LOS ANGELES UNIFIED SCHOOL DISTRICT ENTERPRISE RISK MANAGEMENT STUDY INSURANCE RISK MANAGEMENT AND WORKERS’ COMPENSATION REVIEW
PricewaterhouseCoopers LLP Los Angeles, California April 22, 2002
PricewaterhouseCoopers LLP 400 S. Hope St. Los Angeles CA 90071-2889 Telephone (213) 236-3000 Facsimile (213) 622-9062
April 22, 2002
Mr. Don Mullinax, Inspector General Los Angeles Unified School District Office of the Inspector General 355 S. Grand Avenue, Suite 300 Los Angeles, CA 90071 Dear Mr. Mullinax: Attached is PricewaterhouseCoopers LLP’s review of the Los Angeles Unified School District’s insurance risk management and workers’ compensation functions. The Executive Summary beginning on page 3 summarizes our overall findings and recommendations. We greatly appreciated the assistance of the Office of the Inspector General, other LAUSD personnel, and certain third party vendors in conducting our study. If you have any questions regarding this report, please do not hesitate to call Brian Jones at (213) 236-3407 or Brian Brown at (213) 236-3277. Sincerely,
PricewaterhouseCoopers LLP
TABLE OF CONTENTS
Page Introduction................................................................................................................1 Executive Summary ...................................................................................................2 Insurance Risk Management Review......................................................................8 Organizational Structure and Staffing..............................................................................8 Practices & Procedures...............................................................................................10 Insurance Coverage Review........................................................................................14 Workers’ Compensation Safety Programs ...................................................................18 Background on LAUSD’s Workers’ Compensation Program...............................21 Workers’ Compensation Cost Drivers and Trends ................................................23 California Workers’ Compensation Environment..........................................................23 The Impact of LAUSD Staffing Levels.........................................................................27 LAUSD’s Claim Frequency........................................................................................28 LAUSD’s Claim Severity............................................................................................29 LAUSD’s Cost per Employee/Payroll .........................................................................30 Comments on LAUSD Actuarial Studies .....................................................................31 Workers’ Compensation Claims Administration Review......................................34 Purpose ......................................................................................................................34 Methodology ..............................................................................................................34 Structure of the Claims Function..................................................................................35 Internal District Procedures .........................................................................................37 Vendor Management...................................................................................................46 Liability Claims Administration Review.................................................................50 Appendices Appendix 1 – List of Interviewees ...............................................................................51 Appendix 2 - Sample Broker Service Agreement.........................................................52 Appendix 3 - Sample Table of Contents for Emergency Procedures Manual.................68
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INTRODUCTION Los Angeles Unified School District’s (LAUSD or the District) Office of the Inspector General retained PricewaterhouseCoopers LLP (PwC) to perform a study of its Enterprise Risk Management (ERM) infrastructure. This study is designed to provide an important first step in enhancing LAUSD’s capability to identify and manage the many and varied risks facing the organization. As part of this study, LAUSD has asked us to focus specific attention on its insurance risk management function and its self-insured workers’ compensation program. To address LAUSD’s insurance risk management and workers’ compensation concerns, we conducted a review of LAUSD’s insurance risk management, safety, legal, claims, contracts, actuarial, financial and operational functions. In the process of our study, we gained valuable insights from interviews with 25 individuals listed in Appendix 1 of this report. We wish to thank these individuals and other representatives from LAUSD’s Office of the Inspector General in providing their assistance with this project.
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EXECUTIVE SUMMARY Historically, LAUSD’s insurance risk management function has been weak due to inadequate internal risk management skills sets, a fragmented approach to identifying, assessing and managing LAUSD’s exposures, and uncoordinated employee communications. As a result, the risk management organizational structure and practices and procedures need substantial improvements and current insurance coverages should be reviewed to ensure alignment with LAUSD objectives, adequacy of policy limits, coordination among coverages, appropriateness of insurance service fees/premiums, etc. Like other California employers, LAUSD’s workers’ compensation costs have increased significantly in recent years due to a high rate of claim severity inflation. In addition, LAUSD’s exposure to workers’ compensation claims is increasing due to higher staffing levels. The following graph displays the District’s annual cost of workers’ compensation claims as estimated in its most recent actuarial study, conducted by Advanced Risk Management Techniques, Inc. (Armtech) and dated June 18, 2001.
Los Angeles Unified School District Workers' Compensation Projected Ultimate Loss Millions $110 $100 $90 $80 $70 $60 $50 $40 $30 $20
Fiscal Year
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Although the District’s third-party administrator (TPA) appears to be handling claims adequately, its effectiveness is compromised by LAUSD’s historical lack of focus on employee injuries, uncoordinated approach to addressing workers’ compensation issues, lack of communication and accountability for the cost of risk, and other unique environmental and cultural issues. Since the Office of General Counsel’s (OGC) assumption of responsibility for the Insurance Services Division last year, considerably more attention has been spent on identifying problems and developing solutions in LAUSD’s insurance risk management and workers’ compensation functions. Within this report, we make many observations and recommendations to enhance LAUSD’s insurance risk management function and to improve controls over its Workers’ Compensation Program. We understand that OGC has already begun to address some of these issues. We have prioritized our recommendations into high, medium, and low rankings in various categories based on our perceived risk to the District and the potential cost savings or opportunity cost. The table below summarizes the number of recommendations in each category.
LOS ANGELES UNIFIED SCHOOL DISTRICT SUMMARY OF RECOMMENTATIONS BY PRIORITY
Category Insurance Risk Management Organizational Structure Insurance Risk Management Practices & Procedures Insurance Coverages Insurance Risk Management Information Systems Safety / Loss Control / Training Financial / Actuarial Matters Workers’ Compensation Claims Administration Liability Claims Administration Total
High
Priority Medium
Low
Total
3 0 2 2 1 4 9 0
0 9 5 0 1 3 2 4
0 3 5 0 0 1 2 0
3 12 12 2 2 8 13 4
21
24
11
56
A complete listing of our specific recommendations is provided in the following table and further details are included later in the report.
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INSURANCE RISK MANAGEMENT ORGANIZATIONAL STRUCTURE Item
Priority
Recommendation
1.
High
Hire an experienced risk management professional to supplement existing staff.
2.
High
Restructure the responsibilities of the Insurance Services Division to ensure that the critical exposures are being appropriately addressed and that items that have the greatest potential for cost savings are being pursued.
3.
High
Encourage further collaboration among departments (OGC/Insurance Services, OEHS, Personnel, Facilities, Contracts) to increase the District’s overall risk management function regarding risk identification, quantification, and mitigation.
INSURANCE RISK MANAGEMENT PRACTICES & PROCEDURES Item
Priority
Recommendation
4.
Medium
Update property valuations/appraisals to help determine appropriate property coverage limits.
5.
Medium
Develop a written brokerage service agreement with Driver-Alliant stipulating services, deliverables, timetable, and service team and a compensation figure that is tied to meeting objectives rather than to a percentage of premium that may increase with no increase in services provided.
