Does D&O Insurance Cover Claims of Harassment or Sexual Misconduct

Allegations of improper conduct, such as sexual harassment or misconduct, might occur in any business, at any time. When they do, they could lead to costly lawsuits and often, a business’s leaders and board members are those who stand to bear the brunt of the blame.

Sometimes, these lawsuits come from current or former employees. In other cases, they might arise from shareholders or even members of the public. In any case, the affected executives must respond appropriately. However, the response is likely to cost them a lot of money.

Still, if your business has a Directors & Officers (D&O) insurance policy, then those involved might have a resource available to aid them in their defense. This is often a lifesaving benefit for businesses who face sudden allegations of shocking misconduct, whether they are true or not.

All the same, D&O insurance is not unlimited protection for potential offenders. Therefore, take care to understand the limitations of your policy in addition to its benefits.

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Understanding D&O Insurance

In recent years, the news has been full of stories about business executives, celebrities and public figures who have been accused of sexual misconduct. However, it is not just famous people who might face these allegations. Any business owner might face such a claim, not to mention the costly legal actions that might accompany it. However, a D&O insurance policy might be able to help.

Directors & officers insurance is a type of liability policy designed to extend high-level, targeted protection to company leaders. These policies exist because often, when a business is accused of misconduct, those at the top stand to take the blame. Because lawsuits might name individuals as defendants, the defendant might face the loss of their own money and personal assets.

Many business leaders buy D&O insurance because it is immaterial whether an allegation of sexual misconduct is true or false. The fact is that when someone sues you over this issue, you must respond. Even if some of those named in the sexual misconduct suit had nothing to do with the alleged action itself, they could still face a challenge because of their position.

A D&O claim can make sure that those named in a lawsuit can fight back without spending incalculable personal funds. D&O insurance usually covers company leaders against claims of:

Mismanagement of fiduciary duties
Misrepresentation of company assets
Failing to comply with industry laws or regulations
Poor stock performance
Employment practices

Generally, a claim of sexual misconduct will fall under a D&O policy’s definition of an employment practices liability. However, not all acts of sexual misconduct or harassment will have coverage. It’s important that companies fully understand both the full extent of a D&O policy and where it stops.

Understanding Employment Practices Liabilities

Workers have rights as protected by law. One of the most fundamental of these is the right to a safe workspace and fair, equitable treatment. Any type of sexual misconduct clearly violates even the most basic codes of conduct of any professional setting. That’s why it generally falls under the definition of an employment practice liability (EPL).

Employment practices liabilities are actions (real or perceived) that violate the legal rights of employees. That’s why most businesses carry EPL insurance policies as part of their liability insurance portfolio. These policies might cover the costs of defending the business against allegations of discrimination, wrongful termination, failure to promote and of course, sexual harassment. So, should an employee sue the company and allege that they were sexually harassed, this is the coverage that can help the company respond.

D&O policies often have an employment practices endorsement or extension. Though these are separate from a stand-alone EPL policy, they provide the necessary terms to make sure that the insured directors are covered against EPL allegations levied against them.

However, you cannot assume that an allegation of sexual misconduct will have coverage, even if you have strong D&O and EPL coverage in place.

When Will Allegations of Sexual Misconduct Not Have Coverage

Due to the serious and complex nature of sexual misconduct allegations, there are times when a D&O policy might not cover a claim.

Policies will generally only pay for acts occurring during the director’s scope of employment. Misconduct that occurred outside the workplace might not have coverage.
Certain policies do not cover allegations of physical injuries. So, while an allegation of verbal harassment might have coverage, a sexual assault allegation might not.

Often, these policies will not cover criminal acts. So, if a director of the company gets arrested and jailed for sexual assault, then the policy might refuse to cover their legal costs.

Sexual misconduct of any kind is unacceptable and often criminal. However, many people do not realize that sexual misconduct in the workplace doesn’t have to be physical. It might be verbal or take the form of exploitation or intimidation. That’s why so many businesses require all employees, directors included, to undergo ethics trainings to learn to avoid these situations.

In the end, all D&O policies vary in how they will address sexual misconduct claims. Therefore, ask your management liability insurance agent to help you customize your policy appropriately. However, don’t forget that the responsibility lies with you to make your company as safe as possible.

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