Insurance Coverage for Sexual Misconduct (Spoiler Alert- It is not your E&O)

sexual harassment insurance policies

Sexual misconduct by a company executive or employee can result in a wide variety of legal claims against the company itself. If the victim is an employee, a supervisor’s unwanted sexual advances or other conduct of a sexual nature can form the basis for a sexual harassment claim against the employer under Title VII of the Civil Rights Act. If the accuser is not an employee, the company may be subject to liability for the bad actor’s conduct under negligent hiring or supervisions theories.

Sexual misconduct allegations can spawn litigation beyond claims by the alleged victim as well. For example, former Uber CEO Travis Kalanick was sued by an early investor in the company following widely-publicized allegations of sexual harassment and gender discrimination. The investor asserted that Kalanick’s failure to disclose the alleged misconduct gave rise to claims for fraud, breach of contract and breach of fiduciary duty.

It is also not uncommon for the alleged perpetrator to file a suit claiming defamation following public allegations of sexual misconduct. For example, Dov Charney, former CEO of American Apparel, sued his former company and a hedge fund for defamation, alleging that both sought to damage his personal and professional reputation by suggesting to third parties that he had engaged in criminal misconduct of a sexual nature.

Because no single insurance policy will provide coverage for every type of claim that may result from misconduct allegations, policyholders should look carefully at the following coverages:

Employment Practices Liability Insurance

Employment practices liability insurance (EPLI) is the most likely source of coverage for sexual misconduct claims asserted by employees. EPLI generally covers claims made by employees based on employment-related misconduct of their superiors or co-workers. Most policies expressly cover claims for sexual harassment, wrongful termination, discrimination and retaliation and some provide coverage for additional employment-related claims such as defamation or negligent retention and supervision. Some EPLI policies also cover claims that are made by non-employees, such as customers or vendors, in addition to claims by employees.

A significant limitation is the common EPLI exclusion for claims alleging bodily injury. Thus, while claims for verbal sexual harassment may be covered under an EPLI policy, claims for physical sexual assault typically are not. If a claimant alleges both verbal and physical harassment or assault, an EPLI policy may provide at least partial coverage.

General Liability

Some claims arising out of alleged sexual misconduct may be covered under a general liability (GL) policy. Most GL policies provide coverage for claims alleging “personal injury,” which typically is defined to include defamation. Thus, a defamation suit by an accused harasser, like the American Apparel lawsuit, could be covered under a GL policy.

Unlike EPLI policies, GL policies also cover claims for “bodily injury.” Although a direct claim for physical assault would likely be subject to the standard policy exclusion for injuries that are “expected or intended,” some courts have found that this exclusion does not apply to a claim against a company for the negligent hiring or supervision of an individual who commits a sexual assault. Another limitation on coverage under GL policies is the standard exclusion for claims made by employees of the policyholder. Some courts, however, have found that such claims are covered where the alleged misconduct occurred outside the workplace or were otherwise unrelated to employment.

Directors and Officers

D&O insurance is another potential source of coverage for some sexual misconduct-related claims. D&O insurance generally provides indemnification coverage for the “wrongful acts” of a company’s directors and officers and, frequently, its general employees. Many policies also cover claims against the entity itself, but such coverage is generally narrower than the coverage for insured individuals.

D&O policies typically cover claims for fraud or breach of ­fiduciary duty, such as in the Uber lawsuit. Coverage for sexual misconduct claims is ­limited by standard exclusions for bodily injury, which may extend to claims for mental anguish, humiliation and emotional distress, and exclusions for “willful or intentional” misconduct. D&O policies also typically contain an “insured vs. insured” ­exclusion, which may bar coverage for claims made by employees against the company.

Crisis Management or Reputation Risk

The reputation damage caused by sexual misconduct allegations may be more costly to a business than any other litigation expenses it will incur. Crisis management insurance and reputation risk insurance are two newer forms of coverage that seek to address the risk negative publicity poses to a company’s bottom line. When a triggering event occurs, crisis management insurance typically pays for the hiring of a public relations firm to respond to the issue. Reputation risk insurance generally provides coverage for actual business loss sustained as the result of a negative publicity event. Coverages and policy forms for the two types of insurance vary widely, and sexual misconduct-related events may or may not be covered, depending on the coverage purchased.

Pursuit of Coverage

When a sexual misconduct claim is made against a company or one of its executives or employees, the company should immediately report the claim to all of its liability carriers, even if it is unclear whether there may be coverage under a given policy. When tendering claims and engaging in negotiations with insurers, policyholders and risk managers should not accept at face value any conventional wisdom on what types of liability are covered. If an insurance carrier initially denies coverage, a company should not accept this response without testing its basis and, if necessary, consulting insurance recovery counsel.

