Mendocino County Risk Management Division

The Risk Management Division is responsible for many insurance and related programs and functions that have the ability to affect insurance related expenses to the County. A sampling of the many programs and functions includes: a. Establishing and monitoring property and casualty insurance and reinsurance programs. b. Monitoring claims activity, including guiding the claims handling process either “in-house” (County Counsel) or by retained outside counsel, and settling claims within prescribed authority. c. Managing the Workers’ Compensation Program including the Return to Work Program. d. Administering the Health Insurance Program for County Employees. e. Safety and loss prevention services, including safety training. f. DMV State Poll Notice Program including Defensive Drivers Training

With two positions remaining vacant due to lack of funding, this office is under- staffed. Additionally, recent staff absences due to medical and maternity leave created a severe staffing shortage in which important services were curtailed. Although essential services were maintained, during these absences there was a discontinuation of loss prevention services and training, discontinuation of the creation of the modified duty program, closure of the Risk Management Department to County employees on Fridays, limited telephone hours, no “front counter” services, and limited participation in the RCRC health plan creation.

Because of the staff shortages, key Risk Management staff members frequently are distracted from their primary functions to complete secretarial tasks. For example, a Departmental Audit revealed the following percentages of time that were devoted to secretarial functions by various staff specialists. 75 a. Risk Manager - 10% b. Return to Work Coordinator - 15% c. Safety Officers - 8% d. Safety Coordinator - 15% e. Benefit Specialist - 35% Clearly, this does not represent the optimal utilization of the specialized staff members.

The most recent “Liability Claim Audit” was completed in July of 2000. While this audit did not disclose any significant problems, the dynamic nature of the claims inventory, and new claims activity, dictates more frequent claims audits.

The Risk Management Division is annually “charged” a budgetary amount of approximately $135,000 for legal and claims services that are to be provided by the County Counsel’s Office, (and budgets an additional $7,500 for additional claims expenses). The manual system used by the County Counsel’s office for tracking hours (and thus substantiating or developing budgetary charges), is cumbersome and imprecise.

While not a specific topic of review, the Grand Jury heard testimony that healthcare costs are likely to increase annually by double digits for the short to intermediate term.

A cursory review of the Liability Large Claims Inventory indicates no unexpected patterns of claims activity either as to type of claim, or expected valuations. 76

The County now purchases a fully insured Workers’ Compensation Program with CSAC- Excess Insurance Authority. This program appears to be functioning reasonably well although the renewal premium has been increased significantly.

The County is self-insured for the first $200,000 of loss (each occurrence) within the Liability Insurance Program. This Self-Insurance Program was initiated in March of 1978.

The County currently buys total liability policy limits of $25,000,000. Additional policy limits are available at generally favorable rates. One quotation, now out of date, provided an additional $10,000,000 in policy limits for $6,750.

Mendocino County Ordinance Chapter 5.62 section 5.62.010 provides for the establishment, by the County Auditor, of “a separate interest-bearing trust fund entitled: “General Liability Trust Fund.” (Ord. N. 3132, adopted 1978.) This Trust Fund is specifically designed as the depository for monies that are to be set aside primarily for incurred losses and related loss and adjustment expenses, and to include “incurred but not reported losses”. Section §5.62.040 (A) Further provides that “The balance of the General Liability Trust Fund shall remain actuarially sound at all times and at no less than the seventy percent (70%) confidence level”. The most recent Actuarial Review of the Self-Insured Liability Program for the 2003-2004 Policy Year provides the following estimates of loss and loss adjustment expense costs for the County. The costs of claims and adjustment expenses incurred in the 2003-2004 program year are projected to be $838,000. This includes both allocated loss adjustment expenses (ALAE), and unallocated adjustment expenses (ULAE), and includes claims that will be known (reported) during the program year as well as losses incurred but not reported (IBNR). Allocated loss adjustment expenses are associated with the settlement of individual and specific claims, while unallocated loss adjustment expenses are associated with all other costs that are incurred in the administration and settlement of the claims inventory, but are not attributed to a specific loss. IBNR represents the cost of losses that will emanate from occurrences during the program year, but which may well not be known for an undetermined number of years in the future. Additionally, the Actuarial Study estimates that as of June 30, 2003, the program’s liability for outstanding claims (including ALAE, ULAE, and IBNR) will be $1,603,000. The actuary (Bickmore Risk Services) further estimates the program assets at a negative ($199,000), and attributes the negative assets are “due to the fact that the program is operated on a “pay as you go” basis. The Board of Supervisors has clearly failed to comply with County Ordinance §5.62.040 (A) (requiring funding at the 70% “confidence level”) which (as of June 30, 2003), as noted in the Actuarial Report, requires that approximately $2,014,000 be contributed to the General Liability Trust Fund. The (Bickmore) Report further points out that Governmental Accounting Standards Board (GASB) Statement #10 “requires the County to accrue a liability on its financial statements for the ultimate cost of claims and expenses associated with all reported and unreported claims, including ALAE and ULAE”. The report further states, “The $1,603,000 estimate (of the programs liability for claims and expenses as of June 30,2003) is the minimum liability to be booked by the County in accordance with Governmental Accounting Standards Board Statement #10". The Grand Jury acknowledges that the above $2,014,000 is not a catastrophic financial shortfall, but does represent non-compliance with the County Ordinance, and is not a sound business practice which would dictate the accrual of funds (reserves for losses) as they are incurred rather then the current “pay as you go” practice.

The Bickmore Actuarial Report also recommends a plan for amortizing the June 30, 2003 funding deficit over a five year period (pages 2 & 3).

The Risk Manager is currently reviewing a proposal to fully insure the liability program in excess of a $10,000 self-insured retention. The proposal is from the CSAC Excess Insurance Authority for participation in their Primary General Liability Program (PGL). The cost for the fully insured program for Program Year 2003-2004 has been represented to be $581,615 with an additional deductible fund deposit of approximately $35,600. The program policy is written on an occurrence basis and would effectively eliminate the $200,000 self-insured retention, (a small $10,000 self-insured retention would remain). While the CSAC-EIA Program would provide coverage for most liability claims, it should be noted that there would be some coverages and legal expenses not afforded by this program which would, of necessity, be retained by the County Counsel’s Office. Further, it would not absolutely “replicate the legal representation provided by” the County Counsel’s Office.