6.
Medium
Require that all purchases of insurance be handled by the Office of General Counsel/ Insurance Services Division.
7.
Medium
Review counter-party/vendor insurance certification procedures.
8.
Medium
Establish a risk management web page for employees to more effectively communicate the policies and procedures associated with injured workers.
9.
Medium
Review insurance requirements for major bus contractors.
10.
Medium
Review and ensure proper notification to excess liability insurers.
11.
Medium
Conduct stringent driver screening and background checks of all bus drivers.
12.
Medium
Form a joint Risk Management/EH&S/Helmsman committee to streamline, rationalize, and enhance the communications sent to personnel, e.g., Emergency Procedure Manuals.
13.
Low
For employees utilizing District vehicles, conduct periodic screening of driving violations and take appropriate action if merited. Restrict the use of District vehicles to either employees only or employees and spouses only (no dependents).
14.
Low
Develop written policy with regard to insurance policy record retention.
15.
Low
Periodically (e.g., every 3-5 years) undergo a competitive bidding process for risk management,
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actuarial, and brokerage services.
INSURANCE COVERAGES Item
Priority
Recommendation
16.
High
Review the adequacy of the limits of property coverage purchased, especially in light of a low loss limit of insurance ($100 million) compared to total insured values approaching $6 billion.
17.
High
In the Owner Controlled Insurance Program (OCIP), work with AON to reduce LAUSD’s exposure to potential financial difficulties of TIG, a carrier providing the primarily layer of insurance.
18.
Medium
Renegotiate the service and compensation agreement with AON on the OCIP program as soon as possible to formulate more favorable fee payment terms and to eliminate undesirable indemnification provisions.
19.
Medium
Due to likely increases in the cost of property coverage, consider developing an internal fund to cover lower level losses.
20.
Medium
Review liability policy to reconsider the appropriateness of exclusions for punitive damages, day care facilities, fiduciary liability, employment practices, etc.
21.
Medium
Review the necessity of the Public Officials Errors & Omissions policy providing a $1,000,000 limit with a $500 deductible for the period 11/1/01-02 in light of the District’s $3,000,000 selfinsured retention policy.
22.
Medium
Within the OCIP program, reexamine the construction’s actual progress vs. projections to ensure appropriateness of OCIP terms.
23.
Low
Develop a written policy statement to address management of insurance policy exclusions such as AIDS/HIV/ARC, corporal punishment, and trampolines to heighten awareness of these exposures and risk mitigating actions that can be taken.
24.
Low
Attempt to locate excess workers’ compensation policies purchased in the late 1980’s and early 1990’s.
25.
Low
Attach an ERISA endorsement to the property insurance floater to cover loss of funds from any ERISA-qualified plans due to an act of employee dishonesty.
26.
Low
Within the District’s dishonesty/crime policy, broaden the definition of “employees” to include elected officials, student teachers, and consultants on long-term contracts.
27.
Low
Have insurance broker conduct a study of the District’s catastrophic/large loss/uninsured exposure, e.g., earthquake.
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INSURANCE RISK MANAGEMENT INFORMATION SYSTEMS Item
Risk
Recommendation
28.
High
Track LAUSD’s annual total cost of risk, including self-insurance insured claims and insurance premiums, and identify its exposure to uninsured risks, e.g., earthquake.
29.
High
Develop and disseminate customized claims management reports to help understand the key drivers and trends in LAUSD’s workers’ compensation experience.
SAFETY / LOSS CONTROL / TRAINING Item
Risk
Recommendation
30.
High
Align the workers’ compensation staff and Office of Environmental Health & Safety staff for more direct communications regarding workers’ compensation issues.
31.
Medium
Continue to utilize, if not expand, Helmsman’s Loss Control services to further supplement the efforts of OEHS, but with a more focused and pre-determined scope of services.
FINANCIAL / ACTUARIAL MATTERS Item
Risk
Recommendation
32.
High
Conduct annual actuarial studies for all of LAUSD’s self-insurance funds – Workers’ Compensation, Liability, and Health & Welfare Benefits.
33.
High
Utilize other sources of similar workers’ compensation experience, i.e., statewide patterns and trends published by the WCIRB, to supplement LAUSD’s experience in its next actuarial study.
34.
High
Update payroll information used in actuarial study and provide projections for future years that take into account expected changes in employment levels and wage inflation.
35.
High
Consider the impact of AB 749 in future funding analyses.
36.
Medium
Implement a cost allocation scheme so the District can heighten awareness of workers’ compensation costs and focus attention on problem schools, clusters, or administrative units.
37.
Medium
For upcoming actuarial studies, the TPA should reconstruct and maintain LAUSD’s entire workers’ compensation claims history (going back to fiscal year 1976-77).
38.
Medium
Reflect excess workers’ compensation coverage in outstanding liabilities if available and collectible.
39.
Low
Expand the scope of the workers’ compensation actuarial work to develop more precise estimates and a better understanding of the trends and cost drivers affecting LAUSD’s workers’ compensation experience.
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WORKERS’ COMPENSATION CLAIMS ADMINISTRATION Item
Risk
Recommendation
40.
High
Restructure and potentially increase the workers’ compensation staff resources within OGC/Insurance Services to concentrate on the functions with the greatest potential reduction of workers’ compensation costs.
41.
High
Continue efforts to accelerate the initial reporting of new claims so that claims management can be initiated promptly, e.g., implementation of internet reporting capability.
WORKERS’ COMPENSATION CLAIMS ADMINISTRATION Item
Risk
Recommendation
42.
High
Review and evaluate LAUSD’s Authorized Medical Provider List to determine if some of the providers can be added to Helmsman’s PPO network with associated fee reductions and controls. If not, then the District should consider dropping non-participating and/or noncooperative medical providers so the District can obtain the full benefit of the cost savings that exist in the Helmsman network.
43.
High
Evaluate and remove medical providers from LAUSD’s Authorized Medical Provider List that do not actively participate in the District and Helmsman’s case management activities.
44.
High
Increase the utilization of the Early Return-to-Work program.
45.
High
Negotiate cross-union return-to-work programs to reduce current restrictions in the District’s Early Return-to-Work program.
46.
High
Incorporate the District’s Reasonable Accommodations Committee, or some components of its responsibility, into the Early Return-to-Work program so that employees who are released to return to work with permanent or long-term restrictions may be placed back to work in a timelier manner.
47.
High
Periodically (e.g., every 3-5 years) undergo a competitive bidding process for TPA services to insure that LAUSD is obtaining a high level of service at a competitive rate.
48.
High
Create claims management standards for TPA direction, and tie the TPA’s compensation to program compliance and achievement of objectives.
49.
Medium
Periodically (e.g., every 1-2 years) conduct an audit of the TPA’s claims management performance.
50.
Medium
Incorporate the workers’ compensation policies and procedures, including those for the TPA, into a Policies and Procedures manual that will be available on-line for all LAUSD employees.
51.
