When sexual misconduct is alleged, coverage may be provided under different kinds of policies–depending on policy language and applicable exclusions.
Published on July 28, 2023
By Michelle Gordon, Director of Management Liability Claims, Nicholas Butovich, Director, Associate General Counsel, Coverage Counsel, and Melisa Thompson, Senior Director, Complex Casualty Claims
Since the advent of the #MeToo Movement, we have seen an increased number of individuals coming forward with sexual harassment claims. In addition, we have seen a rising number of claims involving C-suite level employees engaging in egregious sexual misconduct with subordinates and coaches taking advantage of younger athletes. The alleged misconduct includes sexual abuse, assault, and battery. With such claims, the question of coverage always comes into play. Are such claims covered under an insurance policy and, if so, under what type of policy? This article explores this question and the coverage implications for such claims.
When sexual misconduct1 is alleged, is coverage provided under a management liability policy, a commercial general liability (CGL) policy, or something else? The answer depends on the language of each policy and any applicable exclusions.
Coverage under management liability policies
Typically, sexual harassment and discrimination claims are covered under management liability policies—specifically, under the Employment Practices Liability (EPL) or Third Party Discrimination (TPD) Liability Coverage Part of management liability policies.2 However, many management liability policies contain sexual misconduct exclusions that preclude coverage for any claim based upon, arising out of, or in any way involving any sexual misconduct. Such an exclusion typically appears in an endorsement in a management liability policy as follows:
The Insurer shall not be liable under this Coverage Part to pay that portion of Loss on account of any Claim made against any Insured:
Based upon, arising out of, or in any way involving:
- The employment or retention of any person who actually or allegedly engaged in or threatened any Sexual Misconduct;
- The supervision, training, or investigation of any person who actually or allegedly engaged in or threatened any Sexual Misconduct;
- The failure to prevent, intervene, or suppress any actual, alleged, or threatened Sexual Misconduct; or
- The reporting of or failure to report Sexual Misconduct to authorities;
regardless of culpability, intent, or relationship of the actual or alleged perpetrator to any actual, alleged, or threatened Sexual Misconduct, or whether any Sexual Misconduct happened at any premises owned or operated by the Insured.
This exclusion typically applies to all coverage parts within a management liability policy. When there is a sexual misconduct exclusion in the policy, and all allegations are based upon, arise out of, or in any way involve sexual misconduct, there is typically no coverage. See Madison Square Boys & Girls Club, Inc. v. Atlantic Specialty Ins. Co., et al., 204 A.D.3d 539 (N.Y. 1st Dept. 2022) (sexual misconduct and child abuse exclusion precluded coverage for claims for negligent supervision and emotional distress).
However, what happens where there is no such exclusion? Is coverage provided under management liability policies, and, if so, are there any coverage provisions that limit the available coverage in these scenarios?
"Many management liability policies contain sexual misconduct exclusions that preclude coverage for any claim based upon, arising out of, or in any way involving any sexual misconduct."
In the absence of a sexual misconduct exclusion or other limiting policy language, most management liability policies would typically pick up such a claim under the EPL or TPD liability insuring agreement. Wrongful Employment Practices and TPD claims are both defined to include sexual harassment as a wrongful act. As such, sexual misconduct claims, which typically include some form of sexual harassment, trigger these insuring agreements; just which specific insuring agreement is invoked depends on who is bringing the claim. However, the coverage provided is typically subject to a reservation of rights based on other pertinent policy provisions within the EPL or TPD liability coverage parts. These provisions are discussed more fully below.
First, most management liability policies contain a fraud/crime exclusion, in which coverage may be precluded for claims based upon, arising out of, or in any way involving any deliberately fraudulent act or omission or any willful violation of any statute or regulation committed by such insured person. However, this exclusion typically requires a final adjudication. In such scenarios, a defense would typically be provided subject to a reservation of rights, and there most likely would be no indemnification for damages subject to the exclusion.
Second, most management liability policies contain some type of a bodily injury exclusion within the EPL and TPD liability coverage part. Standard language is as follows: coverage is precluded for claims for bodily injury, sickness, disease, or death of any person, or damage to or destruction of any tangible or intangible property, including loss of use thereof. However, this exclusion may not apply to any claim for emotional distress, mental anguish, or humiliation, which are all standard damages in a sexual misconduct claim. Further, since bodily injury is typically not the only damage being alleged, this exclusion typically would not preclude coverage for the whole claim, and thus a defense may be provided, subject to a reservation of rights. Damages arising out of bodily injury would typically not be covered. In some circumstances, there is a modification of this language by endorsement that broadens the standard exclusion. These types of bodily injury exclusions typically preclude coverage for claims “based upon, arising out of, or in any way involving” bodily injury. In such scenarios, if bodily injury is being alleged, this exclusion could preclude coverage for the whole claim, unless there is an applicable carveback.
