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Risk management in the public sector.

MUCH HAS BEEN SAID ABOUT THE LIABILITY EXPLOSION in the United States. Indeed, its effect on corporations has been profound and well documented. But what few people realize is that its effect on public entities has been chilling, spurring rapid growth in the sector's risk management capabilities.

The statistics speak for themselves. Currently, 18 million civil lawsuits are filed annually in the United States, according to Jury Verdict Research Inc. in Solan, Ohio. That's the equivalent of one out of every 13 Americans filing suit each year. Meanwhile, as the number of lawsuits increase, so do the size of the awards. For example, during the last 30 years, the number of jury verdicts over $1 million climbed to 4,665. Eighty-four percent of those awards were recorded in the last 10 years.

Governmental bodies have been hit particularly hard. Until 196 1, there was never a million dollar verdict against a U.S. public entity. Now, according to Jury Verdict Research, the number of such awards has risen to 335.

Faced with the prospect of raising already high taxes, the bane of an elected official's existence, public entities have turned to risk management. As a result, public sector risk management is among the fastest growing segments of the profession. its development coincides with the trend over the past 20 years of establishing professional management practices in the administration of cities, counties, states and various other publicly funded entities.

The process began with mid-size cities adopting the city manager form of government to bring professional management and program continuity to their jurisdictions. In the case of Virginia Beach, the city did not have a centralized insurance function until 1970; coverage was purchased independently by many city departments. But after conducting engineering studies of all city-owned buildings and an analysis of the city's motor vehicle fleet, Virginia Beach officials recommended that procurement of all insurance be centralized, which led to the development of a risk management program.

Interestingly, it has been more difficult to establish public sector risk management in large cities like New York, simply because of the massive nature of the task. On the other hand, smaller public entities have embraced risk management through legislative action that allows them to pool risks. As a result, smaller entities, generally unable to afford to employ a professional risk manager, have learned the principles of risk management by becoming members of workers' compensation and liability self-insurance pools.

As participants in pools, smaller entities are provided with appropriate risk management programs by pool administrators. Generally, entities must comply with recommended programs to maintain their membership. That is often advantageous because many individuals who purchase insurance for small towns have little experience in the field and often leave some assets totally exposed.

Given the dramatic increases in exposures and the costs of risk financing, it is logical that public sector risk management will continue its rapid growth. The public sector faces an array of major risks related to law enforcement, street and highway maintenance, environmental management and professional liability. Furthermore, the need for risk management is reinforced by the fact that there is limited liability insurance available to protect most large cities today from these risks. Virginia Beach's coverage was dropped unceremoniously in 1986, so, like virtually all jurisdictions its size, it is primarily self insured. in 1974, the city established a self-insurance trust fund, which now has rather substantial reserves. But that by no means alleviates the problem or the need for loss prevention measures.

Police and Potholes

IN LAW enforcement, the incident in which Los Angeles police officers were videotaped beating a suspect has caused concerns in every jurisdiction over liability exposures. Law enforcement officials are trained to uphold the law and take action against those who break it. However, there are times when they must be sensitive to suspects, emotions and take a gentler approach. As a result, Virginia Beach and other municipalities have instituted programs to prepare law enforcement officials to deal with situations in which a level of sensitivity to individuals is required. But whether police officers are right or wrong in using force, risk managers must not make judgments but protect their employers against risks of loss.

Another growing liability exposure is street and highway maintenance. With public entity budgets stretched thin, maintaining the nation's transportation infrastructure is increasingly difficult. This is becoming a major problem, particularly in densely populated older cities.

Take potholes in New York City, for instance. By law, the city has 15 days to repair a pothole after it is notified of its location before it can be held liable for related damages. Knowing that the city couldn't possibly repair thousands of potholes in two weeks, a group of plaintiffs lawyers hired a helicopter to take closeup aerial photographs of every street in Manhattan, and then submitted the prints as official notice. Consequently, the city faced an increase in claims, as well as repair costs.

But while potholes may be a source of anguish for municipalities and individual citizens alike, a cause for even greater concern is the safety provided by the nation's roads and bridges. Risk managers must make certain that the structural soundness of the infrastructure is properly monitored.

The third major area of increased liability exposure is environmental. Environmental liability seems certain to be the subject of the nation's next insurance crisis because exposures are virtually unlimited. And, at the same time, environmental exposures are deemed uninsurable by most casualty underwriters, as well as by many excess carriers and reinsurers. At the municipal level, there are significant exposures in both solid and liquid waste disposal. Landfill management, effluent treatment, storm drainage, and drinking water purity are a few of the key areas in which there are concerns.