Low
Consider outsourcing certain high-cost functions to avoid union-related issues, to diminish abuse related to seasonal work schedules, and to reduce participation in generous LAUSD benefits plans that reduce financial incentives to return to work.
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52.
Low
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Coordinate benefits, e.g., workers’ compensation, with the California Family Leave Act.
LIABILITY CLAIMS ADMINISTRATION Item
Risk
Recommendation
53.
Medium
Periodically (e.g., every 1-2 years) conduct an audit of the TPA’s claims management performance.
54.
Medium
Periodically (e.g., every 3-5 years) undergo a competitive bidding process for TPA services to insure that LAUSD is obtaining a high level of service at a competitive rate.
55.
Medium
Create claims management standards for TPA direction, and tie the TPA’s compensation to program compliance and achievement of objectives.
56.
Medium
Incorporate the liability policies and procedures, including those for the TPA, into a Policies and Procedures manual that will be available on-line for all LAUSD employees.
INSURANCE RISK MANAGEMENT REVIEW ORGANIZATIONAL STRUCTURE AND STAFFING Over the past couple of years, a great deal of reorganization has occurred at LAUSD affecting its insurance risk management and workers’ compensation functions. In April 2000, the Contracts and Insurance Services branch, led by Ms. Karen Hemingway and reporting to the Business Services Division, was split into two units – Procurement Services (Contracts) and Insurance Services. In July 2001, responsibility for the Insurance Services Division was transferred to the Office of General Counsel because of its interest in risk management, the large amount of litigation involved in certain insurance programs, and its perceived ability to better control/manage litigated settlements and expenses. The Business Services Division, however, retained responsibility for health insurance matters. In the Fall of 2001, OGC hired several attorneys to increase the District’s risk management efforts and bring in-house attorney involvement to the handling of claims and tort lawsuits. Ms. Hemingway retired from LAUSD’s Insurance Services Division in December 2001.
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The organizational chart below displays OGC’s current oversight of the Insurance Services Division. RICK DEEB (Assoc Gen Co II)
CARL PIPER
JESUS MELENDEZ
(Asst Gen Co)
(Staff Counsel)
WENDY MACY (Assoc Gen Co I)
MILLIE MIYAZAKI (Proposed Ins Specialist)
JANICE SAWYER (Princ Admin Analyst)
PAT BROWN BOB DEEGAN
LISA ATIENZA
(CPS)
(CPS)
SUSAN RODRIGUEZ (Contracts Supervisor)
CARLOS GARCIA (Ins Rep)
DUAN LEVERSON (Ins Rep)
MICHELLE MISTRI (WC CPS)
RAQUEL ACOSTA (Ins Rep)
CARMEL PASA STAN POTTS
NORMA TONG
(Ins Rep)
(Claims Rep)
(Comp)
WANDA CAPERS (Ins Rep)
ANA CORTEZ
LINDA MOHILCHOCK (Ins Rep)
ROSALIE LOMELI
In addition to its current staffing, the District utilizes the consulting services of Mr. Steven Miller of Sensus Consulting. Until recently, part-time consultation was also sought from Ms. Karen Hemingway, former Director of Contracts and Insurance Services branch of the District. The Insurance Services Division currently has responsibility for LAUSD’s Workers’ Compensation, Liability, and Early Return-to-Work programs as well as unemployment insurance, the employee reimbursement program, tax-sheltered annuities, and other insurance programs. Historically, we do not believe that the District has employed an individual who possesses sufficient insurance and risk management knowledge (apart from the claims function) to be an effective District risk management professional. We understand that OGC has recognized this need and we support its efforts to hire an experienced risk management professional to supplement or replace some of the existing staff as soon as possible. We believe a risk management analyst with at least 10 years of experience in the purchase of insurance and the management of risk financing programs would prove a valuable addition to the department. This individual should have professional designations such as “Associate of Risk Management
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(ARM) and Chartered Property Casualty Underwriter (CPCU)” and shall have experience in another risk management department or an insurance brokerage firm. The Early Return-to-Work program, which currently addresses temporary restrictions, should be expanded to include long-term and permanent restrictions. The OGC should also be responsible for increasing workers’ compensation emphasis across LAUSD, which may include the following responsibilities: •
Generating and distributing loss reports to inform site administrators of their workers’ compensation costs.
•
Increased communication and training with site administrators relative to steps they can take to reduce their claims costs, including pre-injury and post-injury activities.
•
Frequent review of the services provided by the authorized medical providers.
•
Coordination of workers’ compensation benefits with the Industrial Injury Absence benefits, and discussions with the unions on cost-reduction methods.
•
Close coordination and teamwork with OEHS representatives who are responsible for workplace safety.
•
Allocation of workers’ compensation costs to the responsible cost centers.
The Contract Supervisor of LAUSD’s Insurance Services office is currently on a leave of absence, and her return date is unclear. The responsibilities of the Insurance Services Division should be restructured to ensure that the critical items that have the greatest potential for cost savings are addressed. Michelle Mistri, Workers’ Compensation Claims Supervisor in LAUSD’s Insurance Services Department, possesses claims management experience and should continue her responsibilities in vendor management, which include review of Helmsman’s activities, approval of settlement proposals, and other activities. For an organization as large as LAUSD, primary risk management capability should be maintained internally. Use of outside risk management consultants can be useful to supplement internal resources, for special projects, and to provide an objective perspective to various risk management issues and alternatives. PRACTICES & PROCEDURES Property and Asset Valuations
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We understand the Facilities department is responsible for the District’s real estate and plants and for providing valuation figures on these assets for insurance purposes. We were told that this department was in the process of engaging a firm to conduct property valuations/appraisals. This update is strongly advised, particularly in light of the low loss limit of insurance ($100 million) compared to total insured values approaching $6 billion. It is possible that the limit of coverage could be low in relation to the true exposure. Additionally, data on construction type, age, protection and exposed properties will need to be collected and provided to insurance underwriters, since insurers are requiring more detailed information on the risks they insure to minimize their own exposure to loss. Counter-Party/Vendor Insurance Certification LAUSD’s Contracts department is now responsible for ensuring that the District’s counterparties and vendors maintain adequate insurance for goods and services provided. Previously, when Contracts and Insurance Services were within one branch, we were told that standards and procedures existed for reviewing contracts; however, no written policies or procedures could be produced for our review. Since the District is self-insured for the first $3,000,000 of each and every general liability and auto liability claim and is fully self-insured for workers’ compensation, it is important that evidence of insurance be obtained from any party providing goods and services to the District and/or working on any of the District’s premises. The District should generally be named as an additional insured on the vendor’s general liability policy, and a waiver of subrogation should be provided on all policies covering the vendor for the benefit of the District. Suggested minimum limits of insurance that should be carried by vendors are $1,000,000 per occurrence and $2,000,000 in the aggregate for general and product liability, $1,000,000 per occurrence for auto liability if vehicles come onto the District’s premises, and statutory workers’ compensation and employers liability of at least $100,000/$500,000/$100,000 if the vendors’ employees work on the District’s premises. If any of the vendors are covered under the OCIP program, these insurance requirements may not be necessary. If the services or goods provided by the vendor are ongoing, it will be necessary to obtain and maintain current certificates of insurance. The District will need to develop a diary system to prompt a request for an updated certificate at least 30 days prior to any policy expiration. Notification of Claims to Excess Carriers Based on our review of the District’s excess liability insurance program, the District’s risk management function has historically failed to comply with the notification provisions stated in the policy documentation. Generally, the notification provisions require the District to notify the excess carrier in the event an incident results in certain types of injuries (i.e. paralysis, loss of
