Simon Glairy is a distinguished authority in the insurance landscape, renowned for his deep expertise in risk management and the evolving complexities of Insurtech. With a career focused on the intersection of AI-driven risk assessment and policy litigation, he has become a go-to strategist for navigating high-stakes coverage disputes. In this discussion, we explore the legal intricacies of workplace harassment claims, the limits of policy exclusions, and the significant financial repercussions for insurers who fail to meet their duty to defend.
When a policy explicitly covers sexual harassment but contains a broad exclusion for sexual abuse, how should insurers evaluate claims involving both verbal misconduct and physical allegations? What specific steps must a claims adjuster take to avoid a blanket denial when these categories overlap?
The evaluation must begin with the understanding that the duty to defend is significantly broader than the duty to indemnify. When an insurer is presented with a “mixed” complaint, they cannot simply look for a reason to say no; they must actively look for any allegation that could potentially trigger coverage. In a recent case involving American Behavioral Health Systems, the court made it clear that if even one allegation—such as verbal harassment or gender discrimination—falls outside the physical requirements of an abuse exclusion, the insurer is on the hook. A claims adjuster must meticulously parse the complaint to see if liability could be imposed on any cause of action without relying on the excluded conduct. Failing to do this, and instead opting for a blanket denial because the claims seem “intertwined,” can lead to a finding of bad faith as a matter of law.
Defining sexual molestation or abuse often hinges on the presence of physical contact or force. How do you distinguish between excluded physical abuse and covered verbal harassment or unwanted hugging, and what are the implications for an insured party’s defense rights during this process?
The distinction is found in the plain, dictionary meaning of the terms, which courts interpret narrowly against the insurer. Sexual molestation and abuse generally require an element of physical sexual contact or the application of force. In the Ninth Circuit’s review, they found that activities like verbal sexual advances, strip searches without physical touching, and even unwanted hugging did not meet the threshold of “abuse” or “molestation.” For the insured, this means their right to a defense is preserved even if the complaint is peppered with more severe, excluded allegations. If any part of the claim is covered, the insurer is often required to defend the entire lawsuit, ensuring the insured isn’t left to fund a complex legal battle out of pocket.
Legal language like “relating to” is often used to broaden exclusions, yet courts sometimes limit its reach to prevent it from swallowing the primary coverage. How do you determine the boundaries of this phrase, and at what point does it fail to capture separately covered claims?
While “relating to” is indeed broader than “arising out of,” it is not an infinite vacuum. It is designed to capture secondary issues, such as a company’s negligence in the aftermath of an incident, but it cannot be used to nullify a primary grant of coverage for sexual harassment. If a court allowed “relating to” to sweep in every instance of verbal misconduct simply because it occurred in the same environment as an alleged abuse, the harassment coverage would be rendered illusory. The boundary is set at the point where the allegations can stand independently; if a jury could find the insured liable for harassment without ever reaching the question of abuse, the “relating to” language fails to trigger the exclusion.
In some jurisdictions, resolving policy ambiguities in the insurer’s favor can trigger bad faith as a matter of law. What are the practical risks of coverage by estoppel for an insurer, and how does this outcome affect their ability to contest the final settlement amount?
Coverage by estoppel is essentially the “nuclear option” in insurance litigation because it strips the insurer of all its defenses. When an insurer acts in bad faith by resolving policy ambiguities in its own favor—as Allied World was found to have done—they are often estopped from denying coverage for the underlying loss, regardless of whether that loss would have been excluded under normal circumstances. This means the insurer is forced to pay the full amount of a settlement or judgment, often reaching into the millions, without any further opportunity to argue that the underlying conduct wasn’t covered. It transforms a localized coverage dispute into a total financial responsibility for the insurer, regardless of the policy’s original limits or exclusions.
Statutory frameworks like the Insurance Fair Conduct Act allow for treble damages and attorney fees when coverage is unreasonably denied. How do these financial penalties change the settlement strategy for both plaintiffs and insurers, and what metrics determine if a denial is deemed “unreasonable”?
These statutory penalties, particularly the prospect of treble damages, create immense leverage for plaintiffs and can turn a standard settlement into a catastrophic loss for an insurer. A denial is typically deemed “unreasonable” when an insurer ignores established legal principles, such as the requirement to resolve ambiguities in favor of the insured or the duty to defend “mixed” complaints. From a strategy perspective, plaintiffs who have been assigned the insured’s rights become much more aggressive, knowing that a successful Insurance Fair Conduct Act (IFCA) claim can triple their recovery. Insurers, on the other hand, must weigh the cost of a defense against the very real possibility of paying three times the settlement amount plus the opposing counsel’s fees, which often forces a much higher settlement early in the process.
What is your forecast for insurer liability in workplace harassment cases?
I foresee a significant tightening of policy language as insurers realize that “standard” exclusions are being shredded by courts that prioritize the duty to defend. We are likely to see a move toward more granular endorsements where harassment and abuse are separated by even more rigid definitions to avoid the “intertwining” trap. Furthermore, as more states adopt or strengthen consumer protection laws and fair conduct acts, insurers will become increasingly conservative, opting to defend under a reservation of rights rather than risking the total estoppel and treble damages that come with a flat denial. The “all or nothing” approach to defense is becoming a relic of the past; the future belongs to insurers who can navigate the nuances of partial coverage without triggering bad faith claims.
