Category Archives: Regulatory Risk

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House Republicans Draft TRIA Proposal Could Mean Big Changes to Come

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Last week, Rep. Randy Neugebauer (R-TX), Chairman of the House Insurance Subcommittee, released to his fellow Republicans a draft proposal to extend the federal terrorism insurance program. That proposal, now made public, would bring drastic changes to a program that has helped to stabilize the market since its 2002 creation. At this point, the proposal is only in outline form with bill language expected over the next few weeks.

The proposal, entitled the Terrorism Risk Insurance Modernization Act of 2014, would extend the TRIA program for only three years while significantly increasing the program trigger limit to $500 million from $100 million, for non-NBCR events, and reducing the annual government assistance cap from $100 billion to $75 billion. The government’s co-share of losses would decrease from its current 85% to 75% beginning in 2017, for non-NBCR events. The government’s responsibility and trigger would remain the same for NBCR certified acts.

The industry has been expecting adjustments to be made to TRIA, upon its extension; however, the numbers included in the Republican proposal are more drastic than many envisioned. Beyond concerns with the changes to the program trigger and co-share percentages, there are additional concerns with language in the proposal allowing for small insurers to opt-out and an implication that domestic terrorism events would no longer be covered by the program.

The requirement that insurers offer terrorism coverage is the backbone of the program, and allowing some insurers to opt-out of offering such coverage could lead to reduced capacity and higher prices for consumers. Excluding domestic terrorism would also be a mistake, as history has shown us that terrorists can come from inside and outside the United States.

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If there is a positive in the House Republican proposal, it is in changes to the certification process. Many industry groups, including RIMS, have been asking for a timeline for events to be certified as “acts of terrorism.” The proposal includes a deadline of 90 days.

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The House Republican proposal is a far cry from the recent Senate agreement. That bi-partisan legislation, S.

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2244, would extend the program for seven years while making much smaller adjustments to the program. If both chambers pass bills along current lines, then the conference committee would have a lot of work to do in order to rectify the two pieces of legislation into a compromise extension.

Texas Fires Back at EEOC Motion

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We normally pass, on blogging about briefs filed by a party before a court ruling, but Texas’ litigation against the EEOC and U.S. Attorney General Eric Holder is not shaping up to be just an everyday lawsuit.

This is a must read for employers. It goes to the heart of what the EEOC is doing these days, and how it is carrying out its duties.

Case Background

In April 2012, the EEOC issued guidance urging businesses to avoid a blanket rule against hiring individuals with criminal convictions, reasoning that such rules could violate Title VII if they create a disparate impact on particular races or national origins. Like various other states, Texas has enacted statutes prohibiting the hiring of felons in certain job categories. In November 2013, Texas sued the EEOC, seeking to enjoin the enforcement of this guidance, which Texas has nicknamed the “Felon Hiring Rule.” In March of this year, Texas amended its complaint to include more specific allegations of injury. For example, Texas alleged that the EEOC issued a right-to-sue letter to an applicant who had been rejected by the Texas Department of Public Safety after disclosing on his application that he had been convicted of a felony (unauthorized use of a motor vehicle). Texas claimed that the job involved “access to sensitive personal information for all 26 million Texans.”

Against this backdrop is a growing firestorm of litigation initiated by the EEOC over hiring checks based on criminal backgrounds. We have blogged about those cases and rulings previously (here, here, here, here, and here).

Earlier this month, the EEOC filed a motion to dismiss Texas’ lawsuit. In its motion, the EEOC offered three primary arguments. First, the EEOC contends that the U.S. District Court lacks jurisdiction to hear the case because the EEOC’s guidance is not legally binding and does not constitute a final agency action. Second, and in part because the EEOC claims its guidance has no binding authority, the EEOC argues that Texas lacks standing to pursue its claims. As the EEOC stated, “[t]he state may disagree with the EEOC’s interpretation of the law, but that does not imbue the interpretation with any legal consequences.” Third, the EEOC said the state’s claims should be dismissed because they are not ripe.

The State Of Texas Replies

In its brief, Texas started by pointing out other cases in which the EEOC pursued administrative investigations and lawsuits against employers and invoked its 2012 guidance. Making the point that the EEOC was attempting to have its cake and eat it too, the state characterized the EEOC as arguing that the guidance is “not worth the paper it’s printed on—even though it urges other courts to defer to it.”

