Helping Employers Understand Insurance Coverage for Sexual Harassment Claims

March 8, 2018

It’s nearly impossible to read the news these days without seeing headlines of allegations of sexual misconduct in the workplace. The news is in turn prompting employers to wonder what role, if any, insurance plays in handling claims should they arise.

As Marie-France Gelot, senior vice president and insurance and claims counsel in insurance broker Lockton’s Northeast operation, notes, sexual harassment claims can impact not only a company’s reputation but also its bottom line.

Typically such claims would be covered under an employment practices liability insurance policy (EPLI) or a hybrid private company directors and officers liability (D&O) policy, although coverage may vary considerably from policy to policy.

“As with any claim, the specific factual circumstances surrounding the matter will be critical in determining whether coverage is ultimately triggered,” Gelot writes in a white paper, “Sexual Harassment: Is Your Company Exposed?”

The term sexual harassment is used widely today, but not all allegations meet the legal definition from the Equal Employment Opportunity Commission (EEOC) that says that sexual harassment includes “unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature when this conduct explicitly or implicitly affects an individual’s employment, unreasonably interferes with an individual’s work performance, or creates an intimidating, hostile, or offensive work environment.”

Gelot outlines the legal procedures for filing a sexual harassment claim under Title VII of the Civil Rights Act, a process that must begin with a claimant filing a charge with the EEOC within 180 days of the alleged event. A claimant cannot file a lawsuit against an employer until and unless the EEOC says so.

The broker points out that even though the bulk of such allegations never make it to trial, there can still be substantial costs.

“Whether or not a claimant is able to actually make a case proving that sexual harassment occurred, the reality is that the bulk of liability faced by companies accused of such conduct is not generated after a jury trial,” she writes. “It is generated by attorneys’ fees in litigation, win or lose. In the current environment, this is a critical point; any perceived harassment can result in six-figure liability for a company, regardless of whether a judge or jury would ultimately find the harassment unlawful.”

In her white paper, Gelot explains specific claim scenarios where the line between insured versus uninsured acts can be confusing. For example, a customer of a retail chain alleges being sexually harassed by a store employee while in the store and suffering damages. This would likely constitute a covered claim under the company’s EPLI policy, assuming that policy had third-party coverage. EPLI policies cover companies and their employees, including of directors, officers and senior management, for claims brought by past, present or future employees alleging wrongful employment acts and decisions. Many, but not all, EPLI policies cover claims brought by third parties, like clients, customers or vendors. These policies would provide defense costs coverage and indemnity coverage for the company and employee.

Insurers also look at where the sexual harassment took place and if the employee was acting in the course and scope of employment. For example if an employee alleges that her manager sexually harassed her in a bar on a Saturday evening during a social event, the insurance carrier would question whether the manager was “on the job” during the social event to determine whether coverage applied.

Employers should also be aware of frequent exclusions like the conduct exclusions for intentional acts and the bodily injury exclusion, which may broadly exclude coverage for assault and battery. Since the definition of battery means unwanted or unpermitted touching, this limits sexual harassment coverage to nonphysical sexual harassment only, even if that is not explicitly stated in the policy wording. However, EPLI policies that do exclude bodily injury typically contain an exception for claims alleging emotional distress, mental anguish and humiliation

Policies could also preclude coverage for intentional or deliberate fraudulent or criminal acts.

Gelot also explores vicarious liability of a business for acts of its employees, situations where an employer and employee may be at odds, and issues of indemnification that may vary by state.

Due to the coverage of recent sexual harassment cases, employees and employers are paying more attention to such claims. For now, Gelot says corporations should examine their own policies to ensure they have the right coverage.

“It remains to be seen if EPLI insurers will react to the momentous changes occurring in the national conversation on sexual harassment in the workplace by limiting the scope of the coverage or making it more expensive,” she says.

Source: “Sexual Harassment: Is Your Company Exposed?”

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