#MeToo Liability: Coverage issues for employers

Excerpted from Lexology By Brandi L. Doniere and Kerri L. Keller


The #MeToo movement began to spread on social media in 2017, fueled by the improprieties of Roger Ailes, Harvey Weinstein and others in the public eye that came to light. The flood of allegations against men in powerful positions has encouraged others to come forward with their own stories of workplace harassment. As a result, businesses began to better educate themselves and their employees, managers, and supervisors on what constitutes sexual harassment. Many also worked to tighten policies and procedures. Better education and updated policies notwithstanding, claims of harassment, continue and employers are looking to their insurers to defend them in court and indemnify them for the associated damages and settlements.


As context, workplace harassment is unlawful under state and federal law when an individual is harassed based on his or her gender or other protected status, such as age, race, or religion. Sexual harassment is the most prevalent type of workplace harassment and often consists of unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature. Importantly, the harassment does not need to be sexual and can include offensive remarks about a person’s gender.


Claims of sexual harassment generally fall into two types, both prohibited by federal and state law: quid pro quo and hostile work environment. Quid pro quo harassment occurs when a person who can take formal employment actions (like hiring and firing) is the harasser. For instance, if a supervisor conditioned an employee’s career advancement on sexual favors, the supervisor commits quid pro quo harassment. A hostile work environment occurs when an employee is harassed in a way that unreasonably interferes with the employee’s work performance or subjects him or her to an intimidating or offensive work environment. For a hostile work environment claim, the harasser can be a coworker, a supervisor, or third-party, such as a contractor, client, or even a customer. Primary liability for sexual misconduct belongs to the wrongdoer, however, employers and supervisors face liability as well.


In addition to bringing claims of sexual harassment and discrimination under state and federal law, an alleged victim may assert several common laws claims as well. These claims include vicarious liability, negligent hiring, negligent supervision, negligent or intentional infliction of emotional distress, and breach of contract. In fact, employees usually assert as many claims as possible against as many individuals as possible, such as officers, directors, managers and supervisors, along with the employer. Further expanding an employer’s exposure, it may want to defend and indemnify its named employees or may be obligated to do so under employment contracts. As to officers and directors, the employer’s bylaws may require it to defend and indemnify them for liabilities arising from the operations of the company, which may include the actions of its employees. In sum, an employer may be obligated to defend multiple causes of actions against multiple individuals all arising out of a single incident.


Where should employers look for insurance coverage when faced with claims arising from an employee’s allegations of harassment? An Employment Practice Liability Insurance (EPLI) policy is the most likely source of coverage. EPLI policies cover employers and their directors, officers and senior managers for claims brought by employees alleging wrongful employment acts. Some EPLI policies also cover claims brought by customers, clients and other third parties. Directors and Officers (D&O) insurance policies similarly provide coverage for the errors or omissions of a company’s officers and directors, which could include such mismanagement as perpetuating a hostile work environment or permitting employees to engage in improper sexual conduct. The coverage provided by D&O policies, however, is typically narrower than that provided by EPLI policies. D&O policies usually contain exclusions for bodily injury and intentional conduct and may contain an “insured vs. insured” exclusion, which would negate coverage for any claim brought by an employee who is also a director or officer covered by the policy.


In some limited circumstances, an organization’s commercial general liability or umbrella policy may provide coverage. To be covered under a general liability policy, the harassing acts or sexual misconduct must have been neither expected nor intended by the insured. Whether an employer expected the sexual misconduct to occur depends on what the employer knew about the wrongful conduct and the wrongdoer’s propensity to engage in it. But determining that the wrongful conduct is a covered occurrence under a general liability policy does not end the coverage inquiry. General liability policies often contain an employment practices exclusion or sexual misconduct exclusion that negates coverage for sexual harassment, negligent hiring and negligent supervision claims.


If an employer does not have EPLI or D&O coverage and its general liability policy excludes coverage, occasionally these claims are covered by an umbrella policy, which may provide “broader than primary” coverage. However, coverage under an umbrella is often subject to significant self-insured retention. It will often be an employer’s last resort when seeking coverage for a sexual harassment claim.


The cost of defending a sexual harassment lawsuit is usually quite high, so the employer’s ability to tender the defense to an insurer is very important. If an employer has one of the policies described above, whether an insurer is obligated to defend an employer depends on the claims and allegations asserted in the complaint. In Ohio, an insurer must defend its insured when the allegations of the complaint arguably or potentially fall within the coverage of the policy. Willoughby Hills v. Cincinnati Ins. Co. (1984), 9 Ohio St.3d 177, 179. An insurer that is required to defend an employer against claims arising from sexual harassment or discrimination may ultimately have no duty to indemnify the employer for damages or settlement paid to the accuser. An insurer’s duty to indemnify an employer depends on the specific facts and circumstances surrounding the misconduct – the same facts and circumstances that will determine the employer’s liability. The following facts and circumstances may be critical to a coverage determination:


Who is the accuser (employee, contractor, customer, client, or patient)?


Who is the wrongdoer (employee, contractor, supervisor, director, or employer)?


Where did the wrongful act(s) allegedly take place?


When and how often did the wrongful act(s) allegedly take place?


Was the wrongdoer acting in the scope of his or her employment?


Should the employer have known that the wrongdoer was engaged in misconduct?


Did the employer take action to stop the misconduct?


In any sexual harassment or discrimination litigation, the allegations in the complaint and circumstances surrounding the misconduct will be key to determining whether a policy provides defense or indemnity. Every available policy should be reviewed for potential coverage, not only when a sexual harassment or discrimination claim is initially made, but whenever previously unknown facts are disclosed, or new causes of action are asserted.