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limb, eye, etc.) and/or if it appears the damages or demand will exceed one half the self-insured retention. The policy clearly stipulates when the insurer should be put on notice, so it may make the decision whether or not to participate in the defense of the claim. Failure to properly notify the insurer per these policy provisions could result in the denial of excess coverage in the event the claim exceeds the $3,000,000 self-insured retention. We understand that there have only been a few claims in recent years that have exceeded the retention, and in one case, the insurer did not pay a portion of the legal expenses associated with a large judgment due to late notice. Apparently, the verdict greatly exceeded the District’s expectations and the excess carrier was not given notice until after the trial. Although the carrier paid its portion of the judgment that fell within its excess layer of coverage, it did not pay about $400,000 in associated legal fees. Broker Services Agreement and Compensation The District has been utilizing the services of Driver-Alliant as its insurance broker for a number of years. Mr. Dan McLean is the account executive and he (as well as Driver-Alliant) has substantial experience in the placement of insurance programs for public entities. Historically, it appears that there has been no written brokerage service agreement executed between the District and Driver-Alliant. Also, Driver-Alliant appears to be compensated on a fee-for-service basis, as a fee is stipulated on each invoice separately from the premium. However, the fee appears to be a percentage of premium and is therefore equivalent to a commission. We strongly suggest that a written agreement stipulating Driver-Alliant’s services, deliverables, timetable, and service team be developed and that compensation not be tied to a percentage of premium. In an appendix to this report, we provide some sample wording for such an agreement. Insurance Purchasing Controls The District should make it clear to all departments that only the OGC/Insurance Services Division is authorized to purchase insurance. There have been a few instances where other departments have purchased insurance (i.e. the broadcasting facility). It is important to centralize the purchasing of insurance for several reasons. First, the purchase of some types of coverages could lead to claim settlement problems if duplicate coverages are purchased on the same risk. Second, the premium expenditures need to be captured by the Insurance Services Division so it can accurately keep track of the District’s cost of risk. Third, the purchase of insurance by unauthorized parties may be in violation of the District’s risk retention/self insurance strategy/policy. As a control mechanism, the Accounts Payable department should be instructed not to reimburse an employee or to disburse a payment for payment of premium unless approved by the OGC/Insurance Services Division. District Owned Vehicle Usage Policy
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We understand that there is no written policy regarding the use of District-owned vehicles, including those that are taken home by employees. Since the District is self-insured for the first $3,000,000 of each auto liability claim it would be in the District’s best interest to restrict the use of vehicles to employees only or to employees and spouses only. No children of employees should be allowed to operate a District-owned vehicle. Also, drivers of District-owned vehicles should be periodically screened for driving violations, and appropriate actions should be taken if merited. Presumably the District’s Transportation department conducts proper screenings of its bus drivers. If this is not the case, then a stringent driver screening and background check of all bus drivers and of applicants for bus driver positions should be conducted. We were informed that as much as 50% of the buses used by the District are operated by contractors such as Laidlaw. We suggest that the contractors’ contracts with the District be reviewed for insurance requirements and that these contractors be required to provide at a minimum, $10,000,000 per occurrence for auto liability claims and statutory workers’ compensation and employers liability coverage of at least $100,000/$500,000/$100,000. Failure to ensure that these contractors are properly insured could expose the District to significant risk within its liability and workers’ compensation self-insurance programs. Risk Management Communications to District Personnel From our review of various historical communications to District personnel, it appears that there is inconsistency and incompleteness in the risk management communications being sent out to personnel. A key example is the two Emergency Procedure Manuals prepared by the Office of Environmental, Health and Safety (OEHS) and the Office of Emergency Services (OES). We would suggest that a committee be convened to streamline, rationalize and enhance the communications sent to personnel. In the appendix, we provide suggestions as to improvements in the Emergency Procedure Manuals. From our interviews, it was apparent that communications between the departments issuing risk management communications to personnel do not collaborate to maximize impact and to minimize conflict and confusion. We believe that it is important for the Facilities, OEHS, OES, Personnel, Contracts, and OGC/Insurance Services departments to collaborate on risk identification, quantification, and mitigation in order to increase the effectiveness of the District’s overall risk management function. We understand that a website is being developed for Insurance Services to assist in the communication of risk management and claims procedures to District personnel. We have seen many organizations with employees in disperse locations use this approach with much success. Typically, secured intranet and internet sites are available that can be accessed by employees to obtain a wide variety of information ranging from saving and investment plans, claim forms, and other policies and procedures. These systems can be accessed from any computer using a user ID and password. We suggest that a specific site be prepared specifically for claims notifications, insurance
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information and requirements for vendors, policies, procedures and emergency response plans. Insurance Record Keeping We were told that the Insurance Services Division has no written policy for record retention. It is particularly important to retain copies of insurance policies covering “long tailed” loss exposures such as all liability and workers’ compensation. An annual insurance summary should also be developed showing coverages, limits, carriers, premiums, etc. We understand that the District may have purchased excess workers’ compensation coverages for certain years in the late 1980’s and early 1990’s. However, records of these policies may no longer exist, so it may be difficult or impossible to seek potential recoveries. Additionally, if the District had record of general liability insurance policies dating back into the 1970’s, it possibly could avail itself of the environmental liability coverage that underwriters inadvertently granted in such policies. The District should request copies of insurance schedules from Driver-Alliant for the years they have managed the account and request copies of policies that are not in its possession.
Uninsured Exposures – Fiduciary, Employment Practices liability The District fully retains exposure for these types of claims since its excess liability program excludes such coverages. The District could be exposed to fiduciary liability claims arising out of its administration of employee benefit plans and savings plans. Despite the fact that all the retirement and savings plan investments in the 403(b) plans are managed by CALPERS, the District could commit an error or omission in the collection and transmittal of funds to CALPERS. It could also commit an error or omission in the enrollment, administration and renewal of medical and dental benefit plans. We suggest that the District obtain quotes for this coverage at the July 1 renewal date of its other coverages to evaluate the costs and protections offered by a Fiduciary Liability program. Emergency Procedures Manuals We have reviewed the two emergency procedure manuals provided by the District. One is presumably prepared and periodically updated by the Office of Emergency Services and the other was prepared in December 2001 by the Office of Environmental Health & Safety.
