Insuring against sexual harassment and other employment-related claims.

Employers are now liable for supervisors' conduct. Follow these steps to prevent a claim and insure the association against one.

Sexual harassment lawsuits and other employment-related claims continue to be among the most serious legal threats that associations face today. Adverse judgments cost employers hundreds of thousands, sometimes millions, of dollars. Even if a claim lacks merit, defense is extremely costly in terms of legal fees, lost staff time, and extraordinary disruption.

Although discrimination claims have been common for some time, sexual harassment claims increased dramatically after the much-publicized 1991 Senate hearings over Anita Hill's allegations against then Supreme Court nominee Clarence Thomas. Those proceedings had the effect of increasing female employees' claims over workplace practices previously viewed as commonplace or at least tolerable. Recent U.S. Supreme Court decisions make an employer liable for a supervisor's conduct, and the burden now is on employers to prove they had an effective system to correct improper conduct and handle employee complaints. (For details, see the preceding article, "New Currents in Sexual Harassment Litigation.") It's time to prepare for another increase in sexual harassment litigation.

Employment claim types

There are two types of sexual harassment claims. Quid pro quo claims usually allege that someone demanded sexual activity in return for a promotion or other employment benefit. Hostile work environment claims usually allege that unwanted sexual conduct (e.g., jokes, comments, and pictures) was severe and pervasive enough to alter an employee's working condition, creating a hostile and offensive environment.

In the association setting, employees usually make sexual harassment claims against another employee at the headquarters office, but they may also make claims against board members and other volunteers. Claimants always name the association as a defendant because, as the employer, it is responsible for providing a safe working environment.

While the most publicized employment-related claims are for sexual harassment, employees can bring many other types against association employers, including

* wrongful termination (e.g., in violation of public policy, in breach of an express or implied contract, etc.);

* discrimination based on race, sex (including pregnancy), age, national origin, religion, disability, and so forth;

* wage and hour violations;

* Family and Medical Leave Act violations;

* libel, slander, defamation of character, or invasion of privacy; and

* retaliation.

With any claims, the claimant often brings suit not only for lost wages (past and future) but also for emotional distress, other compensatory damages, and punitive damages arising from the alleged illegal conduct.

Avoiding claims

In the past few years, enlightened employers have examined their workplace conduct policies and trained employees and supervisors. They have also investigated claims and eliminated questionable activities and situations. This has improved workplace conditions and retained valuable employees in addition to avoiding claims. Consider the following preventive measures for your association.

Update policies. Review and update your employee handbook. Make sure it is comprehensive and reflects the most recent changes in federal, state, and local laws.

Train managers. Train all association managers to eliminate questionable workplace practices and respond to reported incidents and any claims staff may make. Offer human resources professionals training in investigation skills. This training is important because the association's liability may well depend on how it investigates and responds to a claim or how it has responded to similar claims in the past.

Train volunteers. Board and other committee members often work closely with staff at headquarters or sometimes at hotels and resorts. Many times, they have not had the advantage of training or may work in parts of the country not sensitive to the workplace expectations of professionals at, say, a large Washington, D.C.-based association. Do plan training sessions for the board, which usually appreciates it. Sometimes you may need individual meetings with board members and other volunteers to deal with particular situations.

Beware of Intimate relationships. Although personal relationships between employees, board members, and other volunteers may sometimes work out, they carry the risk of a serious claim if the relationship fails. Sexual harassment claims against board members and other volunteers are particularly problematic because they often include counterclaims and cross-claims, and you may lose an employee, board member, or volunteer.

Intervene immediately. Respond actively to any reported incident, regardless of the rank or importance to the association of the alleged harasser. In some cases, it may be enough to have a talk with the offending individual while asking the understanding or forgiveness of the complaining staff person. In other instances, the association may have to take firm action (up to and including firing) against the individual in question or risk dramatically increasing the association's liability exposure.

Besides avoiding claims, of course, these measures help retain valuable staff members and foster a professional workplace atmosphere.

Insuring your risk

Even with good prevention, however, employers are vulnerable. Given the extraordinary costs of defending even a frivolous claim or suffering an adverse judgment, we recommend insurance, particularly in light of recent favorable changes in the insurance market.

