Risk Management

Employment Bias: Should You Settle, or Risk a Jury Trial?

'Hammer' clauses in insurance policies provide a powerful incentive to come to the table.
David KatzMay 24, 2001

Let’s say you’re the CFO of one of the many companies that have laid off workers recently.

Angered by your move, or piqued by a real grievance, one or more of the workers turns around and sues your company for age, sex, or racial bias.

Should you tell your lawyers to settle the case or take it to a jury?

The choice you make, if it’s an informed one, will likely involve at least three factors: your company’s stance on how to defend lawsuits, the costs of the litigation, and your company’s insurance coverage.

In terms of company stance, risk management experts advise that senior executives shouldn’t overturn their corporate risk management philosophy just because of the threat of a whopping jury award.

If a company is one that fights claims to the hilt, it might erode its corporate image if it suddenly chose to settle. Its executives might also feel that a show of weakness would invite other lawsuits.

But most companies are settling, fearing the huge number of billable hours that lawyers can rack up in a jury trial. Paul J. Siegel, a partner with the employment practices law firm Jackson, Lewis, Schnitzler, & Krupman in Woodbury, N.Y., estimates that 95 percent to 98 percent of employment law cases are settled.

Among all senior executives, CFOs are the “most sensitive” to the need to contain litigation costs “because they write the checks,” the lawyer tells CFO.com.

CFOs “should be able to appreciate the costs of defending a lawsuit, the embarrassment in the [news]paper, the cost and the risk of [directors and officers] suits,” he says. They also typically sign off on employment practices liability insurance (EPLI) buying choices.

Siegel says that employers would be “nuts not to have some level of insurance” for bias claims. He likens this to not having standard property-casualty coverage. The boom in bias claims make them a part of any corporation’s basic risk picture, he thinks.

Keeping pace with the national surge in bias claims, the EPLI insurance market has exploded, leaving CFOs with apparently decent prices but a bewildering array of choices.

The number of EPLI carriers has grown from about five in 1991 to 60 or 70, according to a market survey published by Sterling, Mass.-based Betterley Risk Consultants.

More carriers have meant more competitive pricing. Cathleen M. Fitzpatrick, a senior vice president in charge of EPLI for Marsh, Inc., the New York City-based insurance broker, says prices are much lower than they were in 1991. In line with the general hardening of the insurance market, however, CFOs can expect price hikes of 10 percent this year, she says.

Pricing for Fortune 500-sized companies mostly depends on the individual company’s risk profile. But Richard S. Betterley, president of Betterley Risk Consultants, says a company with 300 employees, for instance, can expect to pay $15,000 to $20,000 a year for a $1 million policy with a $25,000 deductible.

Both Fitzpatrick and Betterley say coverage is readily available.

Beware the Hammer

Despite the easy availability of EPLI insurance, CFOs need to understand that coverage shouldn’t provide a license for corporate lawyers to fight an unworthy claim to the death.

In fact, most EPLI policies contain a form of “hammer” clause that’s a powerful incentive to settle cases and not drive legal costs into the stratosphere.

The clause provides that if a company refuses a settlement offer recommended by the insurer, the insurer will only pay for the settlement amount. Beyond that, the company is on its own.

Quite a few employers chafe at that bit. That’s why some carriers offer policies with a modified, or “soft,” hammer clause. Under that provision, if the insured turns down the settlement offer, the carrier pays a percentage of the legal costs the company incurs above that amount.

Fitzpatrick claims she can get big Marsh clients modified hammers in which the insurer would pay 75 percent or 80 percent of the amount above the settlement costs. In certain cases, she says, the carrier might agree to delete the hammer clause entirely.

Betterley, who, as a fee-based consultant, has no interest in selling coverage, says he advises clients not to accept an absolute hammer clause. Many companies “don’t like an insurance company dictating HR policies,” he says.

Instead, he suggests, “buy a policy that has a soft hammer clause.” Without being overly restrictive, it provides an internal incentive to companies to curb lawsuit costs.

That could be even better, from a CFO’s perspective, than having a policy with no restrictions at all. Using moderately restrictive insurance policies, CFOs can strike a balance between the dictates of corporate philosophy and the lawsuit costs they strive to keep off their income statements.

It’s a way of putting the hammer into their own hands.