Cities Begin to Feel Financial Pinch of Being Self-Insured

Last week, the City of Placentia received a letter from the Placentia Unified School District. The message: Stay off our property.

It’s not that the two public entities bearing the same name don’t get along. The school district just isn’t willing to take any chances by letting Placentia--which no longer has liability insurance--hold city-sponsored activities at local schools.

Placentia, which was dropped by its liability carrier, Harbor Insurance Co., last month when the firm decided to get out of the municipal insurance field, is not alone as it begins to feel the repercussions of being self-insured. Since April 1, Huntington Beach, Newport Beach and Buena Park have joined the growing list of cities looking for insurance alternatives.

Orange County residents may not yet feel the sting of the municipal liability insurance crisis, but the subtle changes are beginning to settle in.

In Fullerton, city employees are taking driving lessons, being taught how to safely handle hazardous materials and even attending classes on avoiding back injury. In Anaheim, the city now requires that contractors doing work for the city have at least $1 million in liability insurance--squeezing out smaller companies that cannot attain or afford such costly coverage.

Dropped by their insurance carriers or just unable to afford soaring premiums, a growing number of Orange County cities are becoming self-insured--commonly called “going bare”--or, as one city official colorfully described it, “getting naked.”

As a result, cities are hiring risk managers, part-time claims adjusters and safety coordinators who will decide what, if any, services to curtail, programs to implement and loopholes to tighten.

“We have to be careful,” Placentia Finance Director Frank Dunnavant said. “If we get hit with some of these claims and some of these awards, we could very easily go out of business.”

In Placentia, until the city finds insurance, the school district will not allow any of its facilities to be used for city-sponsored programs. To residents in Placentia, this means that youngsters who participate in city-sponsored summer programs will not be able to learn how to swim in a school pool, said Jim Soto, Placentia’s recreation and Social Services Department director. They also will not be able to use school buses for city-sponsored outings such as treks to the beach, forcing the city to hire commercial transportation and raising the cost of summer programs, Soto said.

The school district’s new mandate raises other problems for city officials, including where Placentia will hold its annual 4th of July fireworks show, which last year drew about 7,000 people to Valencia High School.

Real Test Yet to Come

In most Orange County cities, whether they have already lost their insurance coverage or are facing the prospect of becoming self-insured within the next year, few programs have been cut thus far, officials said. The real test, they said, will come when a municipality loses a big lawsuit.

Under the legal concept of joint and several liability--commonly called “deep pockets”--a person who wins a lawsuit can collect damages from any co-defendant, with the richer co-defendant paying most, and sometimes all, of the claim. Laguna Beach, for example, was ordered last summer to pay an entire settlement of $2 million in a drunk-driving case even though it was found to be only 35% negligent. The driver involved in the accident did not have insurance.

But municipalities are not waiting to lose such lawsuits before they review their facilities and implement programs they hope will lessen their liability.

In Anaheim, for example, officials plan to spend about $20,000 to hire a company to inspect the city’s 36 parks. In the meantime, new playground equipment is subject to stringent review, said Chris Jarvi, head of the Parks and Recreation Department. At Peralta Canyon Park, for example, chain netting now covers what once were openings on a flexible bridge made of wood timbers. At John Marshall Park, a horizontal bar, or “monkey bar,” was removed after a child hurt herself. Although the girl was misusing the equipment by hanging from her knees, her parents sued the city, which settled with the family, Jarvi said.

In Placentia, where officials plan to hire a risk manager and a part-time claims adjuster, senior citizens who use a city van (equipped with a wheelchair lift) for outings to Knott’s Berry Farm, the mall or other excursions will have to depend on their own transportation, Soto said. Although the city will still use the van to take the seniors to certain activities, there is a moratorium on transporting them for “any extras,” Soto said.

Many Facilities Closed

The impact on Orange County cities has been nowhere as harsh as places like Blue Lake, Calif., where the city’s park, roller-skating rink, community hall, playground, picnic grove, baseball diamond and tennis, horseshoe and basketball courts are padlocked and posted: “No Trespassing. Closed.”

In Blue Lake, population 1,242, the town street sweeper, street roller and back hoe are no longer used. Four of the 11 town employees have been fired. And a welcome sign posted at the entrance reads: “Sorry, we’re closed.”

Most Orange County officials say it is too early to pinpoint what programs will be affected by the loss of insurance. But even in cities that still have coverage, some programs are either curtailed or postponed not because they represent a liability but because the money is needed for insurance.

In Laguna Beach, for example, capital improvement projects, such as street repair, have taken a back seat to pay for steeper insurance premiums, Finance Director Dick Reese said. And instead of hiring three new police officers, the city now plans to hire only one additional one--”basically because we’re paying more for insurance,” Reese said. (Laguna Beach pays $325,000 annually and has a $400,000 deductible. Just two years ago, the city paid about $35,000 with a deductible per claim of $100,000.)

Waiver of Liability

In Anaheim and several other cities, companies that are in the construction or related business are now required to have $1-million coverage and must agree not to hold the municipality at fault should a lawsuit result, Anaheim purchasing manager Diane Hughart said.

“Five or 10 years ago, there probably wouldn’t have been any thought given to insurance of those companies,” Anaheim risk manager Thomas L. Vance said. “Now, it’s a major issue. Right now, very few decisions are made on who the city is going to buy goods or services from where insurance is not a major issue.”

To counter the insurance problem, California cities, private health organizations, corporations and professional and business groups are backing Prop. 51, dubbed the Fair Responsibility Act. The initiative would leave intact the liability doctrine’s application to actual damages, such as medical costs and lost earnings. But, if passed, the initiative would strip away its application to non-economic damages, such as pain and suffering, which often amount to millions of dollars. Those costs would be based solely on defendants’ degree of culpability and not their ability to pay.

The initiative’s primary opposition comes from the 5,400-member California Trial Lawyers Assn., whose representatives say that the measure would deprive innocent victims of just compensation for their injuries.

Another form of relief sought primarily by Southern California beach communities is a bill by state Sen. Marian Bergeson (R-Newport Beach). Bergeson’s bill seeks to give municipalities statutory immunity from responsibility for “natural conditions.” In 1984, Newport Beach lost a $6-million lawsuit filed by a Claremont teen-ager who was paralyzed after he dove into shallow water and struck a sand bar.

Preparations Possible

Although most Orange County officials paint a grim picture when describing such lawsuits, Fullerton risk manager Don Dickinson said municipalities can prepare for multimillion-dollar losses.

“As a claim progresses, you get more of an idea of what you’re facing and adjust reserves upwards or downwards,” Dickinson said. Had Fullerton been self-insured when it was hit with a lawsuit involving the McColl dump site, the city would have set aside money in case of a potential loss, he said. Ironically, Fullerton announced its recent $2.5-million settlement (mostly covered by its insurance) the same night it decided to become self-insured.

Fullerton hired a safety coordinator about two weeks ago and is in the process of implementing various defensive-driving and safety courses.

For many cities, it will be a matter of “prioritizing,” Huntington Beach risk manager Ed Thompson said. New playground park equipment, for example, would be placed on the back burner if it came down to paying for either parks or fire and police protection, he said.

“It’s frightening,” Cypress Assistant City Manager Dave Barrett said. “We have to tighten up so as to not allow loopholes. One mistake could have catastrophic effects.”