Google parent company Alphabet Inc. recently agreed to a $310 million settlement of shareholder lawsuits accusing the internet search giant of mishandling sexual misconduct allegations lodged against executives.
In the settlement, Alphabet pledged to invest $310 million in diversity, equity and inclusion programs at Google over a 10-year period. It also agreed to more than 80 updates and revisions to its policies and procedures for handling sexual misconduct, discrimination and retaliation claims; a formal policy to not provide severance pay to any employee who is the subject of an investigation or lawsuit; and to set up an advisory council for overseeing related issues, among other commitments.
The suits stem from a 2018 New York Times report that Android mobile software creator and Google executive Andy Rubin received a $90 million exit package in 2014, despite being the subject of sexual misconduct claims an internal investigation had deemed credible.1 The revelation, which prompted thousands of Google employees to walk out of work in protest, led to two shareholder lawsuits and an eventual board of directors inquiry into the company’s handling of sexual misconduct allegations.
“This is a huge settlement amount,” said Heather Schaaf, Underwriting Director, Burns & Wilcox, Chicago, Illinois. “It is not uncommon for a company to make internal corrections following such lawsuits, but the scale of this commitment to increase their diversity, equality and inclusion is significant.”
The size of the settlement reflects the current landscape for Management Liability Insurance. Driven in part by social inflation2 and the #MeToo movement,3 lawsuits of this nature are becoming more frequent and more costly, contributing to a hardened market for Directors & Officers (D&O) Insurance, for expenses related to leaders named in a suit, and Employment Practices Liability Insurance (EPLI), for costs stemming from such allegations as harassment, discrimination or wrongful termination.
“There is a greater demand for and a more expansive definition of corporate accountability, which is leading to higher settlement totals,” Schaaf said.
Social inflation, event-driven litigation adding to risks
The Alphabet settlement may be the largest of its kind, said Marvin Cigarroa, Broker, Professional Liability, Burns & Wilcox, San Diego, California. Historically, he said, settlement amounts in shareholder derivative lawsuits — brought by a shareholder on behalf of a corporation — have been much smaller.
“Settlement amounts continue to rise, and that is especially true for D&O and EPLI,” said Cigarroa. “Social inflation is having an impact across all kinds of insurance lines, but D&O especially.”
Event-driven litigation is also fueling the hardened Management Liability Insurance market. While securities class action lawsuits—the other primary type of D&O suit—were traditionally filed over stock prices or accounting issues, they are now often related to sexual harassment and similar allegations “that may or may not be impacting a company’s stock value,” Cigarroa said.
Companies purchasing or renewing Management Liability Insurance policies can expect higher premiums, lower limits and carriers that are more selective about the risks they take on, Cigarroa explained. Carriers now are also more likely to ask companies about their handling of workplace accommodations during the pandemic and their layoff and rehiring policies.
“Markets are concerned about coronavirus-related EPLI claims, and that includes D&O lawsuits as well,” said Matt Baxter, Vice President, Burns & Wilcox Brokerage, Atlanta, Georgia. “These are among a multitude of factors that have hardened the D&O and EPLI market.”
The frequent overlap between D&O and EPLI claims is one reason companies choose to package these coverage forms under one policy with one carrier and defense team, Schaaf noted. “The Alphabet case involved a D&O claim that arose out of Google’s handling of allegations that typically fall under EPLI. Many situations originate as one type of claim and escalate into another,” she said. “Allowing wrongdoing in a workplace to continue after it has been brought to management’s attention, for example, can be considered mismanagement, which would be a claim that potentially falls under D&O Insurance.”
Wage and Hour, diversity disputes on the rise
While the #MeToo movement brought issues of sexual abuse and harassment to the forefront of public consciousness, the emphasis on diversity and inclusion in 2020 also has implications in the workplace. “There are more discussions about diversity and inclusion taking place at the board level,” Cigarroa said, pointing to California’s new law requiring companies to diversify their boards.4 “Lawsuits are now alleging company boards lack the proper oversight and controls to evaluate and address social issues like diversity and inclusion effectively.”
Lawsuits are often filed over alleged discrimination in hiring practices, a growing concern in both the U.S.5 and Canada.6 A transgender man in New Jersey filed a lawsuit against Amazon earlier this month, claiming that he was harassed and denied a promotion after telling his boss he was pregnant. The man also claims he was harassed by other employees about the pregnancy, placed on paid leave after complaining to human resources, and then demoted to a position that required heavy lifting upon his return from leave.
A May 2019 analysis of seven lawsuits filed against Amazon detailed a pattern of firing pregnant workers.7
“These types of suits are likely to become more common,” Schaaf said, noting a U.S. Supreme Court majority opinion in June upholds that gender identity and sexual orientation are protected from workplace discrimination under Title VII of the Civil Rights Act of 1964.8 Employment and pregnancy are also addressed in the Americans with Disabilities Act of 1990.
In 2019, the U.S. Equal Employment Opportunity Commission received 23,976 complaints of discrimination related to race and 23,532 complaints related to gender.9 In Canada, the Human Rights Commission was contacted by 36,000 individuals about possible discrimination in 2019 and accepted 1,203 complaints — the highest number in a decade.10
There are more discussions about diversity and inclusion taking place at the board level. Lawsuits are now alleging company boards lack the proper oversight and controls to evaluate and address social issues like diversity and inclusion effectively.
