#MeToo: Risks for liability insurers and their insureds

One year on from #MeToo, Bloomberg estimates at least 425 prominent people across industries had been publicly accused of sexual misconduct.

These headlines have brought the issue of how employers tackle sexual harassment in the workplace into the spotlight. In addition to dealing with any allegations of sexual harassment, organisations will also be scrutinised as to whether they, or their executives, have enabled or turned a blind eye to sexual harassment.

As a result, the focus is firmly on both regulators and employers to do more to support victims of sexual harassment. This heightened attention brings with it increased risk in terms of damage to brand and reputation should an employer be shown to have failed to act appropriately when such allegations are raised.

This increased risk also, inevitably, has insurance implications and the insurance market has responded by adapting or writing new policies to cover such risks. Organisations need to understand to what extent coverage may be triggered under the policies they currently have in place and identify what conversations they should be having with their broker at renewal to ensure they are adequately protected and to ensure proper disclosure of any past allegations.

Sexual harassment - the law

Under English law, sexual harassment is a form of discrimination which is unlawful under the Equality Act 2010 (“Equality Act”). It occurs where person A engages in unwanted conduct of a sexual nature that has the purpose or effect of violating person B's dignity or creating an intimidating, hostile, degrading, humiliating or offensive environment for B.

Two key elements to draw out of this definition are:

• The conduct must be unwanted. It is important to note that just because someone has put up with certain conduct for years and/or has joined in with banter, does not mean that the conduct is wanted. In addition, a victim does not have to say conduct is unwanted before it can give rise to sexual harassment – a one off incident can be enough, and certain conduct will always be presumed to be unwanted unless proved otherwise.
• The conduct must have either the purpose or effect of violating a person’s dignity or of creating a hostile or similar environment - which means the intention of the perpetrator is not always relevant, rather the effect the conduct has on the victim is key.

Potential causes of action and potential defendants

The perpetrator themselves may be personally liable for their acts of harassment. An employer may also be held liable for acts of harassment carried out by employees acting in the course of their employment and by third parties e.g. customers / contractors. Note, this can include events which take place outside of work where there is a sufficiently close connection to work e.g. at the office Christmas party. Ultimately, under the Equality Act, both the perpetrator and the employer may be held jointly and severally liable and the individual may be ordered to pay compensation. A claim may also be brought against management. For example, by shareholders (on behalf of the company) or by liquidators against management if the sexual misconduct allegations, or the way in which the company and its board has responded (or failed to respond appropriately) to the allegations, have affected the value of the company. While this type of action is certainly more likely to be taken in the US (see further below), with the increased globalisation of organisations, the scope for this type of action being brought must be understood.

Insurance coverage

Insurers may provide coverage in respect of sexual harassment claims in Employment Practices Liability (EPL) policies, in Directors’ and Officers’ (D&O) Liability policies, or in standalone policies.

Employment Practices Liability Policies - EPL cover may fall under an extension to a D&O policy and usually covers claims made by employees based on allegations of misconduct by co-workers – including claims for sexual harassment. However, standard EPL Policies may not extend to claims brought by third parties against the organisation.

D&O policies – D&O policies provide cover for the wrongful acts of a director or officer (when acting within the scope of employment). Some policies will also cover the wrongful acts of employees.

Wrongful acts are typically defined to include any actual or alleged act, error or omission, breach of duty, breach of trust, misstatement/misleading statement, breach of warranty etc. Insured events include claims which are usually defined to include written demands for relief, civil, regulatory and criminal proceedings brought against an Insured alleging a wrongful act. As such, D&O cover may respond to, for example, defending criminal proceedings brought against a director or officer, civil proceedings pursuant to the Equality Act, or personal injury claims for psychological illness.

Recent shareholder actions have been brought in the U.S. for: (i) violations of the Securities Exchange Act of 1934 arising from how a public company has addressed sexual harassment allegations and the company’s duty to disclose and report the risks in its SEC filings; and (ii) breach of fiduciary duty claims. And there are a growing number of derivative actions arising out of sexual harassment claims – for example, suits filed by the shareholders of Wynn Resorts alleging failure on the part of the board to effectively exercise oversight over the company and its CEO, Steve Wynn.

As well as providing cover for the costs of defending such allegations and damages awards, these types of policies also usually provide cover for investigations by regulatory bodies. However, cover for internal investigations and mitigation costs is not always provided even though it may be in the interest of insurers that such investigations are carried out expeditiously in order to prevent future incidents that may give rise to serious reputational damage and significant losses. More frequently, crisis management costs are provided which may cover the costs of a PR firm to assist in the organisation’s response to media coverage on the matter. Some policies will also provide cover for the costs of internal training following a claim.

