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.

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.

Convicted Sex Offender: To Rent or Not to Rent, that is the Question (Part 1)

What should you do if a convicted sex offender, out of jail for 10 years, applies to rent one of your listings? Ask the owner of the property?… but what if he/she does not give you a clear decision To Rent or Not to Rent? Does approving this application create additional liability for yourself and your agency?

We know that the Civil Rights Act (Fair Housing Act) of 1968, Sec. 804. [42 U.S.C. 3604], and all subsequent amendments, does not identify sex offenders as a protected class like race, color, religion, age, gender, but does that mean you are cleared to disqualify the candidate? Does the public registration requirement of sex offenders provide adequate notice to the community to obviate any liability? All 50 states require convicted sex offenders to register their residency. Many states have laws that restrict residency within a certain distance of a school or daycare based on their conviction tier. Here are the 3 levels:

  1.  Tier 1 offenders: Must update their whereabouts every year with 15 years of registration
  2.  Tier 2 offenders: Must update their whereabouts every six months with 25 years of registration
  3. Tier 3 offenders: Must update their whereabouts every three months with lifetime registration requirements.

Stay tuned for the conclusions on this topic…we are working to figure out an E&O insurance coverage position on this topic but in the meantime here are some links to educate yourself on this topic:

Sex Offender Registration
Adam Walsh Child Protection and Safety Act
Sex Offender Registration and Notification Act
National Sex Offender Public Website
State-specific Registry Sites
Guide to Fair Housing
The Fair Housing Act
“Megan’s Law”

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

Protecting Client Property: Real Estate Agent’s Ethics Violation Turns Criminal

During the Christmas season, neighbors in a Connecticut town spotted two men carrying large sacks in and out of a home. According to police, one was a local realtor and the other, his accomplice. The men were in the process of stealing from an unoccupied house.

Police arrested the real estate agent on charges of third-degree burglary, conspiracy to commit third-degree burglary, and possession of burglary tools. The home belonged to a recently deceased man, and the agent had access to the home as a realtor.

Police are investigating whether the real estate professional abused access to other homes, which had recently experienced burglaries. Ben Lane “Connecticut real estate agent arrested for allegedly abusing access to rob homes-Authorities investigating a string of burglaries” clarionledger.com (Dec. 29, 2016).

Commentary

The realtor in the above-cited article likely violated at least two professional standards of practice, which led to his criminal liability as well. The 2017 Code of Ethics of the National Association of Realtors includes the following:

Standard of Practice 1-10

REALTORS® shall, consistent with the terms and conditions of their real estate licensure and their property management agreement, competently manage the property of clients with due regard for the rights, safety and health of tenants and others lawfully on the premises.

Standard of Practice 1-11

REALTORS® who are employed to maintain or manage a client’s property shall exercise due diligence and make reasonable efforts to protect it against reasonably foreseeable contingencies and losses.

The particular types of ethics violations in Connecticut are not as common as violations relating to representation and honesty. And, the agent-turned-burglar incident is an extreme and obvious case of an agent failing to properly manage or protect a client’s property.

However, these days, protecting a client’s property is not just about preventing physical access. Real estate professionals must also protect a client’s privacy. During an open house, for example, hide not only the obvious things, like jewelry and small electronics, but also hide any medications in the bathroom, checkbooks, garage door remotes, or any kind of document with your client’s personal information on it. Shut off the homeowners’ Wi-Fi while crowds are present to minimize network hacking attempts.

Consider using security cameras and alarms. It is now possible to easily equip the home with not only security alarms, but also with portable or temporary security cameras can be quickly set up, viewed from a smartphone, and removed when the home is no longer being shown.

Hanover Insurance Group

Conflicts of Interest: Don’t go there.

This should go without saying but we still receive many real estate E&O insurance claims revolving around conflicts of interest. Always be mindful of, and avoid at all costs, actual or potential conflicts of interest. You have a fiduciary duty to your client. Courts have held that a seller’s agent has a fiduciary duty to act with utmost good faith, fidelity, and loyalty in all dealings with the seller. There is no quicker way to embroil yourself in a lawsuit or grievance than acting in your own best interest to the detriment of your client (or in one client’s best interest to the detriment of another client’s interests).