Having set the theme, Texas turned to its legal arguments. The state argued that whether or not the 2012 guidance was a “final agency action” was not a jurisdictional issue, as the EEOC contended it was. Nevertheless, the state explained why the 2012 guidance in fact constituted a “final agency action” under the Administrative Procedure Act. Texas argued that the EEOC’s argument, that only those rules and regulations that were entitled to Chevron deference were reviewable, improperly narrowed the term “action” in a way that “no case from any court in the history of the Nation” had adopted. Texas also pointed out that the EEOC could not prevent review under the APA simply by re-characterizing its process in order to avoid judicial scrutiny under the Act.

Turning to the standing  issue, Texas identified three types of injury it has suffered, each of which independently established Article III standing, including (i) as an employer, the State of Texas is subject to the EEOC’s “Felon Hiring Rule,” and the EEOC issuance of a right-to-sue letter to an applicant denied a job after a criminal background check demonstrates that the state has been subjected to enforcement of the rule; (ii) Texas is seeking to enforce its right to participate in the notice-and-comment provisions of the APA, and the EEOC’s failure to comply with the APA had denied Texas its right to do that; and (iii) Texas has been injured by the EEOC’s purported preemption of the State’s laws. As evidence of this final injury, Texas pointed to the EEOC’s own website, which states that the Felon Hiring Rule “says that state and local laws or regulations are preempted by Title VII” if they cause a disparate impact.

On the ripeness question, Texas argued that, despite the EEOC’s attempts to recast its 2012 guidance as not requiring “individualized assessments” of all job applications, the case remained ripe for adjudication because it presents the “purely legal question” of whether “the State of Texas can continue to follow its facially neutral blanket no-felons policies …or whether the state must abandon those facially neutral policies.”

Implications for Employers

In defending against Texas’ case, the EEOC may have compromised future efforts to enforce its “guidance” against employers in Texas and other jurisdictions. To the extent the EEOC attempts to rely upon its 2012 statements as the basis for prosecuting disparate impact cases focused on criminal background check practices, particularly in cases where the EEOC alleges that an employer willfully violated Title VII, employers need only turn to the EEOC’s representations to the U.S. District Court for fodder in their own defense. Stay tuned for the upcoming ruling in this case.

This column previously appeared on the Seyfarth Shaw blog site.

New Reports Support Call for TRIA Extension

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Two recent reports from the Presidential Working Group (PWG) on Financial Markets and Marsh & McLennan Companies support the argument for a long term extension of the federal Terrorism Risk Insurance Program, otherwise known as TRIA. The much anticipated report from the PWG draws upon comments from many industry groups and interested parties, including RIMS, while the Marsh report is a follow-up to a similar report issued in May 2013.

The “2014 Marsh Terrorism Risk Insurance Report,” released Tuesday, states that “if Congress does not renew or extend the federal backstop, the market dynamics for terrorism insurance will be disrupted and will likely result in increased pricing and limited capacity.” Marsh’s support for a long-term extension of the program is in line with the majority of the insurance industry as TRIA nears its December 31, 2014 expiration. “The potential for adverse economic consequences due to limited or unavailable terrorism insurance should be an impetus for quick congressional action to reauthorize [TRIA].”

Similarly, the PWG study, required by TRIA legislation, made several findings relating to the need for extending the program:

  • Insurance for terrorism risk currently is available and affordable;
  • Prices for terrorism insurance have declined since TRIA was enacted;
  • Take-up rates have improved since TRIA’s passage;
  • The market is currently tightening in light of TRIA’s uncertain future;
  • The private market does not have the capacity to provide reinsurance for terrorism risk to the extent currently provided by TRIA; and,
  • Terrorism insurance would likely be less available should TRIA be allowed to expire

Bi-partisan legislation was recently introduced in the Senate that would extend TRIA for seven years; however, the industry continues to eagerly await legislation from the House Financial Services Committee leadership. While the Senate bill reforms the program, many expect House leadership to ask for more far reaching changes.

Sixth Circuit Affirms EEOC Credit-Check Case Dismissal

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Less than three weeks after oral argument, the Sixth Circuit affirmed a lower court order granting summary judgment in favor of Kaplan in one of the EEOC’s most high profile cases – EEOC v. Kaplan Higher Education Corp.

The EEOC brought suit against Kaplan for using credit-checks in its hiring process – “the same type of background check that the EEOC itself uses” the Sixth Circuit pointed out – claiming that the practice had a disparate impact on African Americans.

