Governments Cooperate in Fighting High Costs of Coverage

When John Oskins heard that a clerical error had led to the accidental jailing of an Irvine man in February, he moved quickly to prevent a costly lawsuit from being filed against Orange County. Within a few days of Robert Jackson’s release from jail, a county adjuster persuaded him to accept a $4,000 settlement. Jackson had not yet asked for anything.

Oskins is Orange County’s claims manager. He describes the Jackson settlement as a simple case of “smart risk management. . . . A part of this job is to recognize potential liability problems and act to eliminate or shorten the county’s exposure as much as possible.”

Indeed, risk management has become big business, with local governments hiring their own experts in recent years because of the escalating cost of liability insurance coverage and, in many cases, because of canceled policies.

“The current crisis in insurance coverage really had little to do with the speed with which we sent an adjuster out to settle the Jackson case,” Oskins insists. “We would have done the same thing even if there was no insurance crisis.”

But other county officials and risk managers for cities throughout Orange County say that they are indeed trying harder to control liability losses, and part of the reason is that more and more of them are becoming self-insured or are joining together to form ad-hoc insurance “pools” in which they share the costs of their combined claims losses.

Self-insurance, however, takes many forms.

For example, Orange County is self-insured for the first $5 million of losses per single occurrence. It has regular, commercially-purchased coverage for the second $5 million, but is self-insured for amounts above that.

Completely Self-Insured

But the City of Orange, which withdrew from an insurance pool last year, is now completely self-insured against liability losses. What would happen if a jury delivered a monetary judgment against Orange so big that the city’s reserves were insufficient to cover payment to the plaintiff?

Risk managers and liability lawyers say that, generally, state law gives local governments up to two years to satisfy a court judgment. They add that in some cases there would be attempts to reach a so-called “structured” settlement, jury awards notwithstanding. In such agreements, part of the judgment is paid at once, with additional payments spread out over a period of time. If such a settlement is not worked out, courts have authority to garnish city funds, in effect, or devise custom-tailored payment procedures.

Payment Plan

In Huntington Beach, a recent settlement included a $9-million, 30-year payment schedule for a traffic injury that involved an allegedly unsafe crosswalk across a city street. The complicated payment plan--partly covered by insurance--involved an $800,000 lump sum, as well as the purchase of three separate annuities that will pay out staggered amounts over the next three decades.

Two weeks ago, a month after the settlement was reached, the city decided to “go bare,” with self-insurance instead of commercial liability coverage, which was becoming difficult, if not impossible, to obtain.

Policy Lapse

Newport Beach, which was self-insured for many years during a similar liability insurance crisis in the mid-1970s, went “bare” again this month after being dropped by two of its policy carriers. Although the third carrier agreed to write a small policy for the city, Newport Beach officials decided the new premium was too high and let the policy lapse April 1.

In 1978, Cypress and four other Orange County cities banded together to form the Orange County Risk Management Authority. Operated through a joint-powers agreement, the authority was set up and is being run administratively by Newport Beach-based Robert F. Driver Co. It has grown rapidly in recent years to include Irvine, Laguna Beach, La Palma, Los Alamitos, Yorba Linda, San Clemente, Stanton, Orange, Tustin and Westminster.

However, Orange now obtains only workers’ compensation coverage through the authority, not liability insurance.

Insurance Cooperative

Unlike some liability insurance pools, the authority is not based on self-insurance. Instead it is an insurance cooperative, with the pool buying commercially available coverage at a volume discount.

Also, authority members are subject to large deductibles.

Cypress Asst. City Manager Dave Barrett praised the co-op arrangement, saying that “members have been able to save 30% or more” off regular liability premiums.

The Driver Co., meanwhile, is attempting to package a separate self-insurance pool for municipalities that are not authority members, or possibly offer the package as a replacement to those that are. It is already administering such a self-insurance plan in several municipalities in San Diego County.

Insurance Pool

About 51 cities in seven Southern California counties, including new members Villa Park and Fountain Valley, belong to the Southern California Joint Powers Insurance Authority, a self-insurance pool that is also based on a joint-powers agreement.

Seal Beach, Santa Ana and Garden Grove are considering membership in a Sacramento-based joint-powers authority.

In such pools, cities deposit a sum equal to about 80% of their most recent liability insurance premium and share the costs of administering the plan, which includes office, staff and audits in addition to payments on claims.

Low Overhead

Because overhead is very low (“There are no glass towers with our name on them,” says George Anast of the Southern California group), there’s little chance that deposits will be insufficient to cover losses.

And, in some cases, so-called “excess coverage”--commercial policies to protect against claims above a certain amount, such as $5 million, are purchased at a discount to supplement self-insurance. Such supplemental coverage is usually brokered among many different carriers at once, so that one company may be responsible for the second $5 million in losses, while another may be responsible for the third $5 million, and so on.

In most cases, there are provisions for going back to member cities and collecting extra assessments if there is an unusually large claims loss.

But at least in the case of Anast’s group, profits made by investing members’ money have enabled it to refund about a third of the cities’ deposits.

“I know some insurance companies that would like to do as well as we have,” Anast said.