By Larry Conrath
These days, businesses have more to worry about when it comes to sexual harassment than just claims of “he said, she said.”
Much like the domino effect we saw with the Target data breach, corporate sexual harassment incidents can easily spiral, leading to derivative lawsuits aimed at directors and officers and board members for not putting effective oversight into place. The Steve Wynn case is a prime example.
Wynn, charged with subjecting female employees to unwanted sexual advances at the resorts bearing his name, is now also being blamed – along with the company’s board of directors – for damaging the Wynn Resorts’ reputation. This damage, the shareholders say, is the direct result of his sexual harassment claims. They say the claims led to a significant financial loss, including falling stock prices and the potential denial of a gambling license for a new hotel on the east coast. Even the state of Oregon is suing Wynn Resorts for breach of fiduciary duty, claiming the board of directors knew of Wynn’s tendencies, and didn’t do enough to stop him.
While companies might force an accused executive out of office immediately after a harassment claim, Wynn’s case is more complicated. The mogul is not only highly identified with the company’s brand, but he is also a major company shareholder. In essence, the Steve Wynn company is suing Steve Wynn.
What’s the Right Coverage to Protect You and Your Employees?
While the allegations in these cases are offensive, keep in mind the importance of due process and the need for a company and its management to defend itself from those allegations that may be unfounded. While no insurance will cover illegal behavior, many types of coverage can be tailored to allow coverage for defense costs incurred up until guilt is proven.
A company’s first line of defense in a sexual harassment case brought by an employee (and often also third-party, non-employees), is employment practices liability (EPL) coverage. An EPL policy will respond when a victim claims sexual harassment by covering the cost of the company’s defense, as well as the potential judgments and settlements arising from harassment claims.
In prior years, the majority of directors and officers (D&O) policy claims have been financial in nature - a company executive misrepresented financial statements, or missed its guidance in some fashion. However, the Wynn case is representative of a recent trending divergence in which a derivative case is brought against an executive for some other event-driven circumstance, not directly related to financial reporting. Other examples of event driven, non-financial D&O cases include a data breach, a substantial physical accident or product liability situation.
In Wynn’s case, a sexual misconduct scandal involving a top executive, has shareholders alleging that the board and management failed to properly prepare or respond to such event and look for direct compensation from the board for their breach of fiduciary duty to the company.
The company’s D&O policy will likely respond to cover defense costs and any potential settlement. D&O insurance is especially critical in derivative matters as the directors and officers have direct personal liability for such settlements as the company is prohibited from indemnifying them.
Engaging Your Board of Directors
Whether the issue at hand is sexual harassment or cyber security, lawsuits like the Wynn case have demonstrated that a board of directors can no longer turn a blind eye toward the actions of the C-suite. Instead, the board of directors must understand the inner workings of the company and ensure that the actions of the company’s directors and officers are in line with the corporate culture and the law.
Getting more involved means your company’s board of directors should:
- Ensure the company is properly insured. Review insurance policies annually to ensure proper liability coverage. When it comes to EPL policies, make sure you have appropriate limits for providing due consideration to the cost of defense and still have enough left to fund a potential settlement. Review of D&O insurance policies may also be in order, ideally to confirm the presence of non-entity EPL coverage to include individuals named on the board for employment and harassment-related issues. Eliminate sexual misconduct exclusions and other limiting policy language that some insurers may attempt to add for insureds in certain industry classes.
- Institute board oversight on policies and procedures. Regularly review HR policies and procedures and put effective grievance measures in place. Require regular reports of complaints and outcomes. Consider heightened value for board members with a depth of HR experience, possibly forming a board committee to deal with workforce issues such as harassment and monitor compliance with established procedures.
- Introduce penalties for non-compliance and incentives for inclusion. Imposing proper disciplinary measures and penalties for any form of misconduct sends the message of no tolerance to employees and the C-suite. Make sure these include a zero tolerance policy - even for the company’s star employees/executives. Consider incentives for executives who practice inclusion and champion diversity as part of their overall performance metrics. This will create a top-down culture that values inclusion.
Workplace harassment is, unfortunately, an age-old problem and the violators can never be fully prevented from their bad behavior despite all best efforts. At the same time, the role of the board of directors is increasing, as shareholders and the public demand vigilance in aggressively addressing these matters. Contact your HUB broker to discuss what you need to know about your coverage and board involvement in the day to day business.