March 12

The Stakes Are Too High Not To Have Misconduct Coverage


Sexual misconduct at any level, in any aspect of life is completely unacceptable. Employers and business owners can’t claim ignorance to these wrongdoings within their business and this type of reprehensible behaviour has gone on far too long.

We all have a responsibility through professional policies, procedures, and ongoing education to fight sexual misconduct.

With that being said, there are good people as Owners and Boards of Directors who have been caught in the crossfire, and can be affected by claims of sexual misconduct. It can ruin more than just a reputation, it can also destroy relationships, families and entire businesses. 

That affects everyone – because we do live in a society where we are innocent until we are proven guilty.

People can sue you for anything – and you want the defense costs to be there.

People can come forward and name the Owner, CEO, Board Members, right on down to employees in a lawsuit. And as business owners, do you know what you are specifically liable for? It’s difficult for owners to determine if you keep someone on amidst allegations, or try and get them help, because they would have to face significant defense and/or settlement costs. If an owner were covered under a commercial policy, they wouldn’t have to go that path alone.

So how can insurance come into play with this?

Let’s get something straight; insurance is not something that covers us for bad behaviour.

If there was an allegation of sexual harassment or discrimination, it would be something that the Board of Directors would have a defense and indemnity for because they could be found responsible for that happening, but they didn’t oversee it.

If it’s a criminal activity, then the insurance company may have some right to not cover some of it, depending on the wording of the policy. If it was something that the Board of Directors did not know that was going on, they would certainly need coverage. It’s always the intent of the insurance policy to cover things that are unforeseeable.

Why you need a Director’s and Officers Policy in place

Small business owners might not even realize they have a Board of Directors. 

As a small business owner, if you look at your business articles of incorporation, if you’re set up as a corporation and not sole proprietorship, there should be a Board of Directors in place. Any business owner that has one employee or more, and certainly when they have a Board of Directors – it is strongly advised to have Employment Practices Liability Insurance which is part of a Director’s and Officers Policy. It will help pay for the legal expenses associated with defending a claim.

This is a type of professional liability coverage, and it’s becoming more and more recommended.

“I carry Errors and Omissions insurance – is this the same thing?”

This is most certainly NOT the same thing.

Errors and Omissions Insurance covers allegations of financial loss of a third party based on your negligence or an error. The big miscommunication or big misconception is that just because you have an Errors and Omissions policydoesn’t mean you’re going to get coverage for misconduct. It’s not the same thing under professional liability – it’s a different discipline.

For example:

As a broker, if I do not place insurance properly or haven’t given sufficient advice, and a 3rd party has a loss based on their perceived lack of advice or hasn’t been given the right coverage, then a client can come back on a financial loss.

Is there an element as a business owner about defamation or slander?

An insurance policy can help an owner navigate through these issues too.

Defamation/Slander Insurance is a type of coverage under a Commercial General Liability Policy, as an extension called Personal Injury – and that’s a very important type of coverage for clients to have as well.

Which is why these are all reviews and conversations that clients need to have with their brokers about the specific types of coverage to get with respect to their certain businesses.

How insurance can also be there in a case of termination for misconduct  

A good example would be if you had to terminate an employee, and you didn’t pay them a proper severance package. Now a Directors and Officers policy with employment practices isn’t going to pay for that employee’s severance, because they are owed that, but it will cover anything that is not foreseeable. So if there was a human rights complaint, then that’s where the intent of the policy is.

If it’s not clear and there’s not been clear misconduct, and if a Board of Directors had bylaws and they were following policies and procedures, and it was outlaid in that guidebook, then that’s where the policy will be very valuable. If there was a settlement that was agreed upon, and there was no clear fraud or criminal activity, then the policy would respond.

Claims have been denied because they didn’t have the right wording

I’ve heard of instances where claims have been denied because they didn’t have the right wording or there was something excluded on the wording.

Here’s a good example to illustrate this:

There was once a franchisor who didn’t have a policy in place and they got sued by their franchisee for misconduct. The franchisor had to pay all defense costs, which ranged in the tens of thousands of dollars, completely out of pocket, and then had to pay $750,000 on top of that as a settlement!

The courts don’t care if you don’t have an insurance policy in place.

The premium would have been $15,000, but you can write that off because it counts as a business expense. Three quarters of a million dollars plus defense costs can be crippling on a business balance sheet, not to mention a significant impact to the health of a business.

The premium is a very small price to pay with everything taken into consideration.

Insurance can be confusing and complicated – and the stakes are too high

It confirms the value as an insurance broker, because people will try to buy insurance on a computer or not include a broker in the process at all and will do it through direct channels or by themselves.

And in my opinion, it is far too complicated of a process and the stakes are too high.


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