Risk managers, both public and private, need to be aware of a ticking time bomb in their midst. For years now we have read headlines of plaintiffs receiving multimillion-dollar settlements against churches due to child sexual abuse. The fact is that every organization that includes custody or oversight of children as part of their business plan is at risk.
How does this affect your organization? To find out, there are some basic questions to ask:
o Is my organization exposed to this risk?
o If so, how should it be dealt with?
o Can we reduce or eliminate the risk?
In the world of business, the objective is basically to improve revenues and increase owner equity.
In the world of insurance, the objective is to manage the transfer of a risk from an insured. The hope is that the premiums received for this arrangement will adequately pay for any losses that actually arise, with the additional hope that the premiums received will also generate a modest profit for the insurer.
Insuring an item that is easily appraised requires a fairly simple formula.
In a class of 1,000 similar homes, for example, you could calculate that one $250,000 home is likely to be destroyed over the next year. If that is your calculation, then you simply price out premiums to cover this single potential loss, your overhead, and reserve a little extra in case a second home is destroyed.
The formula isn't nearly as simple when attempting to estimate future liability cases, however. Pools of "similar" groups are actually not as similar as you would like them to be. Over the past 10 years your pool may not have experienced any large losses, so how do you determine your potential "worst-case scenario"? Additionally, an environmental change may suddenly trigger multiple "worst-case scenario" losses.
If the liability exposure is not calculated properly, the insurer and the insured may face some expensive and ugly surprises.
Child sexual abuse cases are prime examples of losses that can result in catastrophic lawsuits. Besides the staggering dollar amounts of the lawsuits, a painfully ugly situation exists at the center of the case.
These cases will not go away. And the way the exposure is trending, many more child abuse cases will be filed than ever before. Though the headlines may abate for a period of time, don't let your guard down. There is a constant flow of lawsuits in the pipeline–not all of them make headlines.
An organization can go many years without incident, when it suddenly finds itself on the receiving end of a multimillion-dollar lawsuit. Like a time bomb, everything appears normal, until suddenly it goes off.
In the real world, church pastors and schoolteachers have extensive unsupervised access to children. Because of the publicity that churches have received, a church that also operates a school will serve as an example here. Our hypothetical church has 3,000 parishioners and average annual contributions of $1.2 million.
The school has 250 elementary grade students. Average annual tuitions amount to $1.25 million–about $2.5 million in gross revenues. For simplicity, operating expenses and other details will be left out.
Contributions and tuitions will increase a flat 2.85 percent per year over the next 10 years, while over the 10 years, gross revenues amount to $32 million because of an increase in membership and raised tuition.
On the surface, this appears to be a healthy business. What the organization did not realize, however, was that two of their employees (a priest and a teacher) were molesting children. These two employees, exploiting the trust of the organization, sexually abused a total of 10 children.
Problem number one is that no business wants to deal with such a trying situation. Problem number two is that the 10 lawsuits far exceeded the gross revenue the organization built up over the past 10 years. In fact, when the cases are added up, the church is facing 10 lawsuits totaling $50 million.
The dollar amount of the lawsuits represents only part of the loss that the organization faces.
Upon release of the news, 10 percent of the organization's parishioners instantly leave–a loss of approximately $192,750 in annual contributions. The organization may never regain the attendance of these parishioners and they may, in fact, lose more parishioners.
And the money drain doesn't stop there either–the school loses 15 percent of its students. This amounts to a further reduction of revenue, to the tune of $240,937. Will the organization recover its lost number of students? Not likely.
There are more problems. Not only is the insurance carried not likely to cover the entire amount of the lawsuit, but the organization may not be able to obtain any insurance for future abuse-based losses. If a carrier will allow this at all, the premiums will be significantly higher than what they were paying over the past 10 years.
Other considerations:
o Will the organization lose any of its teachers?
o Will it have trouble attracting new talent to replace the lost employees for future operations?
o Will there be criminal charges against the offending employees?
o Could a criminal precedent be set against the organization itself?
o Will the organization ever be able to recover its good name?
Risk managers must ask: Is my organization at risk? Can we reduce or eliminate this from happening to us?
Besides attempting to buy insurance to transfer the risk, organizations need to understand that risk management techniques are available. The key is preventing or reducing the likelihood of these losses from happening.
To do this, organizations must take a zero-tolerance stand. Passive approaches to this subject simply do not work.
How does an organization do this? Common sense would tell you to avoid hiring anyone with a criminal record–particularly a record of abuse. But this alone is not sufficient because many abusers simply do not have a criminal record.
What else can be done? Some techniques available include:
o Strict hiring guidelines.
o Rotating operational reviews (risk management reviews).
o Overseeing Web traffic.
o More interaction with parents.
o Mental and behavioral evaluations (behavioral screenings) of all employees that will come in contact with children.
Of special note for this discussion is the inclusion of psychological screenings to satisfy the last bullet point above.
For many years, some in the mental-health community attempted to use a screening test known as plethysmography. However, this test was very cumbersome and was impractical for the typical business to administer.
Advancements made in this area are very impressive. New successors to this old exam are non-intrusive and far more reliable.
For the past 10 years, a variety of standardized exams/screens have been available for use–primarily by the criminal justice system. Courts rely on these screens to help them in various phases of prosecution to understand their defendant's sexual interest in children.
A derivative version geared for the general public has become available. The Diana Screen gives organizations a convenient and practical tool to specifically test an individual for sexual interest in children.
If properly implemented, an organization can drastically reduce the likelihood of ever experiencing an abuse related loss. In fact, this psychological screen can be administered as part of a company's hiring practice.
What child-based organization would want to hire a person that has a high level of sexual interest in children? Further, the organization may elect to administer the screen to existing employees.
Insurers that recognize the value of preventative measures, including use of psychological screens, may offer significant discounts to policyholders. In the end, the ticking time bomb is removed, a catastrophic financial loss is averted, and parents can truly sleep a little better at night.
How often does a risk management review result in such a happy ending, anyway?
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