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We have determined that there is a need to coordinate and/or combine these two manuals to increase ease of use by the recipients, reduce the volume of paper being distributed, and to be more comprehensive in nature. Each manual has its own strengths and weaknesses. In Appendix 2 we have provided a suggested table of contents plus specific points that should be addressed by section in the manual(s). INSURANCE COVERAGE REVIEW District Property Insurance Program LAUSD currently purchases all-risk property insurance on all of its locations and carries business interruption coverage on only specified locations developed from bond funds. Limited flood ($5,000,000) and no earthquake coverage are purchased with the exception of the Beaudry location. The property insurance program has a limit of $100 million per loss with additional limits purchased for the largest location (Beaudry). The deductibles of $500,000 per occurrence for property damage and $50,000 for business interruption are reasonable, if not low, for an organization of LAUSD’s size. The general insurance market will likely impose higher deductibles at renewal in July 2002.
The structure of this program appears reasonable given market conditions and funds available to pay premiums. We are concerned, however, about the adequacy of the limit of coverage purchased. In the previous section on Property and Asset Valuations, we discuss our recommendations to enable the District to achieve more confidence in the adequacy of its coverage limits. District General, Auto and Professional Liability Excess Program The District purchases excess liability covering claims above a $3,000,000 self insured retention for general liability, auto liability, and school board professional liability. This policy contains numerous provisions (requiring, for example, notification of claims which have the potential to breach the retention amount), various conditions, and other exclusions. Most of the conditions and exclusions are typical of policies covering organizations such as the District. There are a number of exclusions on the policy that could prove problematic, including: •
Punitive damages are excluded. Preferred wording would be for the policy to remain silent or to cover them on a most favorable venue basis.
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•
Claims arising from day care facilities are excluded. If the District operates or allows to be operated on its premises, day care facilities for children of its students, this represents an uncovered risk.
•
Any claims arising out of the transmission of AIDS/HIV/ARC, the use of corporal punishment, or the use of trampolines are excluded. The District should develop a written policy to address the management of these exposures in an attempt to heighten awareness of this exposure and of risk mitigating actions that can be taken.
•
Other types of claims that are excluded under this policy are fiduciary liability and employment practices liability. These exposures were previously addressed.
Expired Excess Workers’ Compensation Program One of the files we reviewed was for an expired excess workers’ compensation policy underwritten by Reliance National Insurance Company (now in liquidation) for the period of 5/1/99 to 7/1/02, but cancelled early. This policy would reimburse the District for losses in excess of $750,000 from a single occurrence.
We understand that this contract was the first excess workers’ compensation policy purchased by the District in many years and that this coverage had been purchased in the late 1980’s and early 1990’s until it became too costly. We inquired if a record of the expired excess workers’ compensation policies was available since there could be an opportunity for the District to inventory their old claims to determine if any of them exceeded the attachment points stipulated in the expired policies. We were told that no such record existed. It is important to maintain records of such policies to enable recovery, since the insurers will not honor a claim under such old policies unless the insured can produce evidence that coverage existed. Many insurers destroy records after several years and cannot refer to their own files for coverage confirmation. Owner Controlled Insurance Program (OCIP) For new construction and renovation projects funded by school bonds, the District has implemented an Owner Controlled Insurance Program (OCIP) through an insurance broker, AON, to provide general liability and workers’ compensation insurance coverage to construction contractors. In order to further understand the history behind this program and its intended purpose, we interviewed Mr. Steven Miller of Sensus Consulting, who has been
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involved in the development and operation of this program since inception. The first issue that we came across during our review of AON’s OCIP manual was the fact that TIG, the insurer for the primary layer of the OCIP, has had its A.M. Best financial security rating downgraded to a B+ (Very Good) recently. TIG is owned by Fairfax, a Canadian insurance holding company. We inquired of Mr. Miller if any actions are being taken by AON to address this downgrade. He replied that he has been in contact with senior executives at AON’s Chicago headquarters who are in turn in contact with Fairfax and have pressured them to improve TIG’s financial position to have its A (Superior or Excellent) rating restored. We suggest that the District have Mr. Miller continue to pursue AON on this matter and come to a resolution in the near future to prevent the District’s and its subcontractors’ coverages from becoming uncollectible. Mr. Miller indicated that he is encouraging AON to identify replacement insurers, insurers to provide support to lessen TIG’s exposure to claims, or to obtain a parental guarantee from Fairfax. If TIG goes into liquidation, the District will likely be unable to obtain a return premium for unearned premiums already paid. It will also have difficulty in collecting claim payments from the liquidator and could possibly face exposure to claims for indemnification by the covered contractors for workers’ compensation and general liability claims, since the District purchased this coverage to protect it as well as the contractors.
We noted that the OCIP program does not provide coverage for Construction Management Errors & Omissions or Contractors’ Professional Liability. If the District has engaged firms to provide management or design services, it should obtain evidence of appropriate insurance for these risks. Additionally, since no Builders’ Risk coverage is provided by the OCIP, and because limited coverage is provided by the District’s property program, the District should seek to obtain Builders’ Risk coverage as soon as possible. One cautionary note regarding Builders’ Risk programs and claims for lost contractors’ equipment: either impose a deductible on claims for lost equipment or exclude coverage for contractors’ equipment. Failure to do either of these could result in the Builders’ Risk policy becoming a no-cost source of equipment replacement for the contractors. OCIPs are a cost-effective way to manage and potentially reduce insurance costs associated with major or ongoing construction projects. If actual construction expenditures exceed projections or if the project falls significantly behind schedule, the cost-effectiveness of an OCIP can be diminished. We suggest that the District have Mr. Miller examine projected and actual construction expenditures/schedules to determine if adjustments to the OCIP term or coverages are warranted. In reviewing the current service agreement executed by LAUSD with AON, it contains some undesirable indemnification provisions, and the fee payment terms are unfavorable to the
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District. The current compensation level seems excessive as it was based on a projected level of construction than was higher than actual activity. In addition to the fee AON receives for servicing the OCIP, its subsidiary, Cambridge Integrated Services, is compensated by TIG for adjusting the claims under the program. AON should make a full accounting of all compensation it receives in any form on this account, and the service and compensation agreement should be renegotiated at the earliest possible opportunity. Property Insurance Floater – Equipment Replacement Program We understand that this insurance policy was purchased in an effort to assist individual schools in limiting their exposure to loss and the resulting capital expenditure required to replace items such as audio visual equipment, computers, etc. The deductible on this policy is very nominal in relation to the master property and liability programs and seems contradictory to the District’s risk retention position. We believe that as the insurance market hardens, this policy will be more expensive to renew given the loss history for the coverage, and we suggest that the District consider developing an internal fund to cover such losses. The various individual schools can contribute to funds to it as premiums and collect from it in the event of a loss.