 

* Written February 1, 2018 by Cameron Argetsinger is special counsel at Kelley Drye & Warren LLP  Reprinted with permission from Risk Management Magazine. Copyright 2018 Risk and Insurance Management Society, Inc. All rights reserved.

Property Management Services – Bodily Injury and Property Damage Exposures

Whether you explicitly perform Property Management services, or you provide property management services as part of a transaction, there are significant exposures to E&O claims resulting from bodily injury or property damage. Keep in mind that if you are working with REO properties, Foreclosures or Short Sales, you are performing property management services.

Most Real Estate E&O insurance policies include some coverage for bodily injury and property damage claims, but the scope of that coverage varies from policy to policy. Some E&O policies only cover bodily injury and property damage claims resulting from an open house or bodily injury and property damage resulting from the use of a lockbox. The broadest of policies provides bodily injury and property damage coverage that applies to all covered services.

Examples of bodily injury and property damage claims are frozen pipes in a foreclosure property. The bank asked you to turn off the water and now you must replace the floor. Items that a former tenant says that you threw away during a trash out that are now incredibly valuable. Bodily injury claims can result from a rental property with mold infestation or a client that falls through the rotten deck.

In many instances, these types of claims will be covered under the property owner’s insurance policy, but in the absence of the homeowner’s policy, you will be held responsible for the claim. Your General Liability policy excludes coverage for claims arising from the performance of professional services, so coverage for bodily injury and property damage claims is a very important part of your E&O policy.

Is your Neighborhood Garage Sale covered by your E&O?

We have been asked over the years if events such as ice cream socials, holiday toy drives, garage sales, etc, conducted by real estate agents within their communities to market their personal/team brand are covered under their E&O policy. What if someone comes to an event and gets injured or worse, is the real estate agent/agency liability covered by their E&O policy? The short answer is no. Garage sales, come visit Santa, 5k charity races, wine tastings, etc. are communal events which are not “normal” activities performed by an agent providing real estate services.

Understandability many of these events are great ways to keep your name top of mind and create goodwill within your market but they have their own risk exposures. This liability can be address by a special event rider to your existing GL policy. Often these riders are a few hundred dollars and can cover multiple types of events over the yearly term of the policy. Considering most agents don’t carry a GL policy themselves, your agency can obtain a rider and pass through the incremental premium increase/ expense to those agents who conduct these types of community outreach events. Stay safe and covered because sometimes remorse is what you DON’T buy.

What is BI/PD Coverage and why do I need it?

BI/PD stands for Bodily Injury and Property Damage. Most Real Estate E&O policies include some measure of BI/PD coverage, such as limited lockbox coverage or open house coverage, but the broadest E&O policies include BI/PD coverage across the policy form. So in addition to coverage for your use of a lockbox or hosting an open house, the BI/PD coverage extends to property management services, REOs, foreclosures and relocation services, as well as residential sales.

The reason the E&O policy extends to provide coverage for Bodily Injury and Property Damage is that most General Liability insurance policies exclude coverage for claims arising from professional services. That said, most E&O policies do require you to have a General Liability policy in force before your E&O BI/PD coverage will respond to a claim.

So if you are listing a foreclosure and don’t turn off the water, and the pipes freeze, the General Liability policy won’t respond and there is no homeowner’s policy to make a claim under. The same applies if you lease an apartment and the tenants then become sick due to mold in the unit. Everyone is familiar with the nightmare scenario when the agent fails to advise the buyer of the rickety stairs and the buyer ends up injured or the foreclosure cleanout that occurred at the wrong house. The inclusion of BI/PD coverage in your E&O policy addresses these situations before a lawsuit is filed so when you are reviewing your E&O insurance policy be sure to check the coverage terms that apply to the BI/PD coverage.

Real Estate Fraud And The Fiduciary Responsibilities Of Real Estate Agents

A Hazleton, Pennsylvania realtor could serve up to ten years in prison after pleading guilty to conspiracy to commit wire fraud. The realtor was arrested in Florida after fleeing there to avoid prosecution.

The realtor preyed on mostly Spanish-speaking, first-time homebuyers, telling them he was authorized to sell to them homes that were vacant or were in foreclosure. The victims agreed to buy the homes and paid the realtor, as well as other parties, for what the victims believed to be their new homes. In fact, the realtor was not authorized to sell the homes, and the fraud began to unravel when the victims began receiving eviction notices from the true owners.

