August 2001

The CFO’s Role in Managing Employment Practices Liability Exposures

Three recent U.S. Supreme Court rulings, coupled with the recent highly publicized Wal-Mart, Coca-Cola, Texaco, Miller Brewing Company, and Salomon Smith Barney cases, have increased the need for CFOs to reevaluate their organizations’ approach to addressing the financial impact of allegations of sexual harassment, discrimination, and wrongful termination.

In addition, the 1999 Watson Wyatt Worldwide Liability Survey pointed out that in 1999, 28.7 percent of all claims against directors and officers were made by employees, compared with only 12.7 percent in 1997. Accordingly, to address employment practices liability exposure, publicly held companies, privately held firms, and nonprofit entities are looking to CFOs to develop risk-management programs that include risk-retention funding and risk-transfer vehicles.

Most firms are partially or totally self-insured against claims alleging sexual harassment, discrimination, and wrongful termination and have questionable funding mechanisms in place to address these liabilities. However, new insurance products have become available during the last 18 months that cover employment claims and punitive damages and provide loss prevention services to supplement the work of the firm’s human resources department and legal counsel.

Employment cases now constitute 30 percent of all civil litigation, and the average verdict in employment cases now exceeds $450,000. More than 22,000 labor and employment attorneys belong to the American Bar Association.

The Equal Employment Opportunity Commission (EEOC) is taking a much more aggressive stance in investigating claims, negotiating benefits, and filing suits against employers. In 1998, 1999, and 2000, the EEOC handled more than 77,000 filed charges against employers. The monetary benefits negotiated by the EEOC outside the U.S. courts in 1998 totaled $169.2 million, and in 2000, $245 million.

Inside the U.S. courts, settlements and verdicts between 1997 and 1999 showed a—

• 404 percent increase in settlements and verdicts of less than $15 million,
• 300 percent increase in settlements and verdicts exceeding $15 million, and
• 240 percent increase in settlements and verdicts exceeding $100 million.

Risk management consultants and insurance brokers are working with CFOs, in-house attorneys, and human resources departments to develop loss-prevention and risk-transfer programs that pay all or some the following costs of risk that firms face today in connection with employment practices liability exposures:

• Cost associated with the time in-house attorneys, managers, and human resources staff spend on developing and updating interview procedures, personnel manuals, job descriptions, performance evaluation forms and procedures, employee handbooks, and disciplinary procedures;
• Cost of legal services provided by law firms in connection with the above items if the firm’s in-house attorneys are not experts in employment law;
• Legal fees paid to law firms for handling EEOC actions and employment practices liability–related litigation and settlements; and
• Cost of payments made to past, present, or even prospective employees in connection with court judgments, settlements, and punitive damages awards.

The need to reevaluate a firm’s ability to self-insure against employment-practices liability exposure is clear. The CFO must assess the impact of recent legal trends on the effectiveness of a firm’s loss-control measures immediately to determine what kind of insurance would be a cost-effective use of the firm’s revenues.