ERISA regulation requires that ERISA-qualified plans be bonded in an amount equal to 10% of plan assets, up to a maximum of $500,000. The plan is the direct recipient of any claim proceeds. Per Ms. Karen Hemingway, the District’s employee benefit plans are not subject to ERISA regulation. We do not agree with this statement, and we suggest that the District have an ERISA endorsement attached to this policy to cover loss of funds from any ERISA-qualified plans due to an act of employee dishonesty. Employee Dishonesty/Crime The District maintains employee dishonesty coverage in the amount of $500,000 with a deductible of $50,000. Coverage applies only to public employee dishonesty, depositors forgery and computer fraud. The definition of employees (as covered parties) should be broadened to include elected officials, student teachers and consultants on long term contract, otherwise a loss resulting from the act of one of these parties would be excluded. There is no coverage for funds lost off premises or while in transit. If The District has this exposure, which we suspect it has, these coverages should be added to the policy.
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Other Miscellaneous Policies A Public Officials Errors & Omissions policy providing a $1,000,000 limit with a $500 deductible was purchased for the period of 11/1/01-02. A copy of this policy was not available for our review, but we suggest that the necessity of this policy be reviewed to make certain that duplicate coverage is not provided under the master liability insurance program already purchased by the District. If the policy attaches below the District’s $3,000,000 self-insured liability retention, it would seem to contradict the District’s liability risk retention policy. WORKERS’ COMPENATION SAFETY PROGRAMS The District’s Office of Environmental, Health & Safety (OEHS) analyzes its loss history, performs ergonomic evaluations to assist in return-to-work efforts, investigates particularly serious or severe claims, and performs facility inspections. OEHS obtains its workers’ compensation loss information via access to Helmsman’s Risktrac system and adds exposure (e.g., employee count) and other data to monitor the District’s progress. Incidence rates are calculated each quarter, and based on this data, there has been a decrease in incidence rates except for garages. According to a July 25, 2001 memo concerning incidence rates, the incidence rates show the following trends:
INCIDENCE RATES
Department
FY 2000-2001 Incidence Rates Per 100 Employees
Comparison to Previous 3-Year Average
School Maintenance & Operations Area Garages
10.96 17.33 35.49
5% decrease 11% decrease 41% increase
Note: Incidence rates are based on OSHA reportable incidents. These counts differ somewhat from workers’ compensation claim counts.
OEHS provided us with numerous reports generated by Helmsman that reflect its continuing work in the workers’ compensation area. These reports, for the period of 11/1/94 to 11/30/2001, included: • • •
WC Open Claims Only - Loss Area Summary by Severity WC Open Claims Only – Top Ten Loss Areas by Severity (bar chart) WC Open Claims Only – Occupations Summary by Severity
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WC Open Claims Only – Locations Summary by Severity Top Ten Locations by Severity (bar chart) WC Open Claims Only – Occupations summary by Severity, based on range of time open WC Open Claims Only - Litigated versus Non-Litigated Claims (pie chart)
The following reports were based on other time periods: • • • • • • • • •
Highest Percentage Change in Incidence Rates (FY 2000 – 2001 vs. previous 3-year average) Top Ten Locations by Total Incurred Cost for WC Claims 7/1/00 to 6/30/01 (bar chart) Top Ten Locations by Severity (Total Incurred Cost) for WC Claims 7/1/00 to 6/30/01, by loss area (bar chart and line graph) WC Summary – Loss Areas by Severity for 7/1/00 to 6/30/01 WC Summary by Location 7/1/00 to 6/30/01 Incidence Rates – Maintenance and Operations Areas (FY 2000 – 2001) Incidence Rates – Automotive Maintenance (FY 2000 – 2001) 2000 – 2001 WC Claims by School Sites (by Local Districts) for FY 2000 – 2001 Loss Area Summary by Severity for 11/1/94 to 11/30/01
OEHS is currently dedicating many of its personnel and resources to an inspection of District facilities, which is intended to make each facility safe for students and staff. It is OEHS’ goal to inspect each of the approximately 900 District facilities by September 2002, and they have inspected over 300 facilities to date. This inspection program, as well as many other OEHS services, provides benefits to students, staff, and the general public. Therefore, it is difficult in many cases to assign a specific percentage to the time that OEHS spends on the prevention of work-related injuries and illnesses. The District has contracted with Helmsman to provide 500 hours of loss control services annually. Although OEHS has utilized Helmsman in a variety of areas, including loss control training, Cal OSHA training, Industrial Hygiene services, we were not provided with an accounting of Helmsman time commitment. We believe the District should utilize Helmsman’s Loss Control services to further supplement the efforts of OEHS, but with a more focused and pre-determined scope of services. We suggest that Helmsman’s Loss Control specialists continue to focus on training, OSHA compliance, and Industrial Hygiene services so that the District OEHS personnel can dedicate their time to analysis of high-cost areas, inspection and follow-up of the numerous District facilities, investigation of a greater number of work-related incidents, and further analysis and follow-up relative to work-related incidents.
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BACKGROUND ON LAUSD’S WORKERS’ COMPENSATION PROGRAM
In 1977, the District established a Workers’ Compensation Self-Insurance Fund to account for and finance the uninsured risk of claims arising from employee injuries. The District uses a third party claims administrator, Helmsman Management Services, Inc. (Helmsman), to handle its workers’ compensation claims. Beginning in 2002, annual actuarial studies are conducted on the self-insured Workers’ Compensation Program. The following graph displays the District’s annual cost of workers’ compensation claims as estimated in its most recent actuarial study, conducted by Advanced Risk Management Techniques, Inc. (Armtech) and dated June 18, 2001.
Los Angeles Unified School District Workers' Compensation Projected Ultimate Loss Millions $110
$100 $90
$80
$70
$60 $50
$40
$30
2000/01
1999/00
1998/99
1997/98
1996/97
1995/96
1994/95
1993/94
1992/93
1991/92
1990/91
1989/90
1988/89
1987/88
1986/87
1985/86
1984/85
$20
Fiscal Year
In its study, Armtech estimated LAUSD’s outstanding workers’ compensation liabilities to be $379 million as of June 30, 2001. To recognize the inherent variability with such an estimate, Armtech established a range from $341 million to $455 million, or –10% to +20% around its
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best estimate to correspond to possible improvements or deterioration in loss control and claims handling. Due to the long payout pattern of this liability, generally accepted auditing standards allow (but do not require) the liability to be discounted for anticipated investment income. Using an assumed annual investment yield of 5.5%, Armtech estimated the present value of LAUSD’s workers’ compensation liabilities to be $296 million, with a range of reasonableness from $266 million to $355 million. In its 2001 Financial Statements, LAUSD used the low end of Armtech’s present value range ($266 million) as the liability for its Workers’ Compensation Fund. However, the funds available to pay these liabilities were only $194 million, so an under funded liability of $72 million was disclosed. As a result, LAUSD’s 2001 Independent Audit Report, issued by KPMG LLP, Simpson & Simpson, and Nunez & Associates, Inc., contained the following qualification: “The District estimates that the present value of its workers’ compensation selfinsurance claims liability at June 30, 2001 was approximately $71.9 million greater than the recorded liabilities. In our opinion, generally accepted accounting principles with respect to internal service funds require that the total present value of workers’ compensation self-insurance claims liability be recorded.” In its 2001 Notes to Combined Financial Statements, LAUSD states, “This underfunded liability, which is material to Internal Service Funds, is not material to overall District operations. In the adoption of its 2001-02 budget, the District has provided funds to partially cover the underfunding of the Workers’ Compensation Fund.” Although LAUSD has apparently recognized an underfunded liability for workers’ compensation for some time, the amount of the underfunding increased dramatically in 2001 due to significant increases in its projected costs since its last actuarial review. LAUSD’s actuarial report also indicates that the cost to administer open claims to conclusion is typically 5% to 10% of the estimated outstanding losses. LAUSD does not recognize this liability within its financial statements.