Many of the victims have filed a federal lawsuit seeking civil damages against the realtor and many of the realty companies with which he was associated. James Halpin “Real estate agent admits to scam”    standardspeaker.com (May 26, 2017).

Commentary
The realtor-client relationship is that of a fiduciary. The realtor owes the duties of loyalty, honesty, prudence, full disclosure, confidentiality, good faith, reasonable care and diligence, and accounting.

Obviously, the real estate agent in the case above did not adhere to his fiduciary duties, and his unsuspecting clients suffered for it, as well as the real property owners.

Be aware of the types of real estate fraud that might be perpetrated on your clients:

  • Foreclosure rescue companies that convince distressed homeowners to “temporarily” transfer title or “leaseback” their own home to obtain relief.
  • Mortgage elimination schemes involving “loopholes” to help homeowners eliminate mortgages within an unreasonably short time.
  • Home improvement fraud committed by unscrupulous realtors who obtain a loan in the name of fictitious people or previous clients.
  • Equity skimming: where a buyer convinces a seller to relist the house at twice its true value. The buyer gets a larger mortgage, pays seller the original list price, and skips with rest of mortgage money, leaving the house to go into foreclosure.
  • Illegal flipping: flipping for profit is fine, but flipping for a price well above appraised value is not.
  • Equity fraud happens when crooks take stolen personal information and use it to obtain fraudulent loans.
  • Fraudulent loan origination happens when realtors help unqualified buyers get mortgages they are unable to pay in exchange for a larger sales commission.
  • Predatory lending and aggressive sales pressure: beware of “no money down” or “no credit check” schemes, which usually prey on the elderly, the unsophisticated, or those who are desperate.

Protect your clients from these scams by knowing your market, the true property values, and your client’s needs and motivations. Keep a watchful eye on how everyone involved in the transaction performs his or her job.

Hanover Insurance Group

Dual Agency on Agricultural Land Deal proves to be Risky Business

Land for Sale

A spotlight on a claim against a real estate agent who acted as a dual agent for both the seller and the buyer of 1000 acres of agricultural land for $10 million dollars ($10,000 per acre).

Fact Scenario:

Prior to the sale, the seller told the agent that the property line was his fence surrounding all 1000 acres. The agent relayed that information to the buyer. The buyer never ordered a survey despite being told to do so by the agent. None of these communications were in writing.

After the sale of the land, the buyer began planting orange trees within the fence lines surrounding the property for his business. Soon after the buyer starting planting, a neighbor to the north complained that the buyer was planting on 100 acres of his property that was within the fence boundary.

The buyer refused to stop planting and continued to develop the disputed property. The neighbor filed a lawsuit against the buyer to quiet title and for trespass. The buyer and the seller filed cross complaints against each other and the agent and his brokerage.

The buyer said he was told that the property line was the fence. The seller said he never told the agent that the property line was the fence. Both the buyer and the seller independently accused the agent of not looking out for their respective interests to help facilitate the sale and earn both commissions for himself.

In addition, the damages for the buyer were not just for the potential loss of 100 acres, they also included the lost revenue for the crop planted on the disputed property line. The buyer claimed that the combination of lost property and revenue was two times the original purchase price per acre. The lack of documentation and the $2 million dollars in damages made the case difficult to settle and very expensive for all parties to defend.

Result:

Ultimately, after a bench trial, the court found that the disputed property belonged to the neighbor. The court noted that the neighbor had been paying taxes on the disputed land.

However, the court split the buyer’s damages three ways ($666K each) between the agent, the seller and the buyer. The judge found the seller at fault for not being clear about the property line in light of his fence on his neighbor’s property, the buyer at fault for not purchasing a survey and the agent for not documenting all communications about the property line and survey.

Best Risk Management Practices:

In cases of dual agency, an agent has duties to both the seller and the buyer. It is incumbent upon an agent to thoroughly document all communications. Any doubts as to what was communicated to the parties will be construed against the agent.

*Charlton-Perrin, Gawain, “Real Estate Agent Claim Spotlight: Helping Real Estate Professionals Manage Their Claim Exposures,” Hanover Insurance Group, November 2017.

Who needs Construction/Development coverage?

New Construction

Construction/Development coverage extends the E&O policy to provide coverage for the sale of residential property that has been built or developed by an insured agent or broker. The practice of building spec homes has become common in the real estate industry and purchasing Construction/Development coverage will address the specific risk involved in the sale of this type of property. Defending an E&O claim where the agent is also the builder is challenging at best.