A company’s EPLI policy will generally help pay legal defense and settlement costs in these cases; however, coverage may not include certain costs. “If an EPLI ADA claim involved a bathroom stall that was not handicap-accessible, the settlement and defense costs may be covered but expenses for construction to bring it up to code may not,” Schaaf explained.
Wage disputes are another potential source of lawsuits. The hospitality industry experiences a particularly high volume of lawsuits over wage-related disputes. In September, worker advocacy group One Fair Wage filed a federal complaint against Darden Restaurants Inc., the parent company of Olive Garden and other national restaurant chains, arguing that its practice of paying tipped workers a sub-minimum wage violates the Civil Rights Act of 1964. The suit claims that these wages expose workers to more sexual harassment than non-tipped workers and employees of color earn less in tips than their white counterparts.
Costs related to these types of allegations could be included within the Wage and Hour coverage on an EPLI policy, Schaaf said, if it was determined that employees did not receive the federal minimum wage after tips were added to their hourly rate.
Wage and Hour coverage is not included in an EPLI policy automatically, she explained, and is typically an endorsement to the policy. “Additionally,” she said, “Wage and Hour often includes coverage for attorney fees and court costs but a company would be responsible for any expenses related to the actual underpayment of an employee.”
Wage and Hour complaints are on the rise amid COVID-19, as workers seek compensation for hours worked prior to pandemic-related closures, remote work and time spent completing employer-mandated safety checks like temperature screenings, COVID-19 tests and health surveys.
Small businesses especially vulnerable to lawsuits
Many companies underestimate their need for Management Liability Insurance, assuming that their strong employment policies or other factors make them unlikely targets of lawsuits. “Companies need to understand that every business is vulnerable to these types of suits,” Baxter said. “Even the best-run companies can be sued—we see it happen regularly.”
Small companies are especially vulnerable and are less likely to have adequate EPLI and D&O Insurance coverage, he added. “The most common misconception I run into is that small business leaders believe D&O and EPLI coverage is intended for larger corporations,” Baxter said. “They think only Google and other big corporations are sued over these types of disputes, but that is not the case. Even a single local restaurant has an exposure to this risk.”
Business owners also assume mistakenly that D&O Insurance is aimed at companies with boards of directors. “If a company has stakeholders, including a bank that lends it money or any outside interest, there is potential for D&O complaints,” Baxter said. “Investors and shareholders expect a certain level of fiduciary responsibility from a company in how it operates as well as a return on their investment.”
Layer coverage, mitigation strategies
Companies seeking EPLI or D&O Insurance or approaching a renewal should review their options well in advance of when a decision is needed, Cigarroa emphasized. “With a hardening market and prices and limits scaling back, getting in front of this process months ahead of time allows time to develop an effective strategy,” he said. “Companies should also be sure to work with a knowledgeable insurance broker or agent who can navigate this hardening market—that is essential.”
Almost as important as buying insurance is working with counsel to ensure proper plans and procedures are in place and complaints are being handled correctly. Human resources departments should be well-trained and provide regular training and updates on how various situations should be managed.
All policies are not equal, Baxter added. Companies should ascertain whether their D&O Insurance contains an antitrust exclusion and carefully review policy wording regarding COVID-19 or other communicable disease exclusions. “Obtain the highest Wage and Hour policy supplement available,” he stressed, “and limits that are adequate for your exposure.”
This could mean purchasing layers of insurance to obtain the limits needed, Cigarroa explained. “A company that may have had a $20 million insurance program with two layers of $10 million each may need to work with four carriers instead of two, if the carriers scale back to $5 million limits,” he said.
Insurance is only one component of protection, however. “Almost as important as buying insurance is working with counsel to ensure proper plans and procedures are in place and complaints are being handled correctly,” Baxter said. “Human resources departments should be well-trained and provide regular training and updates on how various situations should be managed.”
Sources 1 Wakabayashi, Daisuke and Katie Benner. “How Google Protected Andy Rubin, the ‘Father of Android.’” New York Times, October 25, 2018. 2 Demos, Telis. “The Specter of Social Inflation Haunts Insurers.” Wall Street Journal, December 27, 2019. 3 Antilla, Susan. “Insurers grow wary of ‘high-risk’ executives in wake of #MeToo movement.” CNBC, December 26, 2019. 4 Sahadi, Jeanne. “California will now require more diversity on company boards.” CNN Business, September 30, 2020. 5 Jameel, Maryam and Joe Yerardi. “Workplace discrimination is illegal. But our data shows it’s still a huge problem.” Vox/Center for Public Integrity, February 28, 2019. 6 Collie, Meghan. “Canada has a discrimination problem when it comes to hiring — here’s why.” Global News, June 25, 2019. 7 Ng, Alfred and Ben Fox Rubin. “Amazon fired these 7 pregnant workers. Then came the lawsuits.” CNET, May 6, 2019. 8 Liptak, Adam. “Civil Rights Law Protects Gay and Transgender Workers, Supreme Court Rules.” New York Times, June 15, 2020. 9 U.S. Equal Employment Opportunity Commission. “Charge Statistics (Charges filed with EEOC) FY 1997 Through FY 2019.” 10 Canadian Human Rights Commission. “By the numbers.” Minister of Public Works and Government Services, 2020.