On Jan. 28, 2013, Judge Patricia A. Gaughan of the U.S. District Court for the Northern District of Ohio granted summary judgment in favor of Kaplan, finding that the EEOC’s statistical evidence of disparate impact was not reliable and not representative of Kaplan’s applicant pool as a whole. (Read more about that ruling here.)

The Sixth Circuit found no abuse of discretion. The EEOC’s “homemade” methodology for determining race – by asking its “race raters” to label photographs – was, in the Sixth Circuit’s words, “crafted by a witness with no particular expertise to craft it, administered by persons with no particular expertise to administer it, tested by no one, and accepted only by the witness himself.”

Background

The EEOC filed suit against Kaplan alleging that Kaplan’s use of credit-checks causes it to screen out more African-American applicants than white applicants, creating a disparate impact in violation of Title VII.

In support of its allegations, the EEOC relied on statistical data compiled by Kevin Murphy.  Because Kaplan’s credit check process was race-blind, the EEOC subpoenaed records regarding Kaplan’s applicants from state departments of motor vehicles. Thirty-six states and the District of Columbia provided color copies of approximately 900 drivers’ license photos.

Murphy assembled a team of five “race raters” and directed them to review the photos and classify them as “African-American,” “Asian,” “Hispanic,” “White,” or “Other.” Murphy also provided the raters with applicant names.

Based on the results of this “race rating,” Murphy opined that, in a sample of 1,090 (out of 4,670 applicants), the percentage of black applicants who were flagged for review based upon their credit histories was higher than the percentage of white applicants who were flagged.

The district court excluded Murphy’s testimony as unreliable for two reasons. First, the EEOC presented “no evidence” that Murphy’s methodology satisfied any of the factors that courts typically consider in determining reliability under Federal Rule of Evidence 702; and second, as Murphy himself admitted, his sample was not representative of Kaplan’s applicant pool as a whole. The district court granted summary judgment in favor of Kaplan, and the EEOC appealed.

The Sixth Circuit’s Opinion

The Sixth Circuit affirmed. The Sixth Circuit noted that, as the proponent of expert testimony, the EEOC bears the burden of proving its admissibility. It determined that the district court did not abuse its discretion in finding that the EEOC failed to make such a showing.

The EEOC argued that the district court erred in finding that it had “wholly fail[ed]” to provide evidence that its technique had been tested or had any “known or potential rate of error.” The EEOC contended that it provided such support in the form of “anecdotal corroboration.” That is, as to 57 applicants, Murphy cross-checked his raters’ classifications with racial identifications provided by a DMV or Kaplan.

The Sixth Circuit noted that the EEOC’s cross-check yielded an 80% match – “an unimpressive correlation in case where a few percentage points (in credit-check fail rates for blacks and whites) might make the difference between significant liability and none.” In any event, as Murphy himself conceded, a mere 57 instances of anecdotal corroboration is “not enough” to establish the reliability of his photo rating methodology.

As the Sixth Circuit found, “[t]he EEOC’s case goes downhill from there.” The EEOC failed to present evidence that its technique was subjected to peer-review or publication, failed to show that Murphy employed standards to control “the technique’s operation,” and presented no evidence that Murphy’s race-rating methodology was “generally accepted in the scientific community.” The raters themselves “had no particular standard in classifying each applicant; instead, they just eyeballed the DMV photos.”

Finally, as an independent ground for excluding Murphy’s testimony, the district court found “no indication” that Murphy’s group of 1,090 applicants was representative of the applicant pool as a whole. The Sixth Circuit noted that, “[i]nstead there is a strong indication to the contrary: Murphy’s group had a fail rate of 23.8%, whereas the GIS applicant pool had a fail rate of only 13.3%.” It held that an unrepresentative sample “by definition” might skew the respective fail rates of black and white applicants in the larger pool – “and thus is not a reliable means to demonstrate disparate impact.”

Implications

In its opinion, the Sixth Circuit staunchly critiqued the EEOC’s “do as I say, not as I do” litigation tactics. It noted (in the first line of its opinion) that the EEOC “sued the defendants for using the same type of background check that the EEOC itself uses.” It also noted, as the district court observed, that “the EEOC itself discourages employers from visually identifying an individual by race and indicates that visual identification is appropriate ‘only if an employee refuses to self-identify.’”

This blog was previously published by Seyfarth Shaw LLP.