FINANCIAL MANAGEMENT/Controlling claims costs cuts risk

Public risk expenses are rising. In its 1996 survey of 294 local governments, the Public Risk Management Association, Arlington, Va., found that the average cost of risk was $6.7 million, up from $6.2 million for two years earlier.

Effective loss prevention is the best way to reduce liabilities. But cities and counties also need to address cost control once a claim has been made. The following resolutions will help manage claims costs.

Resolution 1. Conduct a risk analysis. When a claim is made, governments sometimes feel compelled to defend a case to the bitter end. That can prove costly. A better response is to conduct an objective risk assessment before determining a defense strategy. Key steps include: * Notifying the insurance carrier(s) of the actual or potential claim; * Evaluating whether the entity has faced similar claims or whether the claimant has filed against the entity before; * Talking with the claimant’s attorney to understand the claimant’s position; * Determining whether a suit has been filed. (A claimant may simply have filed a grievance; if no lawsuit has been filed, costs can be diminished by resolving a problem outside of court.); * Determining the entity’s exposure factor and calibrating resources committed to each claim based on its severity; * Assessing settlement options. Is the lawsuit reasonable? Can the claim be settled for less than the requested amount? The answers to those questions may offer alternatives to a courtroom battle. Resolution 2. Select counsel carefully. Defendants should: * Make sure counsel has expertise in the area of litigation in question. * Determine whether counsel is acceptable to the insurer. Since insurers can be liable for some defense costs, their approval of counsel can promote resolution. * Research legal defense firms, and interview them personally. * Avoid choosing counsel based on hourly fees. Low charges will not result in savings if inexperienced counsel must bill more time than a seasoned attorney for the same tasks.

Resolution 3. Consider alternative dispute resolution. A third party can sometimes help resolve a case early, through mediation or arbitration, saving time and defense costs. Mediation involves assisted negotiation with neutral third parties. It can streamline case processing and provide quicker resolutions than can adjudication.

Increasingly, mediators are specializing in areas such as employment relations. Others have developed a distinctive conflict mediation style, such as settling, fixing and reconciling. Those options allow entities to find a suitable mediator that specializes in the subject matter as well as the means of resolution.

Arbitration operates somewhat like a trial, with attorneys questioning witnesses and attempting to persuade arbitrators. Decisions are usually upheld in court; reversals often involve a party preserving an objection before or during the hearing.

Arbitration can offset power imbalances, focuses on past events and promotes speedy resolution and privacy. Mediation, in contrast, aims to preserve continuing relations; emphasizes future dealings; and often involves multiple parties and issues.

Some state statutes authorize a person to submit to arbitration controversies that might otherwise be the subject of a civil action. A number of courts have deemed municipalities persons for purposes of submitting disputes to arbitration.

Effective risk management remains the strongest defense against high claims costs. But responding to claims analytically also reduces those expenses.