Third, for claims that trigger the EPL insuring agreement—that is, they are brought by a former or current employee or an applicant for employment—any conduct outside the scope of employment is usually not covered. Typically, the policy defines Wrongful Employment Practice to mean, “any of the following actual or alleged acts, errors, or omissions by the Insured Persons in their capacity as such or by the Company” (emphasis added), listing wrongful dismissal, discharge or termination, and violation of any law or public policy concerning discrimination in employment as some examples. Sexual misconduct is not an act, error, or omission conducted by an Insured Person in their capacity as an employee of a company; such conduct would not be considered to have occurred in discharge of their job duties. Therefore, this conduct is typically not covered by the policy. If there is insufficient information to determine whether the conduct is outside the scope of employment, or there is separate conduct also being alleged that is within the scope of employment, a defense would be provided, subject to a reservation of rights on indemnification for uncovered damages.
"When multiple policies potentially respond to such a claim, the carriers need to engage in a discussion of coverage priority based on a comparison of 'other insurance' provisions and, if applicable, allocation discussions."
In addition, many jurisdictions, through statute or case law, preclude coverage for willful or intentional acts. For example, in California, section 533 of the California Insurance Code provides that “an insurer is not liable for a loss caused by the willful act of the insured ….” See CA INS § 533; accord State Farm Mut. Auto. Ins. Co. v. Wertz, 540 N.W.2d 636, 640 (S.D. 1995) (held under public policy no duty to defend or indemnify insured for damages intentionally inflicted). In these jurisdictions, sexual misconduct cases will not be afforded indemnity coverage under a management liability policy.
When coverage is afforded for sexual misconduct claims, insureds need to be mindful that there is typically uncovered loss (as discussed above), and an allocation between covered and uncovered loss should, in most circumstances, be agreed to with the carrier. See Miller v. St. Paul Mercury Ins. Co., 683 F.3d 871 (7th Cir. 2012). Intentional/willful conduct and conduct outside the scope of employment duties are not covered by a management liability policy. See, e.g., United States Liab. Ins. Co. v. Krawatsky, et al., No. JKB-21-0538, 2022 WL 888885 at *15 (D. Md. March 25, 2022) (management liability policy at issue only provides coverage for actions taken within the scope of employment).
Coverage under commercial general liability policies
In addition to management liability policies, commercial general liability policies may provide coverage for a sexual misconduct claim, depending on the facts of the underlying claim. Broadly speaking, CGL policies provide coverage for bodily injury but exclude coverage for injury to employees. Some CGL policies contain sexual abuse exclusions or exclusions for EPL claims. See, e.g., North American Building Maintenance, Inc. v. Fireman’s Fund Ins. Co., 137 Cal.App.4th 627, 642-43 (5th Dist. 2006) (observing that EPL exclusion in CGL form was developed based on industry concern that, as employment practice claims became more prevalent, coverage for employment practices would eventually be found under CGL form).
"To ensure appropriate coverage for sexual misconduct claims, companies need to purchase the proper insurance, and carriers need to address allocation and coverage issues among themselves and with their insureds at the beginning of a claim."
However, a CGL policy may provide coverage where the victim of the abuse is not an employee and where there is no applicable sexual abuse, expected or intended exclusion, or EPL exclusion. In fact, some CGL policies explicitly provide coverage for sexual abuse claims. These policies typically provide coverage for an entity alleged to have negligently hired, supervised, or retained the perpetrator of the abuse. Perpetrators of the abuse are not provided indemnity under this coverage, but may be entitled to a defense. If a CGL policy is silent on sexual abuse, meaning there is no sexual abuse exclusion or explicit sexual abuse coverage, interpretation differs according to the jurisdiction, with many states holding that coverage is available for allegations of negligent hiring, supervision and retention.
When multiple policies potentially respond to such a claim, the carriers need to engage in a discussion of coverage priority based on a comparison of “other insurance” provisions and, if applicable, allocation discussions. Thereafter, once coverage priority and allocation have been agreed to, the carriers should discuss any potentially uncovered loss with the insured.
Summary: Insureds should be aware of coverage nuances
As illustrated above, many coverage implications arise when managing sexual misconduct claims. Companies should be aware of these coverage nuances so that they can be sure they are (a) putting all relevant carriers on notice of these claims and (b) prepared to discuss allocation for uncovered loss. To ensure appropriate coverage for sexual misconduct claims, companies need to purchase the proper insurance, and carriers need to address allocation and coverage issues among themselves and with their insureds at the beginning of a claim.
1 Sexual Misconduct is often a defined policy term in management liability policies. One example of a sexual misconduct definition is “sexual abuse, sexual assault, sexual battery, sexual molestation, sexual exploitation, or the acquisition or transportation of persons for sexual purposes.” For purposes of this article, we will refer to sexual misconduct as inclusive of the following conduct: abuse, unwanted touching, assault, and battery.
2 The Directors & Officers Liability Coverage Part of a management liability policy is typically not implicated, as there are exclusions for employment practices liability and third party discrimination claims, which these types of claims typically fall under.