Claims can be reduced when agencies and personnel work together to achieve that common objective

The Risk Management Pool: An Alternative To Conventional Insurance

By John P. Joyce

The doctrine of sovereign immunity (that a government cannot be sued) is all but gone as a protection from claims against local government bodies. Because the courts and other authorities have taken a broad and liberal view in liability and workers' compensation cases, park and recreation agencies have become more and more concerned with the costs of insuring against these losses. Increases in insurance rates have been compounded by the effects of inflation as many rates are figured on such inflationary values as payroll, replacement property values and generous court awards. Traditionally, the purchase of insurance in the private market was the predominant method of protection against these risks. Other methods that can be utilized in place of insurance and simultaneously with insurance include the following:¹

1. Reduce Risks. The frequency and severity of risk exposure can be reduced through the promulgation of safety and use rules for staff and public, close evaluation of design and construction procedures, and ongoing safety inspections of facilities and programs.

2. Eliminate Risks. Eliminate potential risk exposures by altering construction plans and immediately repairing any unsafe condition on existing equipment or facilities. "Hold Harmless" and "Certificate of Insurance" provisions in written contracts may also be effectively used to eliminate risk.

3. Transfer Risks. Transfer involves the signing over of risks to another party. Transfer is usually accomplished in writing through documents. Surety bonds, performance bonds, and leases in-lieu-of purchase are common examples of transfer.

4. Retain But Control Risk. Retention of risk is a form of self-insurance through the assumption of a limited level of losses. Increasing the level of "deductibles" with conventional insurance policies is a good example. Others include: non-insurance (don't insure losses which can easily be absorbed) and self-insurance of specific risks. The success of a retention program depends largely upon the ability of the park and recreation agency to constantly monitor its activities, facilities and equipment and control losses.

The proper selection and use of techniques from the above methods is that activity known as risk management. A recent development in risk management at the local government level, has been the establishment of group self-insurance or risk management agencies. Pioneered in California, there is now sufficient experience with the insurance pooling concept to guide plans for the establishment of similar self-insurance agencies. Several municipalities in northeastern Illinois now have joined together to create such a "pool" for self-insurance and risk management. A pool of dollars generated by member agencies with similar risk exposures becomes the insurance fund. Thus, premiums are paid to the group rather than to private insurance companies. Such an agency transfers the risk of individual government units to the collective resources of all agency members along with commercial insurance companies. In Illinois, legal authority for such pooling comes in the form of enabling legislation permitting intergovernmental cooperation.

Several park districts in Illinois currently are studying the formation of such an organization.

The Park Forest Recreation and Parks Department has participated for over three years in such an agency. The Intergovernmental Risk Management Agency (IRMA) has been in existence since January, 1979. Since it is one of the few major park and recreation operations covered by IRMA, Park Forest's experience might be useful for park districts considering the formation of such a group.

At present, 33 municipalities are members of IRMA. Prior to the formation of IRMA the annual premiums of conventional insurance increased 400% to 500% during the period 1974 to 1976. Some municipalities were unable to purchase an insurance program to meet their specific needs. IRMA came into existence after two years of study by a group of some 21 municipalities. The study, conducted by a consultant, involved a three-phase process:

1. Analysis of the insurance portfolios of individual jurisdictions,

2. Review of possibilities for various non-conventional and inter-governmental alternatives, and

Illinois Parks and Recreation 14 January/February 1983

3. Development and implementation of an acceptable alternative program. IRMA now provides protection for first party property losses and third party liability claims including workers' compensation.

What are the benefits of self-insurance pool?² Most bodies that have joined such an agency have experienced fewer claims and lower settlements from the start. The higher deductibles, as an alternative to insurance premiums which are paid in advance, improve the members'cash flow and allow investment of these funds at today's higher interest rate. Self-insurance programs also tend to put "teeth" into local safety programs. But, of course, there also may be drawbacks for your agency. Your local insurance agent who stands to lose a good chunk of business will understandably be "cool" to the idea. This may result in a movement to support "keeping business local and with the private market." With this kind of pressure, self-insurance can sound "risky" to certain officials and the general public.

Agencies joining such a risk management pool should be prepared to allocate additional staff resources to safety programs and risk management.

Under IRMA, protection for the prescribed liabilities is provided through a three-tiered format referred to as "layering of coverages."³ Initially, each member municipality pays the first $1,000.00 (deductible) on each and every loss. Secondly, members pay into a group self-insurance fund from which the next $249,000.00 of a claim is paid. Finally, the Risk Management Agency purchases conventional insurance coverage to pay valid claims over $250,000 (and up to an agreed upon maximum) and to pay self-insurance fund losses when the aggregate exceeds $2,450,000.