Sometimes, the appearance of a conflict of interest is enough to instigate an adverse action. Thus, it is necessary to be vigilant about any potential conflicts which may arise and tell your client immediately in the event a conflict of interest arises. If the conflict of interest cannot be waived, withdraw promptly in the manner least detrimental to your client.

*McCune, Daniel R., Perdue, Kimberly and Charlton-Perrin, Gawain, “Top Ten Tips for Real Estate Agents to Avoid Getting Sued,” Hanover Insurance Group, August 2016.

The Pitfalls of Dual Agency and Bugs

A recent residential transaction resulted is a substantial claim being paid because of an undisclosed termite infestation. Our insured was both the listing and selling agent, so when things went wrong there was no one else to look to for a defense.

When the agent listed the property, the sellers signed a disclosure indicating no past termite damage or active infestation. That being the case, the sellers ordered and received a termite inspection report. The report indicated active termites and the seller took the least costly steps to eliminate the termites. The agent received a copy of the report and reviewed the details provided. Unfortunately the agent did not understand all of the details in the report, or she would have realized the severity of the termite infestation.

After closing the buyers found extensive termite damage and active infestation. Estimates for repair exceed 50% of the value of the home, which meant that according to local ordinance, the house had to be torn down and rebuilt in compliance with current building code. The buyers claim that they received a copy of the invoice for the termite inspection but not a copy of the report. The buyers allege that the report indicated active infestation and that the agent was aware of this fact.

There are a few reasons why this transaction resulted in a substantial E&O claim. First, the agent did not question the details of the termite inspection. If she had, she would have recognized the severity of the termite problem. Second, the agent failed to provide a copy of the termite inspection report to the buyers and document delivery of the report.

The resulting claim ended up costing in excess of $350,000 in damages and attorneys fees.

Be Proactive and Start Filing your Text Messages

Documenting conversations and decisions made during a real estate transaction is an extremely important best practice for E&O compliance. When you find yourself in the middle of a lawsuit, having proper documentation is paramount. Real estate client relationships often start off with email and signed documents which are easy to store. But eventually, in today’s mobile phone world, communication between agents and clients advance into text messaging. Since this medium is designed for limited characters and brevity is the norm, it is even more important to moralize these conversations at the end of a transaction. Furthermore, some day you will get a new phone or mobile phone carrier so it is impractical to think you are going have easy access to all your text messages forever.

There are several software tools on the market to help you export your text conversations into computer files or physical hard copies that can filed per client within their transaction folder. Doing this after each transaction will ensure that you will never be left wondering if that important decision which ultimately lead to an E&O lawsuit was discussed via text.

Here are 2 tools to consider for easy phone to computer exporting of texts Iphone    Andriod

Avoid the Extremely Difficult Client

One of the best ways to avoid having an E&O suit filed against you is to avoid the extremely difficult clients. Yes, that means walking away from someone who wants to pay you for your services. We know how hard you work to earn a chance at a new listing or buy side client but some clients are not worth the hassle.  How does one know who to avoid? Call upon your spidey senses, if something about a client does not feel right trust your instincts.  Consider carefully whether to retain or stay with clients: who make unreasonable demands; who constantly question your analysis or advice; who refuse to communicate effectively; and/or who have fired or speak badly of your peers. Remember, a client prone to angry or irrational behavior may, eventually, direct his or her ire at you, regardless how careful you have been to provide the utmost service.

*McCune, Daniel R., Perdue, Kimberly and Charlton-Perrin, Gawain, “Top Ten Tips for Real Estate Agents to Avoid Getting Sued,” Hanover Insurance Group, August 2016.

Not in my house.

