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One city's successful move to self-insurance.

One City's Successful Move To Self-Insurance

A self-insured municipality can save itself a small fortune in revenues each year simply by keeping its claims handling and defense counsel in-house. I make this statement with conviction, because in the City of Long Beach, NY, we have done just that.

In early 1986, Long Beach had a general liability policy with an American International Group carrier. For a $400,000 annual premium, the city received $1 million in coverage, with a $5,000 deductible. The city itself played no role in claims handling or defense, and had no risk management policy at all.

When the policy came up for renewal in 1986, the city council was amazed that due to the hard market, the premium would be doubled to approximately $800,000, with a deductible of almost $200,000. It was at this point that the council took a long, serious look at the viability of self-insurance.

I was immediately hired away from my position at one of New York's largest insurance defense firms to create a claims handling and legal defense operation for Long Beach. Sizing up the task at hand, as the city's new deputy corporation counsel, I found that Long Beach is situated on an island that is 25 miles long and a half mile wide. This seaside community is comprised of approximately 35,000 year-round residents, with an extra 10,000 residents during the summer months. The city also has approximately 350 full-time employees on the books, including a 77-person police force and a fire department consisting of 21 paid and 70 volunteer firefighters.

One of the first questions I asked when I arrived on the job was, "Who is the risk manager?" The answer I got back was, "you are."

Until 1986, the city's carrier had a liberal policy of settling claims, and not unexpectedly, a large number of relatively small claims were constantly brought against the city and were subsequently settled in the $2,500-to-$10,000 range. On average, 15 new personal injury lawsuits per month were brought against the city.

Having been given free reign to develop both organization and policy, I announced to the general public that no plaintiff would receive payment from the city without a fight. I also put two signs up in my office that read, "Anyone who gets money from me will have earned it," and, "Don't bother suing us unless you need the experience." Claimants and their attorneys who came to my office for a claim hearing soon got the message.

Being newly self-insured, the city had only two claims against it when I started my job. This was a unique opportunity for me to see whether every claim could be worked up correctly right from the start, and whether it was possible for me to stay abreast of the developments of every claim.

For a claims-handling system, I created a series of forms that a legal secretary could easily put into action. Upon receipt of a Notice of Claim (required by New York State law to be served upon a municipality within 90 days of the occurrence), a copy of the notice would be sent to the police, fire, highway, buildings and public works departments. It would be accompanied by a form requesting that they search their files for any records of the defect which allegedly caused the accident, visit the site within 24 hours, inspect and secure it if necessary, and make any required repairs as quickly as possible, keeping me informed of the action taken.

Using my experience as a claims examiner for a major carrier, I established a reserve for each claim and revised it each time new information was received. Any claim that, on the surface, appears to be of real value is immediately designated for outside investigation using a rotating roster of two or three investigative firms for quality comparison. Often, early investigation is the most fruitful, as memories can fade rapidly and fraudulent claims are usually tripped up by a rapid inquiry.

Initially, I had considered hiring investigators to work in-house, but finally decided that the competition between two or three firms would keep the quality of work high. The cost of using private firms is not significantly higher than the cost of civil service benefits for a single government employee.

To initiate a successful risk management program, it is essential to begin by creating a manual. Samples are easy enough to obtain upon request from other cities and private corporations. Borrowing from the best of these sources, I added about 10 percent original material and adapted the content to a beach community. Copies of the finished manual were distributed to all department heads and supervisors. It was easy to convince the city manager to announce the policy regarding disciplinary proceedings against employees who were resistant to observing safety rules.

Soon after, a comprehensive system of accident reporting was set into motion, wherein any incident involving an injury, however slight, or property damage valued at over $50 was to be reported to my office. These reports were periodically scrutinized to identify trends in either types of accidents, accident-prone employees or other repeating factors. We adopted a policy of taking an employee off his job and retaining him if he showed a significant accident trend. This policy quickly and dramatically reduced these repeating factors.

The next step was to set up a legal defense operation that was as efficient, effective and economical as possible. I created an entire system of legal forms for legal pleadings so that the names, phone numbers and pertinent details for each action could be easily entered.

Law firms charge for the time that goes into preparing the answer to the complaint and many other pleadings, when in reality, they have all of the forms on a word processor and a legal secretary to enter the information. They also charge for many other activities that are either performed by non-legal personnel, are unnecessary or actually take only a fraction of the billable time.

By having a staff attorney doing legal defense work, legal costs are set at a fixed rate. As the City of Long Beach's chief defense counsel, I receive the same salary regardless of how much work I do on a file, therefore, I have a strong incentive to handle each file as efficiently as possible. At the same time, there is a strong disincentive to neglect any file for the simple reason that if I make an error on a file that costs the city money, I am directly accountable.

The Bottom Line

When insured, the city was served with 15 new lawsuits per month. Now, after becoming self-insured, the city is served with an average of two new lawsuits per month. When insured, the city paid $400,000 per year in premiums, and another $100,000 annually in deductibles. After three years of being self-insured, the city has paid a total of $49,000 in claims, and every trial has resulted in a verdict for the city. The total expenses for the last three years have been under $15,000, which puts the total cost at an average of less than $22,000 per year, compared to $500,000 per year when insured.

There is no doubt that luck has played a role in this dramatic turnaround. While self-insured, the city has had no serious claims made against it, but what if it had? A catastrophic injury combined with any degree of liability would trigger immediate action on the part of the city. Aside from the normal aggressive defense procedures, we would calculate the potential jury value and the settlement value.

For example, what if we were faced with a case that we knew would not settle for less than $3 million? In the State of New York, cases such as these often take up to five years to come to trial. That would give us time to save the necessary funds, with the aim of creating a structured settlement. Eventually, by working with a structured settlement company, we could offer a package with a payout worth $3 million to $4 million. Of course, actual figures vary widely depending on the number of years in the payout, the life expectancy of the plaintiff and the prevailing interest rate.

Since these cases are relatively rare, working within our estimated budget, one case every few years should be manageable. Regarding cities such as Long Beach, having an insurance policy with a $1 million limit would only provide partial protection in these kinds of cases.

In a relatively short period of time, Long Beach has conquered both the high cost of insurance and highly inflated lawyer's fees, while reducing its claims paid per year an average of 95 percent. Although the cost of self-insurance will increase yearly, it will probably remain the most cost effective alternative for the city for many years to come.

Universal Applications

Other municipalities and corporations can reap similar rewards from becoming self-insured. All they need to do is hire one or two additional in-house attorneys and claims examiners who know their business and can dedicate themselves to the success of a self-insurance program. They will then need their city council, or similar governing body, to put faith in the program's in-house defense people by giving them the authority to defend or settle claims based on their professional evidence assessment. One of the worst things that can happen to any in-house defense team would be to get politically motivated interference from an executive body. A large part of the success of Long Beach's self-insurance program is because the city council has given it's defense team freereign to handle each case as it sees fit.

The decision to become self-insured and keep all claims and legal operations in-house must be based on a careful analysis of the risk factors and loss experience of the organization in question. When weighing the enormous cost savings of having in-house attorneys and claims people against using outside attorneys and claims people, in most cases a business or municipality willing to make a philosophical commitment to retain risk control can easily reduce the number of claims made against it, as well as the total costs resulting from such claims.

PHOTO : Lawrence Rogak heads off beach risks and lawsuits in Long Beach, NY.

Lawrence N. Rogak is deputy corporation counsel and risk manager for the City of Long Beach, NY.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Long Beach, New York
Author:Rogak, Lawrence N.
Publication:Risk Management
Date:Dec 1, 1989
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