Firms can insure against allegations

Uneasy lies the head that wears a crown, said William Shakespeare. And when the head belongs to a corporate executive or employee, it is no less than a crown of thorns.

Corporate executives today are under attack from the #MeToo movement, as sexual harassment and sexual assault charges spread virally on social media. Celebrities, artists, politicians, journalists...there is not one profession that has not been rocked by those two dreaded words: #MeToo.

The movement attempts to demonstrate the widespread prevalence of sexual assault and harassment, especially in the workplace. Naturally, allegations fly thick and fast. Given the all-pervasive nature of social media, judgements are passed within seconds, and often the alleged oppressors do not have a chance to defend themselves. Corporate reputations are at stake. Plus, there could be financial repercussions. So, does a Directors & Officers Insurance policy or D & O Insurance policy, as it is widely known, help in the wake of a sexual harassment charge? DNA Money spoke with insurance experts to help readers understand the nuances.

Dial L for Liability

Typically, a D&O cover applies to former, present and future members of the board of directors and the management comprising officers and employees in a managerial or supervisory capacity. The policy normally covers the parent company and, if opted for, all subsidiaries of the parent company as mentioned in the last annual audited accounts submitted with the proposal form.

Usually, the policy is designed to operate on an unnamed basis covering all directors / officers and employees of the policyholder. Typically, the insurance premium amount is determined by a number of factors, namely the limit of indemnity (say, Rs 10 crore), past claim settlement, whether the company is listed or unlisted, and financials. Not just big firms, even small and medium-sized enterprises or SMEs are these taking such policies. And, it is not without a reason. Reports of sexual harassment claims are rising, and targets include company officials.

Sushant Sarin, executive vice president, Tata AIG General Insurance says an allegation of a wrongful act such as sexual misconduct, made directly or through social media against a director, officer or employee (d.o.e) of a company, will trigger the D&O Policy. "When such director, officer or employee defends himself/herself and incurs legal cost and expenses towards the same, these will get paid under the D&O policy," says Sarin.

Sexual misconduct by a company executive or employee can result in legal claims. These claims often are not only against the accused but also against the company itself. It can trigger a chain of events, not just setting up of an internal committee to probe the case. The individual(s) against whom the allegations are made can find themselves the subject of criminal proceedings as a result of his actions. Other senior executives may also be dragged in this, if they are alleged to have turned a blind eye, or if they have failed to follow set procedures or properly act on complaints.

So, what are the policy benefits for the organisation and the official in question when a sexual harassment charge is filed and publicly discussed? The policy enables the director, officer or employee to engage the best defence to protect himself/herself against an allegation, especially if the same is unfounded, baseless or malicious. In case of an actual misdemeanor, if damages have to be paid to the wronged, this too would be covered under the policy, points out Sarin.

What does liability insurance cover

A liability insurance policy can come in form of different variants. They can be covers like a right to defend, coverage for retired directors, employment practice liability, damage to reputation, defence cost, severability, etc. So, how do they work when a sexual harassment charge is filed? Easwara Narayanan, COO of Future Generali India Insurance explains that 'The right to defend' condition under D&O policy would mean that in case of wrongful allegations against directors, while the Insured (Directors) have a choice to defend themselves by taking consent from the insurer, the Insurer has a right to take over defence.

The employment practice liability cover protects directors in case of claim against directors on account of wrongful termination, harassment of employees and other employment related malpractices.

The potential for reputational damage caused by sexual misconduct allegations is big. "Damage to reputation costs provides for the cost of hiring public relation services for rebuilding the brand of company and safeguarding the reputation of related directors," says Narayanan. So, when a trigger event occurs, a crisis management extension of the policy will typically pay for those related costs. This facility is useful for the alleged perpetrator, especially where they have been wrongly accused.

The D&O policy indemnification is primarily on defence costs. Apart from defense costs, it allows costs of investigations and insurable compensations awarded by court of law.

"Allegations of sexual harassment made against Directors by employees is part of employment practice liability cover under D&O policy. Apart from employment practice liability cover, policy also covers similar allegation from third party," says Narayanan.

Grey area

Some legal experts say that in order to trigger coverage under a D&O policy, the wrongful act should have occurred whilst the person was acting in the course and scope of his or her employment. So, if the alleged misconduct occurred outside of working hours, that can be a grey area.

For example, if an employee alleges that her manager sexually harassed her in a bar on a Sunday evening during a social event, the insurance company may question whether the manager was on the job during this social event to determine whether the policy coverage applies.

CHARGES ARE OFTEN AGAINST EMPLOYEE AND COMPANY ALSO

• D&O cover applies to former, present and future members of the board of directors and the management comprising officers and employees in a managerial or supervisory capacity and operates on an unnamed basis.
   
• When sexual harassment charge is filed, the insurer has a right to defend themselves by taking consent from the insurer, under 'The right to defend' condition under D&O policy
   
• In order to trigger coverage under a D&O policy, the insurer could raise the question whether the wrongful act occurred whilst the person was acting in the course and scope of his or her employment