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WORKERS’ COMPENSATION COST DRIVERS AND TRENDS LAUSD faces many external and internal issues related to its increasing workers’ compensation costs and to its emerging workers’ compensation experience. In addition to several environmental factors affecting all California employers, LAUSD possesses several unique characteristics that are also driving its costs, including: •
An increasing workforce with constant turnover.
•
Other benefit plans that significantly diminish incentives for injured workers to return to work, e.g., salary continuation, extensive sick leave and vacation time, and disability programs.
•
Difficult union relationships contributing to high litigation rates.
•
Seasonal work schedules that may encourage claims abuse during longer breaks.
•
Certain inherently risky work classifications, e.g., police and bus drivers.
•
A “graying” workforce whose claims are subject to higher medical costs and longer recovery durations.
In this section, we provide some background on the California workers’ compensation environment that is affecting LAUSD’s costs. Using information contained in LAUSD’s most recent actuarial study and other employment information, we make some comments and observations about LAUSD’s emerging workers’ compensation costs. Finally, we provide some recommendations for enhancing future actuarial studies. CALIFORNIA WORKERS’ COMPENSATION ENVIRONMENT In considering LAUSD’s emerging workers’ compensation experience, it is important to understand the impact of changes in California’s workers’ compensation laws. Workers’ Compensation Claim Trends Several significant workers' compensation reforms were passed by the California state legislature in July 1993. While the legislation provided for significant increases in benefit levels over a three-year phase-in period, particularly those related to totally disabled and seriously injured workers, it also limited benefits for certain over-utilized treatments and psychiatric injury claims.
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Since the beginning of the 1990’s, the state of California has experienced a dramatic reduction in claim frequency (claims/payroll) as well as temporary abatement in rising claim severities. This phenomenon was attributed to California’s prolonged recession in the early 1990’s and a successful fight against fraud. The improvement, however, was limited largely to the private sector, as claim frequency remained unchanged at most California public entities. Many private sector employers in the state attribute their success in reducing workers’ compensation costs to their own cost-containment efforts rather than to changes in state regulation or the general economy. These cost-containment efforts included safety initiatives/injury prevention programs, case management, improved communications with injured workers, and return-to-work programs. Allocation schemes were also imposed by many organizations to increase accountability for worker injuries. By 1995, claim frequency was leveling off and increasing claim severity (the average cost of claims) became the dominant factor affecting overall loss costs. Some of the causes we have identified include: • • • • • • • • • •
Significant benefit level increases from the 1993 California Reform Act Treating physician presumption of correctness Inflation, e.g., wage, medical, etc. Aging workforce Ergonomic standards High cost of medical technology, e.g., MRIs, CAT scans, etc. Higher pharmacy costs Increase in the duration of claims Increases in California medical fee schedules Increase in average permanent disability ratings (“PD creep”)
The Workers’ Compensation Insurance Rating Bureau (WCIRB) of California has estimated an 11% annual growth rate in claim severity since 1994, which is well above the level of general and medical inflation. Workers’ compensation costs in California are now at the highest amount ever recorded by the WCIRB. California’s Insurance Marketplace Prior to January 1, 1995, a minimum rate law existed in California that required workers’ compensation carriers to initially charge at least a minimum rate determined by the WCIRB. Competition was largely driven by dividends paid by the carriers at the end of policy periods or through retrospectively-rated plans. As part of the 1993 Reform Act, the minimum rate law was replaced by “open rating” beginning January 1, 1995, allowing insurers to compete for business by determining their own rates.
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With the inception of open rating, commercial insurance premiums plunged in response to favorable claim trends, and the marketplace became fiercely competitive as companies tried to retain or grow their market shares. From 1997 to 1999, insurance rates declined on average to about one-half of the amounts charged in 1993. Guaranteed-cost policies largely replaced dividend and retrospectively-rated policies as employers “locked in” their favorable rates. In addition, many self-insured organizations, including hundreds of public entities, converted to insured programs in the 1995 to 1999 period as market prices became so attractive relative to their own claims experience. The workers’ compensation rate war lasted for a much longer time than expected and ultimately resulted in a dramatic change in the landscape of the California workers’ compensation insurance industry. Most California writers specializing in workers’ compensation, which had once dominated the market, went out of business or were placed under regulatory supervision. Their market shares have been consumed by the State Compensation Insurance Fund (the competitive state fund) and by new entrants and national carriers that have moved into the market as prices finally began to firm. Beginning in 2000, workers’ compensation carriers began to significantly raise rates to more adequately cover the cost of their claims. Average rate increases exceeded 20% in both 2000 and 2001. After advising an industry rate increase of 10.2% effective 1/1/02, the WCIRB has recently suggested an additional mid-term (7/1/02) increase of 10.1%. In response, many of the organizations that had previously switched from self-insurance to insured programs due to low rates are finding insurance coverage terms increasingly unfavorable and may be reconsidering a return to self-insurance. Assembly Bill 749 On February 4, 2002, the California Legislature passed Assembly Bill 749 (AB 749) and the Governor signed the bill on February 15, 2002. AB 749 is the first workers’ compensation benefit increase bill in nine years and significantly increases most classes of workers’ compensation benefits over a four-year phase-in period beginning January 1, 2003. Specific benefit changes include: •
Increases in the maximum temporary total and permanent total weekly benefit from $490 to $602 in 2003, $728 in 2004, $840 in 2005 and by the change in the State Average Weekly Wage (SAWW) in 2006 and thereafter;
•
Increases in the maximum permanent partial disability benefits for certain permanent disability rating intervals in 2003, 2004, 2005, and 2006;
•
Increases in the schedule of weeks for payment of permanent disability benefits in 2004;
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•
Increases in benefit minimums in 2003, 2004, and 2006;
•
Increases in the aggregate death benefit and life pension benefit maximums in 2006; and,
•
Annual cost of living adjustments in weekly life pension and weekly permanent total benefits beginning with injuries occurring in 2003.
When fully implemented in 2006, the WCIRB projects that employers’ workers’ compensation costs in the State (currently projected to be about $15.2 billion in 2003) will increase $2.4 billion, excluding the impact of increased benefit utilization and $3.5 billion, including the impact of increased benefit utilization. Although the bill includes some cost-saving reforms that are intended to reduce aggregate system costs, it is currently difficult to project their realization. The table below displays WCIRB’s estimate of the impact of AB 749 through its phase-in period.