IRMA and other organizations like it, however, offer much more than a simple pool for self-insurance. In addition to self-insurance protection, the agency provides a variety of services to members aimed at reducing their overall losses. Unlike conventional insurance which may lump together the losses of private, not-for-profit as well as public organizations, the locally controlled self-insurance agency can provide premium costs that are more reflective of actual loss experiences. Group members who are exposed to similar risks, not only have an incentive to control losses, but police themselves under the auspices of the group.

This incentive to control and reduce losses is achieved because the agency is a "group" in the truest sense of the term. Members know each other, share and evaluate experiences both good and bad, and police themselves as a result of these experiences. This is the climate that has not been achieved in the private market where premiums are determined by that mysterious "loss experience in the industry," which is often neither known nor defined.

Another substantial loss prevention incentive is created by tying group premiums and other costs directly to loss experience. In Park Forest, the $1,000.00 deductible on each and every loss is directly the responsibility of the operating division

Pioneered in California, there is now sufficient experience with the insurance pooling concept to guide in the establishment of similar self-insurance agencies.

experiencing the loss. A management accounting system which allocates deductible payments and actual claims settlements to the operating level serves as a significant incentive to reduce losses throughout the organization. As a result, when the supervisor is notified of an injury to a Park program participant, when the special facility manager reports an injury to a facility user, or when the park superintendent has an unusually high number of workers compensation claims, the deductible payments for each of these losses might be assessed directly to the activity involved.

The annual contribution to the Risk Management Agency by each municipality is based upon the revenue generated by that municipality. Early on, it was determined that the amount of revenue received by the member body during the fiscal year was an accurate measure of a municipality's potential for losses and claims. While this has proved to be satisfactory for general purpose government units, it may not meet the needs of special districts as a measure of loss potential. Other factors such as acreage, special facilities operated, and participation may be developed in addition to, or instead of, revenue as a basis for determining an agency's contribution to a Risk Management Group. No member government, however, is obligated to pay claims or losses suffered by another member except to the extent of its own financial commitment to the group.

To encourage a reduction in losses, a deviation in the annual contribution of plus or minus 25% is applied to each member based upon its individual claims history. For example, members with a lower than average loss experience may receive a rebate of up to 25% of annual contribution based upon revenue. On the other hand, members with a heavy loss experience could be assessed at a rate up to 25% higher.

In the case of Park Forest, a portion of annual rebates received over the past two years has been shared directly with employees through a bonus program for avoidance of work related injuries, excessive sick leave use and liability losses. Any employee in a risk position who avoids: (1) a work related injury, (2) a preventable vehicle accident, and (3) use of more than half the annual sick leave allocation, receives a cash bonus. Funds for these bonus payments come directly from the annual IRMA rebate and are tied to it. Such a rebate, dependent on favorable loss experience, is ideal as the basis for any number of employee bonus programs tailored to the needs of the member agency.

The Risk Management Agency is structured not unlike the Special Recreation Cooperative which has proven so successful in Illinois. From an organizational standpoint, policy decisions and the employment of staff, independent contractors and legal counsel are the responsibility of a Board of Directors which is made up of one representative from each member municipality. A municipality may become a member of the Risk Management Agency by majority vote of its elected officials and 2/3 vote approval of the IRMA Board.

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Each member government holds one vote.

The day-to-day operations of the agency are carried out by a risk manager. At present, staff functions for the agency are performed by agencies whose services are provided on a contractual basis rather than by paid employees. Once losses do materialize, an important benefit of a Risk Management Agency should be the provision of more informed and expert claims handling, defense, and legal services. These services should be tailored directly to the needs of member juirisdictions (i.e. municipalities, park recreation agencies, etc.) and address specifically their common experiences and exposures. Furthermore, those responsible for claims handling, investigation and defense of claims are controlled directly by the members of the group on the basis of their performance.

A most disheartening scenario is that faced by a supervisor or superintendent who, after monitoring a conscientious safety program, is informed of a major "out-of-court" settlement amounting monitarily, to nearly equal the program's total budget when there appears to be little if any agency negligence. From the first-line supervisors' perspective, such settlements appear to be a result of an inadequate and unaggressive defense effort.