Again, the temperament of the times can create claims that border on the absurd to complicate an already difficult task of assuring public health and safety. For example, Virginia Beach once had to defend itself against a complaint from a taxpayer who alleged that, due to the city's negligence, an excessive amount of chlorine ended up in her shower water and caused her hair to turn green. It was later found that she improperly used a hair dye, but the investigation and related activities still cost the taxpayers money. In another environmental crisis, an environmental group demanded that a stream which passes a city-owned landfill be diverted and its water purified, even though there was no evidence that the water was contaminated.

Obviously, cases like these are a source of anguish to public officials throughout the nation. On the one hand, there is an obligation to assure public health and safety. But, on the other hand, budgets are stretched thin and there are corresponding obligations to utilize taxpayer monies efficiently.

In that regard, Virginia Beach has taken a proactive stance in dealing with potential environmental liabilities. As environmental issues became more pressing, Virginia Beach's risk management department began working with the city's solid waste department to make certain appropriate monitoring and testing was being conducted at city landfills, including one that was closed years ago and is now a city park. Because of this program, the city knows there is no evidence of contamination in the aforementioned stream.

The fourth major area of increased exposure is professional liability, which applies to almost any act in which any public entity employee engages and that may have a deleterious effect on anybody. Many public sector employees are considered professionals, and most public entities stand behind them when in their professional roles.

In addition to mitigating liability exposure, public risk managers are paying closer attention to property risks. An example of the current level of sophistication in risk management for public entities is the evaluation of public property. To a large extent, this was previously based on original cost data, which in many cases is fragile at best.

For example, the oldest building owned by Virginia Beach was built long before current accounting standards were established. In fact, it was constructed and paid for by a levy of several thousand pounds of tobacco, the principal means of exchange in Virginia in the 18th century. Unfortunately, there are no records showing the actual cost of construction; nor are there any records showing the value of a pound of tobacco.

However, there are ways to deal with such valuation problems. Building values can be established by examining the type of construction, square footage and special equipment requirements. Then retrospective cost models can be used to estimate original cost as well as replacement value.

Proactive Risk Management EXPOSURES, particularly in the areas of liability, have reached an extreme. As in the public sector, less and less of the public risk management budget is allocated to the purchase of insurance. N o t only have risk managers been forced to be more sophisticated and imaginative in developing new modes of risk financing as alternatives to traditional insurance, but they have placed greater emphasis on loss prevention.

In Virginia Beach, for example, the risk management department is working with other city agencies to obtain funding for specialized training as well as to justify the purchase of equipment to enhance employee and general public safety. As part of this program, the agencies routinely meet to discuss problems or projects in an effort to reduce potential risks. Such risks stem from new recreational activities, major construction projects, and design problems in city facilities.

Proactive risk management, however, isn't limited to in-house meetings. One of the most significant means of addressing risk management issues is lobbying for and against legislative and regulatory reforms that impact an employer's exposure base. Although it is often perceived that public sector risk managers are constrained from taking part in shaping legislative initiatives or remedial actions related to insurance and other risk financing alternatives, that is simply not the case. Taking part in the political process in the risk management context is as much a role of public sector risk managers as it is for their private sector counterparts. Both public and private risk managers must determine the most cost-effective ways to manage risk. In the private sector, this results in maximizing profits or efficiency. in the public sector, it enables the employer to maintain the lowest possible tax rate.

Although there are a few constraints that may inhibit the full flexibility of public sector risk managers, they are relatively minor. The one substantive difference is that the activities in the public sector are always open to public scrutiny. But public and private risk managers have much more in common than they have in the way of differences. In each case, management counts on the risk manager to eliminate unpleasant surprises. Management doesn't want to hear too much about risk management unless there's an impending crisis-either real or imagined-that may have them held accountable, either to shareholders or the general public.

Even with creative and proactive means of dealing with risk, all risk managers are on the horns of a bedeviling dilemma, functioning in an environment in which the parameters of risk are expanding, while resources for financing risk are shrinking. As a result, public sector risk managers' jobs are increasingly vital to the financial well-being of employers and taxpayers.

So it is imperative that public risk managers understand the magnitude of risk and deal with it cost effectively. They must persuasively communicate to all levels of management the need for effective risk management. If public entity risk managers become deeply involved in addressing and resolving problems, and persuasive in communicating their roles, the risk management function in the public sector will attain its deserved level of respect and recognition. And, most important, the public's interest will be served.
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Esenberg, Robert W.
Publication:Risk Management
Date:Mar 1, 1992
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