Recent headlines have been dominated by grave allegations of sexual misconduct across all areas of business, media and political life. For businesses facing allegations related to sexual misconduct, liability may extend to the entity, as well as to its management, whether or not they were personally involved in the incident(s) at issue. We examine the potential liabilities and coverage implications.

Liability considerations

Sexual misconduct by a company executive or employee can result in legal claims not only against the accused but also against the company itself.

If the victim is an employee, unwanted conduct of a sexual nature from a colleague may form the basis for a sexual harassment complaint or civil claim against the employee/ manager and his/her employer. An internal investigation may be undertaken as part of the firm's internal processes, and the individual and company may wish to defend their positions, incurring 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. They may also be a target for a claim by the shareholders, acting on behalf of the company, if the alleged misconduct has negatively impacted on the value of the shareholders' investment.

Other senior executives may also find themselves facing similar claims if they have turned a blind eye or if they have failed to follow procedures or act on warnings or complaints.

Although it seems unlikely that a company would bring claims against its own board of directors, in the event that the company suffers such reputational damage that it enters into insolvency, liquidators could look to bring claims against the former board members in connection with their failings to adequately handle complaints/allegations over sexual misconduct.

Internal investigations may result in self reporting and external investigations in certain cases.

Insurance implications

Directors and Officers (D&O) insurance will be a potential source of cover for some sexual misconduct-related claims, particularly if an Employment Practices Liability (EPL) extension is present.

D&O insurance generally provides cover for the "wrongful acts" of a company's directors and officers and (increasingly commonly) for its employees.

Whilst policy wording dependent, an EPL extension will typically cover claims made by employees based on the alleged misconduct of their co-workers. Most extensions cover claims for sexual harassment, wrongful termination, and discrimination and some may provide coverage for additional employment-related claims, such as defamation or negligent retention and supervision (where entity cover is available).

In order to trigger cover under a D&O/EPL policy, the wrongful act must have occurred whilst the Insured Person was acting in the course and scope of his or her employment. This may present obstacles if the alleged misconduct occurred outside of working hours.

Another significant limitation is the common D&O/EPL exclusion for claims alleging bodily injury. Whilst 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.

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.

However, as D&O policies also typically contain an "insured vs. insured" exclusion, this may operate to preclude cover for claims made by employees (if they are an Insured Person) against an Insured Person (the accused executive) and/or the company. It may operate to exclude 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 cover in the insured v insured exclusion itself.

Consideration should also be given to the scope of any conduct exclusion which will typically operate as a bar to cover for any intentional or deliberate fraudulent or criminal acts. These often require a final adjudication. Due to the sensitive nature of sexual misconduct allegations, these types of claims may settle out of court before this exclusion can trigger.

Damage to reputation

The potential for reputational damage caused by sexual misconduct allegations cannot be underestimated.

It is becoming increasingly more common for D&O policies to provide cover for crisis management. When a triggering event occurs, a crisis management extension will typically meet the costs of the company hiring a public relations firm to respond to the issue.

Whether this is available to the company will all depend upon whether entity cover is provided. The cover may, however, be useful for the alleged perpetrator, especially where they have been wrongly accused.

Settlement of claims

Settling claims of this nature will also require careful consideration.

Policy wording will play a crucial role in determining which party has the ability to settle a claim, and how. Typically, D&O policies allow the insured to settle a matter with the prior written consent of the insurer, such consent not to be unreasonably withheld. Provided the insured can identify a credible reason for a proposed settlement, an insurer is not likely to be able to justify withholding its consent. Likewise an insurer may have difficulty in persuading an insured to settle early if they feel strongly that they want to defend their position.

Cover for investigations

Insurers may need to consider the extent to which cover is provided for investigations. Of course, most D&O policies will provide cover to the individual and/or the company (subject to the exclusions mentioned above) in respect of the defence costs occasioned by criminal proceedings and formal investigations into named individuals or the affairs of the company generally.

There may be some benefit to insurers covering costs associated with informal, internal investigations in order to, for example, identify any systemic issues in historic response to allegations, the adequacy of procedures or their implementation, to avoid the possibility of future claims and decrease their exposure down the line.

For example, following internal investigations by Save the Children, which found that, whilst the charity's policies and procedures were fit for purpose, there were "significant omissions and failures in HR response to historic informal complaints around behavior", the charity is said to have taken a number of positive steps to prevent future failings to adequately deal with behavioral complaints, including providing employees with compulsory training on acceptable behavior in the workplace and by implementing a whistle- blowing hotline.

However, whether these costs should remain a business expense continues to be subject to debate. If internal investigations are to remain an uninsured expense, this should encourage companies to ensure that they conduct adequate background checks on their employees, and that their procedures and controls are adhered to in practice, in order to prevent the need for launching internal investigations in the first instance. It may also promote transparency by requiring appropriate disclosures to be made to shareholders or investors regarding knowledge of any egregious behaviour.

Conclusions

Sexual misconduct claims may potentially give rise to a wide range of exposures. D&O insurers should be mindful that wider corporate accountability could become a more significant issue, in the context of sexual misconduct claims, than might have once been envisaged.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.