Security & Privacy Insurance! • Key exclusions -- • Dishonest Acts • Officers or directors • Employees (if officers/directors had knowledge) • Misappropriation of trade secrets by an insured • Contractual Liability • - Exception: obligation under a NDA Agreement • Special Class Action Retention • Greater of $100,000 or 200% of the standard retention Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

49. Security & Privacy Insurance! • Policy Limits • Limits: up to $15 million available • Retentions: start at $25,000 • Minimum Premium: $3,500 • Submission requirements • AIG netAdvantage application Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.

50. Security & Privacy Insurance! • Policy application and materials • http://www.aignationalunion.com Insurance underwritten by member companies of American International Group, Inc. Any description herein is a summary only. It does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for complete details of coverages and exclusions. Coverage may not be available in all jurisdictions. Issuance of coverage is subject to underwriting.