Until recently, insurance coverage for sexual harassment and other employment-related claims was almost nonexistent. The typical directors and officers (D&O) or association professional liability insurance (APLI) policy eliminated coverage either by specifically excluding these types of claims or by excluding all claims by one insured against another. Since the complaining employee, the association, and the subject of the complaint were all covered under the policy, the insured-versus-insured exclusion generally eliminated coverage for almost all employment-related claims.

Similarly, the typical general liability and umbrella policy did not provide much coverage, either because of a similar insured-versus-insured exclusion or because the claim did not involve any bodily injury.

This situation, however, has drastically improved for associations. With the soft insurance market, carriers writing APLI or D&O policies are now competing to add back coverage for sexual harassment and other employment-related claims for a minimal increase in premium.

The first step, of course, is to purchase insurance. If you have never purchased D&O or APLI coverage because of the cost, reconsider. Premiums have declined, and these policies can include employment practices coverage.

If you already have a policy, make sure it provides full employment practices coverage. Some carriers cover only specific types - such as wrongful termination and sexual harassment - omitting coverage for the other claim types we outlined earlier.

Other policies may only provide sublimits for these desired coverages. In fact, some carriers offer several different policies that provide differing degrees of coverage, so be an educated shopper when seeking alternatives and reviewing policy forms.

Similarly, check the difference in premiums for various employment practices insurance coverages and possibly seek alternative quotes for different deductibles and limits. Costs vary widely. It is possible to add full coverage with a minimal deductible to an existing D&O or APLI policy for a slight increase in premium.

Finally, review each of these issues with respect to any umbrella or excess policy you may have.

The trick is to be a smart consumer. A knowledgeable insurance broker, consultant, or attorney can help review the alternative policies, coverages, and premium quotes.

Handling a claim

Getting the right policy is only half the battle. If a claim is made, it is critical that your legal counsel present the claim to the insurance company in a way that leaves that company no alternative but to agree the claim is fully covered and to provide the best defense possible.

Step 1: Notify the insurance company. First, give the insurance company written notice of the incident or claim in accordance with policy instructions. Write the notice letter in consultation with your legal counsel, because wording can make a difference in whether the insurance company accepts or rejects the claim or agrees to defend under a reservation of rights. View the insurance carrier as a friendly adversary. Be sure the notice makes it clear that the claim is covered.

Often, the insurance company will respond to the notice letter by agreeing to defend the association under a so-called reservation of rights letter. That means the company agrees there probably is coverage and will pay for a defense, but it reserves its right to deny liability depending on how the facts develop during litigation and at trial. Your association's legal counsel should help you respond to the reservation of rights letter to make sure the association is fully protected.

Step 2: Choose counsel. The next step is to agree on defense counsel. If the association's regular legal counsel is not an experienced labor litigator, do consider whomever the insurance company suggests. If your regular counsel is experienced and perhaps has already been working on the claim, however, tell the insurance company the association wants him or her to defend the claim.

The policy may specify whether the insurance company or the association has the right to select defense counsel or whether it must be a joint decision. Regardless of wording, in many states a reservation of rights letter gives the association a greater right to decide.

The final decision usually comes down to money. Lawyers who handle claims for insurance companies usually work at lower rates. If your counsel will negotiate on billing rates, or if the association will pick up the difference, usually the insurance company will agree to use your lawyer. Also, with a reservation of rights letter, the association should have more leverage.

It is in everyone's best interest to cooperate in choosing defense counsel and defending the claim. No matter which lawyer defends, continue to assist with and oversee the defense.

Of course, your best defense is prevention. The association's liability may well depend on steps taken to update the employee handbook, train staff and volunteers, and effectively handle any incidents that arise.

Jeffrey P. Altman is a partner and Lisa Lavelle is an associate with McKenna & Cuneo, Washington, D.C. E-mail: [e-mail] and [e-mail].

An Insurance Resource

ASAE sponsors an association professional liability policy that provides the broad employment practices coverage discussed in this article. For more information, call the ASAE Services Corporation, [phone].