If a sexual harassment claim is made, the first question to consider from a coverage perspective is whether the alleged perpetrator is an insured under a policy that might be triggered. For coverage to be triggered (under a D&O or EPL policy), the wrongful act must have been carried out in the course and scope of the insured person’s employment.

Exclusions

As always, exclusions may preclude cover under one of these insurance policies. Chubb’s position in relation to coverage of Weinstein’s legal defence costs is that certain exclusions in their policies preclude cover – including intentional acts, damages arising from wilful, malicious, fraudulent or dishonest acts – or actions that intentionally cause personal injury.

There is usually a conduct exclusion which precludes cover for any intentional, deliberate, fraudulent or criminal acts. However, this exclusion usually calls for a finding of such acts by way of “final adjudication” and in practice these types of claims usually settle rather than proceeding to a court hearing making it more difficult for insurers to apply the exclusion.

Insured versus insured exclusions may also preclude claims made by employees who fall within the definition of insured persons under the policy.

Also, claims alleging bodily injury are typically excluded. As such, while claims for verbal harassment may be covered, those for physical harassment, including any physical contact, assault or rape, may not. Emotional distress and anguish associated with bodily injury may be covered under an EPL policy.

Claims made nature of the policy

As these policies are claimsmade policies, they only provide cover for claims made against the insured during the policy period. If the allegations are historic, claims may not have been notified in a timely manner and in accordance with policy conditions. Equally, a prior litigation exclusion may preclude cover if facts or occurrences were the subject of a prior litigation which was commenced before the policy period. Organisations also need to be careful to ensure that they are properly disclosing any past allegations to insurers during the policy application process.

Aggregate limit of liability – Finally, the per claim deductibles and aggregate limits of liability may impact upon coverage, particularly where there are multiple allegations made by different claimants in relation to the same breaches and/or pattern of behaviour.

Improving the situation for all – What steps may be taken by employers?

Better education, training and cultural change will obviously improve the situation for all – potential victims, employers and their insurers.

An employer can put processes in place to help reduce the likelihood of inappropriate behaviour occurring, thereby improving its risk profile and putting itself in a position where it can better defend a claim of sexual harassment by showing that it took all reasonable steps to prevent the harassment from taking place. This could include:

• training staff on what is acceptable conduct in the workplace;
• sending regular reminders / briefings as to appropriate behaviours;
• having clear procedures in place for reporting sexual harassment complaints;
• encouraging and supporting victims who report claims of sexual harassment.

What should employers do if a complaint of sexual harassment is made?

Importantly, employers should take the complaint seriously, even if it relates to historic allegations. Employers should recognise that it can be very difficult for a victim to make a complaint and if a complaint relates to historic matters it is important that it is considered while recognising it may be difficult to find sufficient evidence to support the complaint.

Employers should follow their internal grievance process in a timely manner. This is key – importantly, unwanted conduct can include inaction where an employer fails to prevent or address harassment in the workplace.

If a complaint is well-founded, employers will need to take disciplinary action against the perpetrator. It may also be appropriate to take action in respect of the wider workforce e.g. refresher training/briefings across the workforce on appropriate behaviours in the workplace.

What is on the horizon?

On 25 July 2018 the Women & Equalities Committee published a report on sexual harassment and what should be expected of employers and the bodies who regulate them. The report makes a number of recommendations. Key among these are:

• An acknowledgment that employers and regulators have, to date, failed to tackle sexual harassment in the workplace and that, in order to give this the attention it deserves, there should be mandatory requirements on employers as to steps they have to take. In particular, it recommends a statutory Code of Practice setting out steps employers should take such as having a proper reporting procedure in place, support for victims, targeted training for managers, as well as requiring public authorities to undertake risk assessments and put in place an action plan to mitigate that risk. In addition, it recommends a 25% uplift to compensation where an Employment Tribunal finds that the Code has not been followed;
• Regulators like HSE, FCA, Ofsted to put action plans in place to ensure employers they regulate protect workers from sexual harassment;
• Standard, approved confidentiality clauses to be adopted and clarity provided that complaints of sexual harassment are covered by whistleblowing legislation. In addition, making confidentiality clauses which seek to prevent disclosure of criminal offences or future acts of sexual harassment void;
• Requiring employers to collate and disclose data on sexual harassment complaints and how they have been dealt with.

We are waiting for the government’s response to these recommendations. In the meantime, organisations should work with their brokers or insurers to review their policies and consider updating or retraining employees on appropriate behaviours.