D&O: Navigating the #MeToo movement

As the world wakes up to the prevalence of sexual harassment in the workplace, employers and insurers are reassessing their risk exposure, while legislators are focused on drawing up new rules around workplace behaviour.

Recent years have seen global companies increasingly focused on implementing policies to protect their workforce by preventing sexual harassment and work-based assaults. These initiatives have not been an organic development in human resources policy. Instead, they are partly a response to the #MeToo and #TimesUp movements which revealed the alarming prevalence of harassment, predatory behaviour and sexual assault in the workplace.

Court cases relating to the highest profile cases continue to play out in the world’s media at the time of writing – among the most well-known, the numerous allegations of rape and predatory sexual assault against former influential film producer Harvey Weinstein in October 2017, including one count of rape in 2013 and inappropriate sexual behaviour towards a second woman in 2006.

The emergence of these allegations would later lead to some of the world’s best-known actresses coming together on social media urging others to use the hashtag #MeToo if they had ever been harassed or assaulted at work. Such celebrity names as Jennifer Lawrence, Uma Thurman and Gwyneth Paltrow gave the campaign the impetus to reach a global audience and thousands of cases in other industries began to emerge.

The movements have been devastating for some companies, which have realised that they need to take a far more proactive approach to stamping out bad behaviour – or face the reputational and legal reprisals. This has manifested in various ways across different geographies. The last two years have seen a notable rise in sexual harassment complaints globally, impacting both large and small companies in nearly every industry.

Sexual harassment charges filed with the US Equal Employment Opportunity Commission, for example, increased nearly 14 per cent in 2018 from the previous year as the #MeToo momentum gathered pace, with the federal regulator recovering US$70 million (£54 million) for these claimants, according to The National Law Review.

Kate Palmer, associate director of advisory at employment law firm, Peninsula said a failure by employers to address the changing attitudes towards sexual misconduct could have a number of far-reaching implications for firms.

“Poor control of these issues can easily cause productivity issues with a workforce and, potentially, lead to valuable members of staff leaving their roles entirely,” she explains. “Increased awareness also places employers at more risk of facing a tribunal claim as a result of this. They may also find it difficult to attract talent if it has built up a poor reputation in this regard.”

Assessing the cost

Beyond sexual harassment, employers must also consider myriad allegations that often arise out of a sexual harassment claim. Claims of retaliation are common, while an employee may also accuse employers of negligent hiring or creating a work culture that allowed harassment to flourish.

As governments and legislators respond to the #MeToo scandal – albeit with varying degrees of vigour – employers and insurers may face major regulatory changes that alter how sexual misconduct is both defined and handled.

In the UK, these social movements have not led to an immediate change in the law, the government appears to be readying itself for additional legislation. Following the conclusion in October 2019 of its consultation on sexual harassment, it is weighing up potential changes, including extending the time employees are given to take a harassment, discrimination or victimisation claim to an Employment Tribunal, and strengthening the law to protect staff from harassment by clients, customers, and other third parties people from outside their organisation.

“While we wait for the government to respond to this, they have confirmed upcoming legislation that will prohibit any provision in confidentiality clauses or NDAs preventing disclosures of harassment to the police,” Palmer says.

Across the pond, around 15 states, including New York, Oregon and New Jersey, have introduced new laws to help protect employees from sexual harassment and gendered discrimination at work since the #MeToo movement. The revised policies include extending the statutes of limitations to report cases of harassment, amending the arbitrary standard that harassment must be ‘severe’ or ‘pervasive’ to constitute a hostile work environment, and requiring anti-harassment training in all workplaces.

In addition, New York state passed legislation in 2018 that generally prohibits confidentiality provisions in sexual harassment settlements – a move that is widely expected to lead to a significant rise in claim rates.

With the slogan “20 by 2020”, influential advocacy group the National Women’s Law Center is using its weight to force more states to pass legislation over the next year. The recent revelation that the aforementioned Weinstein has reached a tentative US$25 million settlement agreement with dozens of his alleged victims – and the revelation these settlements would largely be paid off by the shamed mogul’s insurers – also highlights the direct impact #MeToo is having on employers’ insurance policies and ability to get adequate coverage.

Jared Zola, a partner at Philadelphia-based law firm, Blank Rome, says while he hasn’t seen a notable rise in the number of claims made under employment practice liability insurance – the main cover for sexual harassment in the workplace – the actual size of the claims have increased since #MeToo as alleged victims seek greater sums to compensate for wrongdoings.

“The size of EPL claims have definitely increased over the last two years. From my point of view, getting claims paid has been more difficult. A lot of insurers are being hit hard from the property side, such as natural disaster claims, and then you have all the threat of sexual harassment claims,” Zola notes.

How big is the problem?

According to the December 2019 EPL insurance market survey by Betterley Risk Consultants – which polled over 30 of the world’s largest insurance companies including AIG, Hiscox, The Hartford and Travelers – insurers have hiked up their EPL rates by as much as 10 per cent over recent months as the force of #MeToo heightens.

“It’s a clear indication (to us, anyway) of how hard the #MeToo increase in claims is hitting some insurers, and of the increasing frustration with harassment,” Betterley notes.
#MeToo also threatens to trigger a whole new wave of directors’ and officers’ claims.

This impending threat first materialised at end of 2017 when, in one of the biggest shareholder derivative settlements recorded, 21st Century Fox agreed to a US$90 million (£69 million) settlement, funded by its D&O insurers, after investors alleged the company’s management allowed a culture of sexual and racial harassment to pervade the company. The investors argued that this culture resulted in both reputational and financial damage to the firm.

In this #MeToo era, companies and insurers are exposed to a range of possible D&O-related claims including a failure to monitor harassment, breach of duty and allegations of ignoring or enabling harassment.

The D&O market is certainly showing signs of strain. Data from Cornerstone Research revealed that the average D&O settlement amount in 2018 was US$64.9 million (£49.9 million) – more than triple the figure from 2017.

D&O rates have also jumped up considerably the past few years, with commentators blaming an increase in securities class actions as well as ‘event-driven’ litigation spurred by movements such as #MeToo.

Figures from insurance broker Marsh showed D&O rates for its FTSE 100 clients increase by as much as 77 per cent in the third quarter of 2019, while for private companies, the increases were as much as 42 per cent.

David Blades, associate director of industry research and analytics at credit ratings agency, AM Best, said insurers are increasingly looking for employers to enhance their policies and proceduresand overall risk controls as a consequence of #MeToo.

This article was published in the January-February 2020 issue of CIR Magazine.

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