Municipal entities across the country are looking for ways to cut expenses each fiscal year. Money is constantly being re-allocated to

various programs which results in decision makers taking action to find new sources of revenue. One significant line item in a fiscal

budget is the administration of the entities’ risk management program. Municipalities are continuously re-evaluating their risk

management program to determine if there are better alternatives that could save money but limit exposure. In 2003, the *New York Times published an article that discussed the rising costs of insurance in a post 9/11 era. The article

concluded thconcluded that more and more towns and cities have come to the realization that self-insuring their exposures is a cost effective

alternative to purchasing an insurance policy. When self-insurance is not a viable option, many municipalities make the decision to

carry a large retention for each line of business (perhaps $100,000.00) and purchase an insurance policy to cover any incident greaterthan the retention. Municipalities who self-insure or carry large retentions are faced with unique challenges. Often times when they experience a loss to their self-insutheir self-insured property they find that there is a third party whose negligence caused the loss. This puts the municipality in a position where they have paid to repair or replace damaged property; however they were not responsible for the damages. When this occurs,

the municipality has the right to place a claim against the at-fault party to recoup their loss. This is commonly referred to in the

insurance industry as the right of recovery or subrogation. Insurance companies rely on the recovery process to bring back money paid out to the bottom line. There is an intricate process

setup to ensusetup to ensure that recovery efforts are successful. Prior to receiving the subrogation referral, there is a team of frontline adjusters

who have gathered all of the pertinent information and evidence that will be necessary to secure a recovery. Insurance companies

hire teams of experienced licensed adjusters to pursue their recovery interests. These adjusters spend hours on the phone every day

negotiating their demands to bring back the most money on behalf of their employer. Their compensation is directly correlated with how successful they are. In the event that the recovery adjuster is unsuccessful, most insurance companies are members of Arbitration

FForums, which allows them an alternative recourse to resolve the subrogation claim.

Unfortunately public entities are simply not setup to secure a successful recovery. There are three unique challenges that municipalities

face when attempting to recover money. The first challenge to overcome is the investigation. The recovery process at a typical

municipal entity is very different from the process established by the insurance companies.

*Goodenow, Evan. High Costs Force Towns to Self-Insure. The New York Times, 2003.

Public Entities and Subrogation Recovery

When municipal property is damaged by a third party, the response is not focused on obtaining the information that will help

recovery efforts. Rather the response is focused on securing the area to avoid further damage or injury, followed by repair or

replacement of the damaged property. Once the repairs are completed, the municipality may or may not create an invoice that

reflects the costs associated with repairing the damaged property. Even if the invoice is generated, many public entities fail to include

all chargeable line items. As the party presenting the recovery demand, the public entity is faced with the burden of proving their

claim. claim. This means that all demands need to be backed up with proper documentation. As an example, let’s assume that you are a town manager when a car loses control and strikes a traffic light, rendering it inoperable.

The accident gets reported to the police department who arrives on scene to secure the location and direct traffic while the light is out. A contractor is called out to repair the light. A public works employee is on scene supervising the job from start to finish. Parts were

ordered, labor was invested and days went by until the traffic light was in operating order again. A temporary stop sign was put up to assist with traffic flow while the light was inoperable. Now it’s time to present your claim to the insurance company that insured the at-fault vehicle. You receive a one page invoice from the public works employee that lists replacement parts needed to repair the light.What other information should be included on the invoice? What can you bill for? What documentation will be needed to prove the claim?claim? In this example, the obvious billable items are the police detail, contractor’s invoice and replacement parts ordered to repair the light.

Some other costs that should be billed back to the insurance company include the salary paid to the public works employee who oversaw the job, the costs associated with installing a temporary stop sign, administrative fees to prepare the demand and any other

costs associated with the event. Essentially, if a fee was incurred because the event took place, the fee is billable.

Once the traffic light is repaired and the invoice is generated, municipalities typically rely on an employee from finance or

administration to manage the recovery. Personnel issues present the second unique challenge that public entities face when attempting to recover monies owed to them after a loss. As previously stated, insurance companies hire licensed adjusters with years of

negotiation experience to administer their subrogation recovery program. A public entity does not have the same resources available

to them. The assigned point person is charged with the task of identifying the at-fault party, reporting the claim to the appropriate

insurance compainsurance company and following up with the adjuster until the money is recovered. In a perfect world, this process takes

approximately 30-60 days. The point person however, has a full-time job. Because his or her primary responsibility is not recovery,

the task falls to the back burner. The demand may or may not get sent out timely.

The point person may not have the time to follow up with the insurance company on a weekly basis. What if the demand gets lost by

the insurance company and needs to be re-submitted? Now a few more months go by and the point person has heard nothing. The

process proves to be complex and cumbersome.

A few months go by and your employee has made a few calls. Suddenly, he or she receives a call from the insurance company who is

in receipt of your demand. This brings us to the third unique challenge that public entities are faced with. The adjuster would like to

negotiate. The adjuster on the other end of the phone receives hundreds of demand like yours every month. The adjuster is

eexperienced and knowledgeable but worse than that, the adjuster has leverage. She is breaking down every line item in your demand. She wants to see the invoice from the contractor, the time cards for the police officer and the public works employee, the receipt for

the parts ordered to repair the traffic pole, the receipt for the stop sign, the time cards for the employees who installed the stop sign,

and why on earth are you charging an administration fee? Weeks go by as your employee gathers and submits the documentation.

She calls back and offers you 70% of your demand. Your employee refuses, asking her for justification. She responds that she has had

the demand the demand reviewed by a 3rd party vendor who has taken depreciation. They also determined that the labor rate was excessive in

comparison to similar demands received. The adjuster concludes by offering 75% of your demand and advises that this is her final

offer. Take it or leave it. What is your recourse?

Unfortunately, municipal entities are at a disadvantage when negotiating with an insurance company. Many insurance carriers are

members of Arbitration Forums. When two insurance companies cannot resolve a claim on their own, arbitration offers an

inexpensive alternative to litigation. Although self-insured entities are welcome to join Arbitration Forums, most are not members.

Municipalities Municipalities must rely solely on the negotiation skills of the employee handling the recovery. Typically this employee’s background

is in finance or administration, not negotiation. Suit is always a viable recourse if the insurance company refuses to make a reasonable

offer however the cost of retaining an attorney and filing suit isn’t usually justified depending on the size of the demand and the offer

presented by the insurance company.

When faced with the burden of recovering money from an insurance company, public entities are often accepting less money than

wwhat is owed to them simply because they lack the resources to effectively recover what is rightfully owed. Whether it’s a disorganized investigation, lack of dedicated personnel or ineffective negotiation, municipalities are getting the short end of the stick time after time.

While accepting that these challenges are inevitable is one potential response, there are proactive steps that municipalities can take

to address these issues.

Engaging a consultant to review your internal procedures and make recommendations on how to more effectively recover

outstanding funds is one solution. Alternatively, hiring a third party firm to administer the recovery program offers a

comprehensive solution to the problem. While a third party firm will charge a fee, the fee is typically a percentage of the recovery.

This solution not only becomes cost effective, but eliminates the need for a dedicated personnel resource within the public entity.

Whichever solution you pursue, we hope that this article has encouraged you to re-evaluate your current recovery program and

inspiinspired you to take action to guarantee successful recoveries.

Article Credit:

Nichole Magnifico, CPCUSenior Claims Consultant401-435-3600 x1152nmagnifico@starshep.com