Insurers Eye Increased Risk of Public Entities in Era of Cutbacks

The climate of government cutbacks is forcing public entities to reduce expenditures while trying not to greatly increase their risk or jeopardize their immunity from lawsuits.

Prison overcrowding is one particularly worrisome area.

The situation is causing insurers to express concerns about insuring these public entities, according to risk experts at the Professional Liability and Underwriters Society’s conference in San Diego, attended by more than 1,700 industry professionals.

The risk managers were on a panel at the conference called: “Decreased Coffers/Increased Risk: What’s a Public Entity to Do?”

Moderating the panel was Robert A. Spolzino, a partner in White Plains, N.Y.-based Wilson Elser Moskowitz Edelman & Dicker LLP. Panelists were Daniel J. Howell, senior executive vice president and managing director of Alliant Insurance Services Inc.’s Specialty Group; Susan L. Kostro, senior vice president of public entity and energy for Ironshore in Boston, Mass.; Sean M. Pattwell, managing director and senior vice president of West Orange, N.J.-based Herbert L. Jamison & Co. LLC & Jamison Special Risk Inc. and Thomas L. Vance, risk manager for Anaheim, Calif.

Risk questions aside, there is the matter of the bottom-line for governments, according to Spolzino. Since the recession began in 2008, general fund reserves of municipalities across the nation have shrunken and over half-million municipal jobs have been lost, he said, posing the question:

“What does that do to insurance expenditures and where do we go from here?”

Vance said Anaheim has been belt tightening since the downturn began, first with job freezes, then with cuts to services. The trick, he said, has been to ensure those services that are axed don’t impose greater risk on the entity and don’t harm certain immunities from lawsuits that municipalities enjoy.

The city is cutting back on some services, including police services, but instead of reducing critical police services, the city cut in areas like property crime, he said.

“While we’re cutting services…we’re doing it with an eye on not letting risks increase,” he said.

However, municipalities that figured the recession wouldn’t last so long are facing the tough scenario of having to cut severely into their reserves, and their services, he said.

“You’re seeing a lag where cities thought they could get by on their reserves and now they’re having to make steeper cuts,” Vance said.

These cuts may be having a ripple effect through the insurance industry, as cut corners are producing greater risk and less risk aversion, panelists said.

“We have some anecdotal evidence that the (errors and omissions) claims might be going up, the employment practices claims might be going up,” Kostro said.

Kostro believes the industry may also see a rise in claims due to lack of infrastructure maintenance.

“The infrastructure problems that existed are not getting better at this point,” she said.

The panelists all agreed that one big red flag risk that’s currently being waived and needs to be paid heed is the prison system.

In California, for example, the inmate problem is more exacerbated as the state pushes inmates into county jails, Howell said, adding that the overcrowding and mixing of light- with severe-offenders continues to increase the chances of liability. “There’s a potential there,” he said.

And while counties are doing their best to deal with the situation, including early release programs, and better organization, they are being overwhelmed, Howell said, adding, “It’s sort of a ‘Whac-A-Mole’ situation.“

Continuing in that vein, in the public entity sector, Pattwell added, “everything unfortunately flows downhill.”

The risk threatening public entities is making the sector decidedly less attractive to insurers, he said.

“I’m not real optimistic in the near-term that we have the financing strength to see these things worked out nor do we have the political will,” Pattwell said, adding that the class needs to be looked at with a “hard eye.”

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