Sexual harassment – insurance considerations

Date published

26/02/2018

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Since the New York Times published allegations against film producer Harvey Weinstein in October 2017, the subject of sexual harassment has received extensive media attention in Hollywood and beyond. The #MeToo hashtag has been viewed as a rallying cry against such conduct and its momentum suggests a mindset determined to call out unacceptable behaviour in the workplace.

Potential claims

Whilst the headlines are dominated by high profile individuals and companies, the reality is that sexual harassment allegations can happen in any industry and in companies of all sizes. Strikingly, a recent BBC survey found that 53% of women and 20% of men in Britain have been sexually harassed at work or a place of study.

Against this backdrop, it is timely for Employment Practices Liability (EPL) and Directors’ & Officers’ (D&O) liability insurers, brokers and insureds to review cover for employees and those in managerial positions who might be subject to proceedings, irrespective of whether they are personally accused of sexual harassment. Insurance cover for public relations and crisis management costs should also be considered.

Potential conflict

Typically, a sexual harassment claim would be pursued against the alleged perpetrator (whether or not that person is a D&O) and his or her employer. This would fall for consideration under the terms of the EPL cover. For claims of sex discrimination under the Equality Act 2010 (which includes harassment of a sexual nature), both the perpetrator and the company can be held jointly and severally liable and the individual can be ordered to pay compensation to the victim.

In claims against both the perpetrator and the company there is clear scope for conflict between the defendants, particularly if the company has reason to believe the claimant, such that EPL insurers may need to fund the costs of two defence firms.

EPL cover may form part of a company’s D&O policy or be held separately. A careful review of the wording should be undertaken to assess whether the alleged perpetrator qualifies as an insured under both covers.

Extent of cover

Aside from the more traditional employment type claim, there is scope for additional exposures arising from sexual harassment, which may impact a D&O policy.

The perpetrator would be one obvious target by shareholders acting on behalf of the company if his (or her) conduct impacted the value of the shareholders’ investment. Such a claim could be based on breach of fiduciary duty/duty to act in good faith by using a position of power to harass and/or sexually assault potential or actual employees and simultaneously diminish the company’s reputation and value.

Shareholders could also seek to bring proceedings against management personnel other than the perpetrator, for example:

  • Failure to undertake adequate due diligence in respect of a managerial appointment or to identify or respond to warnings or complaints
  • Consciously allowing sexual harassment in a workplace environment
  • Failing to have or follow procedures to address sexual harassment.

Depending on the wording (including any exclusions) and the capacity in which the perpetrator was acting, cover might also respond to:

  • Criminal proceedings brought against a D&O
  • Civil proceedings pursuant to the Protection from Harassment Act 1997
  • Personal injury claims for psychological illness caused by sexual harassment.

Damage to reputation

The scope for reputational damage arising from allegations of sexual harassment is clear. The board of The Weinstein Company LLC fired Harvey Weinstein within days of the allegations against him being made public. Determining what action to take and whether to publicise such action will require careful consideration. Expert advice may be sought not only on legal issues but also on effective communication strategies and reputational management.

Settlement

Insurers and insureds will need to consider whether and how a claim for sexual harassment might be settled. An innocent insured person, falsely accused of sexual harassment or of allowing such conduct may, quite understandably, wish to defend the claim and clear their name. Further, a company may wish to support the insured to avoid a perception of being a soft target for future claims. On the other hand, an accused and/or the company may just want to get rid of the matter irrespective of any actual wrongdoing.

For insurers, commercial considerations will be taken into account, such that an insurer may prefer an early settlement in order to avoid exposure to extensive defence costs. The precise terms of the policy will be crucial in determining which party has control to settle a claim and how. Often D&O policies are phrased in such a way that a settlement requires the consent of the insurer, such consent not to be unreasonably withheld. Such a provision can be viewed as insured-friendly, since so long as the insured can point to objective reasons for a proposed settlement it is likely to be difficult for an insurer to withhold consent.

Comment

The range of potential exposures relating to sexual harassment outlined above illustrate the kind of issues that require careful consideration by D&O insurers when reviewing the scope of cover provided by their wordings.

Read other items in the Professions and Financial Lines Brief - March 2018