As we have discussed in the past, allegations of sexual misconduct have dominated headlines and revealed a pervasive corporate culture of abuse of power across all industries. For businesses that face allegations of sexual harassment and assault, liability may extend to the entity, as well as to its management, whether or not they were personally involved in the incident(s) at hand. Let’s take a look at the various liability implications.
When an employee makes a sexual misconduct allegation against a colleague, this may result in a sexual harassment complaint or civil claim against the employee/manager and his/her employer. The firm may conduct an investigation as part of its internal processes, and the individual and company may wish to defend their positions, resulting in legal fees. The individual(s) against whom the allegations are made may also find themselves the subject of criminal proceedings as a result of his or her actions. In addition, shareholders, acting on behalf of the company, may sue the individual if the alleged misconduct has negatively impacted the value of the shareholders' investment. Other senior executives may end up facing similar claims if they either ignored the situation or failed to follow procedures or act on warnings or complaints.
Directors and Officers (D&O) insurance will be a potential source for coverage for some sexual misconduct-related claims, particularly if an Employment Practices Liability (EPL) extension is present. D&O insurance protects against “wrongful acts” of a company's directors and officers and for its employees. EPL coverage under D&O insurance will typically cover claims made by employees based on the alleged misconduct of their employer or colleagues. EPL insurance typically provides coverage for sexual harassment, wrongful termination, and discrimination.
For a D&O/EPL policy to respond, the wrongful act must have occurred while the insured was acting in the course and scope of his or her employment. This could be a problem if the alleged misconduct occurred outside of working hours.
Another issue to consider is that typically D&O/EPL policies include an exclusion for claims alleging bodily injury. While claims for verbal sexual harassment may be covered under a D&O/EPL policy, claims for physical sexual assault typically are not. If a claimant alleges both verbal and physical harassment or assault, a policy may provide partial coverage or no coverage at all.
D&O policies will also typically cover claims made against other executives for breach of fiduciary duty, in the event the shareholders initiate a claim in the company’s name against other executives. It’s important to note though that D&O policies also typically contain an “insured vs. insured” exclusion, which may serve to preclude coverage for claims made by employees (if they are an insured person) against an insured person (the accused executive) and/or the company. This provision may exclude the insurers' liability for any claim brought against the board of directors for a failure in their duties owed to the company, unless there is a claw back of coverage in the “insured v insured” exclusion itself.
Consideration should also be given to the “scope of any conduct” exclusion, which will typically exclude any intentional or deliberate fraudulent or criminal acts. In the Harvey Weinstein sexual assault cases, for example, Chubb has refused to pay Weinstein’s legal costs, saying that “it would normally cover legal costs to defend against claims of damage or injury caused accidentally,” but his conduct was intentional.” The co-founder of the Miramax studio and The Weinstein Company has been accused of sexual misconduct, including assault, against 70 women. He recently was indicted on multiple sex crimes and rape by a grand jury in Manhattan.
The wording in the D&O policy will determine who has the ability to settle a claim, and how. Typically, D&O policies allow the insured to settle an issue with the insurer’s prior written consent.
There are other important considerations when reviewing a D&O policy with your clients. RPS provides D&O insurance solutions and is available to help you with your clients’ needs. Please give us call.