The best defense: insurers should work with clients to reduce risks of sexual harassment claims.

One hopes that efforts by U.S. businesses to educate workers about sexual harassment have cut the overall number of incidents. Certainly, the efforts have increased awareness of sexual harassment and the number of complaints registered. Sexual harassment in the workplace harms victim, perpetrator and employer--and often the insurance company standing behind the employer.

Each year since 2000, the Equal Employment Opportunity Commission has handled more than 25,000 sex discrimination charges. In the 1990s, U.S. employers paid about $1 billion to resolve such claims, much of it coming from their insurers. Sexual harassment costs a typical Fortune 500 company $6.7 million a year, or $282 an employee, while meaningful preventive steps cost only $200,000, or $8 an employee. Clearly, employers and their insurers have a cost incentive to avoid such claims. All it takes is some preventive maintenance by the employer, perhaps with assistance from the insurer.

A company can be held liable it" it has been negligent in preventing sexual harassment. Instances of harassment can occur through actions, spoken words, or writing--either at the work site or away from it.

Medium-sized and small companies seem particularly vulnerable to sexual harassment problems because they often lack the preventive training programs of larger firms. Their managers, who haven't learned how to prevent or respond to sexual harassment complaints, may ignore a situation until it is too late. Also at smaller companies, because employees can work more closely together, they often are less cautious with banter, jokes and pranks.

In one case, a major customer made sexual remarks to a female sales representative and touched her inappropriately. When she complained to her manager about this behavior, he faced an unappealing array of choices. He could do nothing, hoping the problem would be forgotten and not recur. But that might encourage the customer to repeat the episode--with possibly a worse outcome. Also, a jury might conclude that the second assault would not have occurred if the employer had acted on the first complaint.

The manager could advise the employee to be careful to act very professionally with the customer in the future. But should the manager need to reprimand, demote or discharge the female employee later for a legitimate reason, she might sue--alleging illegal termination in retaliation for her sexual harassment complaint. If the jury believes the employee, and not the manager, damages could be considerable.

The manager could assign that customer to a male sales representative. Such an action could be construed as punishing the female employee for making a complaint, since it denies her a source of commissions. Again, it is illegal to retaliate against a person who has made a complaint or participated in a sexual harassment investigation.

The manager could warn the customer that another episode will not be tolerated. That's commendable, but does not preclude another incident and it may involve taking the word of the employee over that of the customer.

The manager's best course of action is to report the incident to the company's human resources department. Every company should have a policy to investigate all sexual harassment complaints, no matter how small the claim. Besides being the right thing to do, a thorough investigation can be a defense to a sexual harassment claim.

Human resources should be better prepared than a manager to handle a sexual harassment allegation. Their investigation may cause discomfort, but it will remind employees they are accountable for their behavior.

Insurers, as a condition of insurance or to qualify a company for favorable rates, should require an audit to determine if a company's policies and procedures are adequate to prevent sexual harassment claims.

Policies and procedures should include:

* Company issuance of an Equal Employment Opportunity statement to each employee.

* An anti-harassment policy that describes types of unacceptable behavior arm penalties for violations. Employees should be able to report sexual harassment complaints without fear of retaliation.

* An outline of how an investigation will unfold. This helps employees understand the process and helps managers be consistent in its application. The employer should react quickly and decisively to every complaint.

* Obtaining written acknowledgement from employees that they have received a copy of sexual harassment policies.

* Providing regular awareness training for all employees so that they fully understand what behavior is not acceptable.

Companies that have such policies and practices, and follow them, are much easier to defend ha lawsuits.

Arthur V. Lambert is a partner of Epstein Becker Green Wickliff & Hall P.C. in the Texas labor and employment practice. He can be reached at [e-mail].