Claims administration, then, is one of the major responsibilities of the Risk Manager and includes processing, investigating and settling those claims not requiring a defense attorney. But not all cases can be handled outside the courts. Legal counsel is employed by the Risk Management

What are the benefits of self-insurance pool? Most bodies that have joined such an agency, have experienced fewer claims and lower settlements . . .

Agency to defend all cases which cannot be settled at the administrative level.

Of particular importance should be the selection of attorneys who are familiar with the operations of member bodies and can work closely with them in preparing strong defense cases. This is particularly important as Neil Dougherty⁴ has reported that even in the private market, "more and more insurance companies are beginning to fight their cases through the courts. * * * The idea is that by winning more such cases, the financial attractiveness of an unsound case involving a park and recreation facility or program will be removed." The effectiveness of such an endeavor hinges on the selection of claims service personnel and legal counsel who deal more frequently and directly with park and recreation agencies. In fact, legal counsel may be selected from an approved list of specialized attorneys to assure the proper expertise for each case and to achieve lower overall claims costs as a result of the lawyer's familiarity with the "industry." The specialized attorney probably would not need to do a lot of research and case preparation, thereby saving expense.

Another important service provided by a risk management agency is the program to assist member bodies in the reduction of their own losses.

Members are expected to evidence a high degree of commitment to the loss prevention program. A lack of this commitment, in fact, is one of few grounds for expulsion from the group. The agency plays an active role in assisting members with establishment of an effective loss prevention program. For the supervisor, the facility manager or the maintenance worker, this may well become the most noticeable change associated with joining such an agency.

The foundation of the Loss Prevention Program is the development of meaningful management involvement. This is normally represented in a written safety policy endorsed by top management and adopted by the elected board. Such a program also encourages the appointment of a loss prevention coordinator to oversee the program on an ongoing basis. The coordinator may encourage the formation of safety committees, establish with supervisors safety rules and regulations and communicate this to all employees. Each individual department is encouraged to set forth its own goals and objectives toward the reduction of loss. The greatest savings in such self-insurance programs comes when officers and employees of the member jurisdiction begin to understand that losses and claims paid actually come from their own budgets. A rigorous program of accident investigation and reporting is usually the "stepping off point" to an improved loss experience record. Finally, department heads and supervisors are then held accountable for the loss prevention record and program within their own area of responsibility.

The Risk Management Agency evaluates the activities of each member annually to determine the status of its own individual loss prevention program.⁵ This evaluation, designed as a management tool, is then accompanied by recommendations to help strengthen the local program. The most significant premium savings will seldom be realized until the member becomes effectively committed to loss prevention.

Thus, the formation of a risk management agency brings with it both benefits and responsibilities which go beyond a mere group self-insurance pool. The benefits, in addition to a

(Continued on page 25)

ABOUT THE AUTHOR:

John Joyce has been Director of Recreation and Parks in Park Forest for 9 years. Prior to assuming this position, he served as Director of Parks and Recreation for the City of Maplewood. Minnesota. He has received both the Bachelors and Masters Degree in Park and Recreation Administration from the University of Minnesota and has completed further graduate work in Public Administration. During his 9 years in Illinois, he has been active in IPRA as Board member, committee chair and member of various committees.

Illinois Parks and Recreation 16 January/February 1983

THE RISK (cont. from p. 16)

savings in money, include the assured availability of liability coverage, lower costs as an incentive for lower claims and improved claims and loss prevention services aimed specifi-

A rigorous program of accident investigation and reporting is usually the "stepping off point" to an improved loss experience record.

cally at the types of member bodies. The member responsibilities, however, include an active safety and loss prevention program which will require the time, attention and commitment of each and every employee in the organization.

(The next issue of IPR will feature an article on risk management from another perspective. Henry Deihl, former IAPD President, is the author ofanarticle,"Risk Management—A Team Effort.")

References

1. Department of Local Government Affairs. Risk Management, A Guide for Local Government. Springfield, IL. 1979.

2. The Product Information Network. Self-Insurance: Managing Your 0wn Risk's for Better Results, Advisory Report. McGraw-Hill Inc.. November 1. 1981.

3. Intergovernmental Risk Management Agency. An Information Sheet Prepared for Member Agencies. January 4, 1982.

4. Dougherty, Neil J., "Legal Liability: The Role of the Expert Witness," Parks and Recreation Magazine, January 1982. p. 68-69.

5. Intergovernmental Risk Management Agency. 1981 Loss Prevention and Claims Administration Status Report, Gallagher Bassett Insurance Service.

Illinois Parks and Recreation 25 January/February 1983