When neighbors noticed unusual activity at a recently-sold home, officers were called. They found two people engaged in sexual activity. The woman claimed to be the new owner of the house and said the man was her husband. When asked for identification, police were led by the couple to their car, which smelled of marijuana. A subsequent search turned up a glass pipe and drugs. However, the investigation then took a surprising turn.
The woman was, in fact, the real estate agent who had, the day before, sold the house to new owners. She had met the unidentified man at the home for an evening rendezvous. The new homeowners, not impressed with the realtor’s late-night showing, are pressing charges for criminal trespass. Jonathan Martinez “Real estate agent accused of hooking up with a man inside home she sold” www.click2houston.com. (Aug. 22, 2016).

Commentary
The real estate agent in the above matter faces criminal trespassing, as well as breaking and entering charges. Having access to a house for professional reasons does not mean you have the right to be in the house for personal reasons. Whether this agent faces jail time will depend on whether the district attorney wants to press charges, but there is definitely a reason to do so, especially in light of the possible drug possession charges.

Even if the home was not sold, her being in the home for personal reasons; bringing a third-party to the home of a seller; or other activities beyond the scope of performing a home sale/purchase transaction can lead to liability, especially if the home is devalued because of the agent’s acts. Agents should never show or be in a home unless the purpose is to facilitate the sale/purchase of the home. Agents representing sellers must make sure they are aware of any showing, not only to keep their clients in the loop, but also to protect themselves against any claims that they did not meet their fiduciary obligations to show the home or that the showings were for some purpose other than selling the home.

*Hanover Insurance Group, February  2017.

I’m Here For You

Trust is paramount, develop it buy showing your clients you are there for them through the exciting and stressful journey of a real estate transaction. Let your clients know they are your top priority by keeping them informed of all significant developments in a bid, contract, or purchase, and responding promptly — within 24 hours — to clients’ messages. In this age of email, social, text and cell phones, there simply is no excuse for not keeping a client informed of all significant developments during the representation. A client, who knows he or she can get in contact with you, and that you are committed to advocating for his or her interests in purchasing or selling real estate, is less likely to pursue a lawsuit or grievance even in the event a problem with the transaction arises.

As you know, real estate is a people business and you should not underestimate the importance of how your client feels about your service. If you don’t show how much you care about them, they will do the same in reverse, especially if they have a grievance that needs a solution.

*McCune, Daniel R., Perdue, Kimberly and Charlton-Perrin, Gawain, “Top Ten Tips for Real Estate Agents to Avoid Getting Sued,” Hanover Insurance Group, August 2016.

Let your Client Make the Tough Decisions


Clients rely on their real estate agents to provide a complete and accurate assessment of all risks and benefits of any transaction, but the client must decide how to proceed in light of your assessment. Do not allow a client to say, “It is up to you,” because if your decision does not yield the result
your client wants or expects, the client may hold you responsible. Tough decisions such as whether to get a home inspection or list at a certain price are best made by the client. You can provide them an assessment of the risks and possible choices, but ultimately, the decision is up to the client. A client who is empowered to direct the deal (with your advice) is less likely to cast blame if things do not go as planned.

* McCune, Daniel R., Perdue, Kimberly and Charlton-Perrin, Gawain, “Top Ten Tips for Real Estate Agents to Avoid Getting Sued,” Hanover Insurance Group, August 2016.

Keep Some Opinions to Yourself

Service oriented real estate professionals can sometimes get themselves into trouble if they feel compelled to give advice on matters that are beyond their professional scope.  You are not hired to be an expert in all things pertaining to home/land/building ownership.  To help avoid a lawsuit…never offer opinions on:

Legal Issues: Encourage your client to retain an attorney early on in the transaction, they can be a valuable resource during the property evaluation phase.
Zoning: Unfortunately your client will have to do some leg work on their own to figure out the specific zoning laws pertaining to their property or they can always hire an attorney.
Property Boundaries: This can be a very detailed and complicated part of a transaction, defer to the surveyors who are the experts and attorneys who are more qualified to interrupt the reports.
Anything not on MLS: Focus your area of expertise around information in the MLS, this can be challenging enough without adding in all of the above.

*McCune, Daniel R., Perdue, Kimberly and Charlton-Perrin, Gawain, “Top Ten Tips for Real Estate Agents to Avoid Getting Sued,” Hanover Insurance Group, August 2016.