Workplace sexual misconduct allegations take on an added dimension of seriousness in the wake of the #MeToo Movement, beyond the unfortunate impact on its victims. In the United States, investors have held directors and officers accountable for the manner in which allegations of sexual harassment among leadership and employees were being addressed. Now, investors are commencing class actions as a consequence of the impact that those allegations have on company share price. It is conceivable that such developments may eventuate in Australia. For this reason, insurers and directors alike should be alive to the risks presented by these types of allegations, and the potential scope of cover under the company's Directors' & Officers' (D&O) liability policy. This article explores those risks, indicates the impact that the #MeToo Movement may have on the Australian D&O insurance market and outlines some strategies that could be deployed by companies and their insurers to mitigate the risks.

The risks

In 2006, Harlem activist Tarana Burke utilised the phrase 'Me Too' when she established a not-for-profit organisation to aid underprivileged women of colour affected by sexual abuse. In 2017, the use of the phrase gained global momentum, when Hollywood celebrities used the hashtag #MeToo on Twitter to share their experiences of sexual abuse or harassment, calling for a change to the acceptance of abuse and harassment in the entertainment industry. The #MeToo hashtag was used by more than 4.7 million people in 12 million posts on Facebook during the first 24 hours of going 'viral' on 15 October 2017. The phrase 'Me Too' began to be adopted by people in other industries that wished to demonstrate the prevalence of sexual harassment in their own workplace. The 'Me Too' movement shows no sign of losing momentum.

Increased awareness of sexual misconduct allegations has propelled demand for greater transparency in corporate leadership.

In the United States, investors have expressed dissatisfaction regarding the manner in which the directors and officers of companies have addressed allegations of sexual misconduct committed by their leadership or by employees. Shareholders have made claims against executive leadership accused of turning a blind eye or failing to follow procedures in light of complaints that are made. One well reported lawsuit was that commenced by shareholders of Twenty-First Century Fox Inc, relating to Fox's mishandling of claims against a news chief and anchor. Fox paid out a $90 million settlement to the shareholders in 2017. On 9 – 10 January 2019, two shareholders of Google's parent company Alphabet filed separate lawsuits against Alphabet's board, alleging a culture of concealing sexual misconduct intended to protect the company's executives and board at the expense of shareholders and employees. The lawsuits assert breaches of fiduciary duties, unjust enrichment and corporate waste. It is alleged that the board's conduct has damaged the company; millions of dollars have been paid in exit packages to sexual misconduct offenders, and the company has experienced increased litigation exposure.

While we are not aware of any similar suits filed in Australian courts, it is possible that claims of this nature may arise here. In Australia, directors can be held liable for their own personal sexual misconduct or for the manner in which they have addressed (or failed to address) sexual misconduct matters within the company, as well as its correlative impact on company share price. As has occurred in the United States, the latter type of claim could be commenced via a class action.

The Sex Discrimination Act 1984 (Cth) (the Act) defines sexual harassment broadly, as making unwelcome advances or requests for sexual favours, or engaging in any other unwelcome conduct of a sexual nature, in circumstances in which a reasonable person, having regard to all the circumstances, would have anticipated the possibility that the victim would be offended, humiliated or intimidated. This means that the conduct does not have to cause actual offence. The Act contains a non-exhaustive list of circumstances to be taken into account and expresses that conduct of a sexual nature can include statements made orally or in writing. Crucially, the Act also provides that employers can be held vicariously liable for sexual harassment committed by their employees, unless they can show that all reasonable steps were taken to prevent the conduct.

Australian public companies must also be mindful of the share market continuous disclosure rules, which US management liability specialist Kevin LaCroix has observed are 'more challenging' than the US periodic reporting requirements. In essence, the disclosure obligations under ASX Listing Rules 3.1 and 3.1A provide that once an entity becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity's securities, the entity must immediately tell the ASX that information. The disclosure obligations do not apply in certain limited circumstances. However, care has to be taken when deciding whether, or not, and what to disclose. One the one hand, false or misleading disclosures contravene the Corporations Act 2001 (Cth) and attracts a penalty of imprisonment, and on the other, a failure to disclose relevant information is both a criminal offence and civil penalty provision, punishable by fines or penalties of $110,000 to $1,000,000 (respectively). Further, class actions for breach of continuous disclosure obligations are now a prominent method of seeking redress against company leadership.