The basic E&O policy excludes the sale or property in which an insured agent or broker has an ownership interest, and includes several exceptions to the exclusion, with specific caveats that must be satisfied for coverage to apply. With Construction/Development coverage to apply, the policy usually requires that there must be a specific separate business that does the construction, so an individual cannot be the builder. The policy will also require a specific written disclosure of the relationship of the agent, insured and builder/developer. Keep in mind that every insurer words the coverage a little differently, so read the policy thoroughly.

Keep in mind that while many agents will say that that are not builders, but they sell the houses that their husband or wife builds, they own the construction company as community property. So when you are completing the E&O application and you see the question regarding the sale of property built or developed by an insured, be sure to consider the agents that are selling spec homes and whether or not that agent has an ownership in that construction company.

Know your “Hammer Clause”

There really is no such thing as a “Hammer Clause”, but that is the common term for the Consent to Settle Clause in your E&O policy. The Consent to Settle clause dictates what the insurance company will do when the company and a party making a claim against you agree on a settlement, but for whatever reason, you decide not to settle. Remember, the insurance company cannot settle a claim without your agreement, so there is a provision in the policy that determines what happens if this situation occurs.

There are various reasons why this might come up. The insurance company is interested in settling claims with the least amount paid in attorney’s fees and damages and that is not always what is best for you as an insured. Think about a transaction where you did your job perfectly and your client turned around and sued you for some nonexistent undisclosed defect in the property. The insurer might want to offer the claimant $5,000 to sign a waiver and drop the suit rather than hire an attorney and defend you. Some agents, in the interest of time and aggravation, may agree to settle. But you have the option to fight the claim. This is where the Consent to Settle clause comes into play.

When an insured refuses to agree to a settlement, the policy dictates the amount that the policy will pay over and above the amount that the claim could have been settled for. A standard Consent to Settle limits the insurer’s liability to the amount that the claim could have been settled for plus legal fees up to the time the settlement offer was made. Some policies have what’s known as a “Modified Hammer” in that the insurance company agrees to pay up to what the claim could have been settled for plus 50% of the damages in excess of the original settlement offer.
The important thing to remember if you are faced with this situation is that, by refusing to settle, you are taking on the chance that a court or arbitration may find in the favor of the claimant, and you could end up paying out of pocket for damages that could have been avoided.

 

What does DOL (Defense Outside The Limit) Mean?

One of the options you have when buying E&O insurance is Defense Outside the Limit (DOL) or Defense Within the Limit (DWL). It is important to understand this option clearly because this will impact coverage under your E&O policy significantly as well as the premium charged.

Defense Outside the Limit, which is sometimes referred to as Claims Expenses Outside the Limit provides substantially more protection than Defense Within the Limit which can also be referred to as Claims Expenses Inside the Limit. The difference is how the expenses incurred defending you or your agent against an E&O claim impacts your limit and what you have available to pay in damages, if any, when that claim is resolved.
Under either option, DOL or DWL, any costs incurred defending a covered claim will be paid by the E&O policy, after any deductible is paid, but with the DOL option the payment of these costs will not reduce the limit of liability that you have available to pay damages that may be awarded to the person making a claim against you. If you choose DWL any costs incurred will reduce the amount you have available under your policy to pay damages.

As an example consider a claim involving a buyer that claims an agent failed to disclose a leaky basement. The insurance company hires an attorney to defend the agent and between information discovery and depositions the attorney’s fees and costs amount to $100,000. It becomes apparent that the agent should have known and disclosed previous water infiltration problems with the house and the claimants are awarded $200,000.

Assuming the agent’s policy has a $250,000 limit, the E&O policy that is written with Defense Outside the Limit will pay $100,000 in attorney’s fees and $200,000 in damages. Under this same claim example if the agent had a DWL policy the $100,000 in attorney’s fees would be covered under the E&O policy but only $150,000 in damages would be covered. The difference is that with DOL the attorney’s fees are covered IN ADDITION TO the limit of liability available to pay damages.

It is also important to note that the aggregate limit of liability is the maximum amount available to pay damages for any one policy period. So, while unlikely, it is possible to have one or more claims during a policy period that exhausts your policy limit

What is a deductible waiver?

Does your E&O policy have a deductible waiver? It should if the following conditions are met:

  1. Seller disclosure form signed by Seller & acknowledged in writing by Buyer prior to closing;
  2. Home warranty purchased or waived in writing by Buyer prior to closing;
  3. Written Home Inspection Report was issued by licensed or certified home inspector, or waived in writing by Buyer prior to closing; and
  4. State/local board approved standard sales contract utilized

*Based on policy information provided by Hanover Insurance.