In light of potential claims that could be made against Australian directors, consideration must be given to the potential protection afforded by the company's D&O policy, or alternatively an Employment Practices Liability (EPL) policy.

D&O coverage

A company may look to its D&O policy for coverage where a director, officer or employee engages in sexual misconduct.

Generally, D&O insurance responds to a challenge to decisions made by company management.

Like any other contract, the cover provided will depend on the wording of the insurance contract, being the policy, but some general comments can be made. The policy usually provides cover for 'wrongful acts' of company directors and officers, or potentially also for employees. In order to trigger cover, the wrongful act must have occurred while the insured was acting in the course and scope of their role. Commonly, a policy may have Side A cover (protecting past and present directors and executives), Side B cover (protecting the company for their liability to indemnify directors) and Side C cover (protecting the company against securities claims made against it).

The policy may provide some cover for both the directors and the company in respect of loss that arises from an actual or alleged wrongful act which has an employment liability base, such as unwelcome conduct of a sexual nature, either under Side A /Side B or as an extension of cover.

However, a company must be mindful that there are commonly limits to coverage available. Policies often exclude cover for claims arising from physical injury (while providing cover for mental anguish or distress). Policies typically exclude cover for criminal acts or dishonesty (thereby excluding rape or other sexual assault offences). Also the policy may exclude cover for claims involving facts, situations, or occurrences that were the subject of demands or litigation pending on, or prior to, the inception date of the current policy or an earlier specified date.

EPL coverage

Employment protection liability (EPL) policies usually provide cover specifically for claims made by employees based on employment-related misconduct of colleagues, including sexual misconduct, unfair dismissal or discrimination. Companies may take out an EPL policy for its potentially broader coverage in the context of sexual misconduct claims rather than rely on any EPL cover available under the D&O policy.

The Australian D&O market

The Australian market has recently seen an increase in D&O premium prices, in part due to an increase in the amount of active class action proceedings in recent years. As at September 2018, being the most recent publication of data by the Federal Court of Australia, there were 94 representative proceedings in the Federal Court nationally. Again, it is foreseeable that Australia may see class actions on the basis of share price impacted by sexual misconduct allegations.

The Australian Law Reform Commission (ALRC) report 'Integrity, Fairness and Efficiency – an Inquiry into Class Action Proceedings and Third Party Litigation Funders' issued on 24 January 2019 reports that in 2017 – 2018 there were 32 class actions filed in the Federal Court, increasing from 15 in 2013 – 2014. Shareholder claims are currently the predominant type of class action filed and finalised in the Federal Court, and between 2013 and 2018, every shareholder claim received third party litigation funding. The cost of settling class action proceedings should also be considered. The ALRC reports that the majority of class action proceedings are resolved by judicially approved settlement. Between 2013 and 2018, the median settlement amount for shareholder claims was $36 million, but settlement amounts have ranged from $3 million to $132.5 million.

As a consequence of the volume of class actions and potential for high settlement figures, insurers appear to have decreased appetite for the provision of cover for securities claims. In its most recent insights report this year, Aon has reported that as a consequence of this decreased appetite, Australian companies are looking to overseas markets (in particular London) to obtain cover; this way they spread their risk and circumvent capacity constraints occurring in the Australian market. Aon has also reported that insurers are increasingly discerning as to which risks they are willing to insure and on what terms cover is provided, and are limiting coverage based on individual risk profiles. However, the market is more stable for non-listed companies than their publically listed counterparts. 

Mitigating the risks

Given the potential for claims against companies in Australia, what steps can be taken towards mitigating the risks?

In the first instance attention is best directed to internal company measures. Companies need to implement and review sexual harassment and bullying policies, as well as procedures for the monitoring, review and reporting of misconduct complaints to the board or leadership team. Leadership could review the company's past responses to allegations of sexual misconduct to form an awareness of where potential claims may come from and also to inform any necessary changes to existing policies and procedures. It can be hoped that such strategies may help companies avoid circumstances which may give rise to a claim.

But because systems fall down and the past cannot be changed, insureds and their brokers should also review their insurance cover, especially under the D&O policy, just in case sexual misconduct claims arise. Consideration should be given to exclusions, per-claim deductibles, and aggregate limits. The extent to which cover is provided for investigations (both internally and by a regulator) must also be evaluated. Cover under EPL policies and cover for public relations and crisis management costs could also be considered.