ASSEMBLY BILL 749 ESTIMATED IMPACT OF BENEFIT PROVISIONS
Accident Year 2003 2004 2005 2006
Excluding Impact of Benefit Utilization Incremental Cumulative % Increase % Increase 5.3% 5.3% 2.4% 2.1%
5.3% 10.9% 13.6% 16.0%
Including Impact of Benefit Utilization Incremental Cumulative % Increase % Increase 7.0% 7.8% 3.5% 2.9%
7.0% 15.3% 19.3% 22.8%
AB 749 also contains certain cost-savings reforms that are designed to reduce aggregate system costs such as: • • •
Partial repeal of the treating physician presumption of correctness New procedures related to pharmaceuticals New procedures related to obtaining medical-legal reports.
The WCIRB, however, has no credible statistical information available to prospectively quantify the cost impact, if any, of these system reforms at this time.
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THE IMPACT OF LAUSD’S STAFFING LEVELS Changes in employment level affect workers' compensation costs. As the number of employees increases, workers’ compensation costs would be expected to increase, absent any other changes. As shown in the table below, LAUSD’s overall number of employees increased about 23% between fiscal years 1996-97 and 2000-01.
CHANGES IN LAUSD EMPLOYEES (FULL-TIME EQUIVALENTS) BY LOCATION Employee Classification Classroom Employees Other School Employees Nonschool Employees Bus and Truck Drivers
Dec. 1996-97
Dec. 1997-98
Dec. 1998-99
Dec. 1999-00
Dec. 2000-2001
42,698 17,230 4,245 1,117
45,835 17,691 4,507 1,107
49,059 18,813 4,878 1,002
51,169 19,759 5,383 1,035
52,468 21,032 5,516 1,049
65,289
69,140
73,752
77,345
80,065
Annual % Change
-
5.9%
6.7%
4.9%
3.5%
Cumulative % Change
-
5.9%
13.0%
18.5%
22.6%
Total
Source: Districtwide Staffing at School and Nonschool Location by Independent Analysis Unit, Roger L. Rasmussen, Director, dated July 27, 2001. The primary data source for this report was the District’s payroll master file. The number of full-time equivalent employees (or FTEs) was calculated by dividing hours paid for each employee class by the number of hours in a pay period.
Certificated staff information supplied by LAUSD implies another 3.8% increase in fiscal year 2001-02. LAUSD is currently engaged in the largest building program in its history. Over the next six years, we understand that LAUSD will complete construction of 159 new facilities projects to accommodate “explosive” growth in its student population. The new facilities will accommodate a projected total of 76,871 students. Such growth in facilities and student enrollment will likely lead to higher employment levels and higher workers’ compensation costs, absent any other changes. The current 1 to 10 employee/student ratio at LAUSD implies that another 7,000 to 8,000 employees will be needed to operate the additional facilities.
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LAUSD’S CLAIM FREQUENCY Changes in the volume of claims experienced by LAUSD will obviously affect overall costs. The following table shows the ultimate number of claims projected for the past 16 years as well as claim frequency (claims/employee) in the last few years.
LAUSD WORKERS’ COMPENSATION CLAIM HISTORY
Fiscal Year
1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00
Ultimate Claims (1) 7,950 8,738 7,844 7,499 7,595 7,764 8,010 7,638 7,591 6,449 6,137 6,084 6,436 6,644 6,531 6,893
Number of Employees (2) NA NA NA NA NA NA NA NA NA NA NA NA 65,289 69,140 73,752 77,345
Claim Frequency (1)/(2) (3) NA NA NA NA NA NA NA NA NA NA NA NA .099 .096 .089 .089
Note: Ultimate claims were taken from LAUSD’s last actuarial study performed by Armtech and dated June 18, 2001.
The total number of workers’ compensation claims incurred in each fiscal year was relatively stable from 1984-85 to 1992-93, dropped about 15% in fiscal year 1993-94, and has remained relatively stable since then. We are currently unable to explain the sharp decline in 1993-94, although it may be related to 1993 benefit reforms related to stress claims. The claim frequency statistic in column (3) of the table implies that almost 1 out of every 10 LAUSD employees reports a workers’ compensation injury each year. Although the absolute number of claims is rising in more recent years, employment levels are also increasing, so claim
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frequency (claims/employee) appears to have improved somewhat in the last couple of years. It would be useful, however, to review indemnity-related claim counts apart from medical-only claims. Because the latter typically account for two thirds of the claims but only a small fraction of losses, i.e., 2% to 5%, they can create distortions in claim frequency statistics. LAUSD’S CLAIM SEVERITY The severity of each claim will also impact the overall workers’ compensation cost to LAUSD. In the table below, we display the ultimate average cost of each claim incurred over the last several years as implied by LAUSD’s most recent actuarial study.
LAUSD WORKERS’ COMPENSATION CLAIM SEVERITY
Fiscal Year
1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00
Ultimate Loss (1) 34,436,732 37,459,524 37,655,272 41,138,861 43,231,773 50,241,450 64,010,466 59,616,455 63,063,173 52,863,052 63,473,759 75,358,248 80,076,006 88,101,015 93,611,774 104,395,934
Ultimate Claims (2) 7,950 8,738 7,844 7,499 7,595 7,764 8,010 7,638 7,591 6,449 6,137 6,084 6,436 6,644 6,531 6,893
Claim Severity (1)/(2) (3) 4,332 4,287 4,801 5,486 5,692 6,471 7,991 7,805 8,308 8,197 10,343 12,386 12,442 13,260 14,333 15,145
Percentage Change (4)
-1.0% 12.0% 14.3% 3.8% 13.7% 23.5% -2.3% 6.4% -1.3% 26.2% 19.8% 0.4% 6.6% 8.1% 5.7%
Note: Ultimate losses and claims were taken from LAUSD’s last actuarial study performed by Armtech and dated June 18, 2001.
In the state of California, the WCRIB projects that the average indemnity claim cost in 2000 will be 91% greater than the cost of a 1994 indemnity claim. This represents an annual growth rate since 1994 of 11.4%. LAUSD’s actuarial projections imply an 85% increase in the cost of a claim over a similar period of time, implying an annual growth rate of 10.8%.
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LAUSD’S COST PER EMPLOYEE/PAYROLL Loss costs in relationship to the number of employees or to payroll combine the impacts of changes in both claims frequency and severity.
LAUSD WORKERS’ COMPENSATION LOSS COSTS (PER EMPLOYEE / PER PAYROLL)
Fiscal Year
1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
Ultimate Loss (1) 63,473,759 75,358,248 80,076,006 88,101,015 93,611,774 104,395,934 104,349,585
Number of Employees (2) NA NA 65,289 69,140 73,752 77,345 80,065
Loss Cost Per Employee (1)/(2) (3) NA NA 1,226 1,274 1,269 1,350 1,303
Payroll ($000’s) (4) 2,363,330 2,474,286 2,630,000 2,907,040 3,242,874 3,407,097 3,841,319
Loss Cost Per $100 of Payroll (1)/[(4)/10] (5) 2.69 3.05 3.04 3.03 2.89 3.06 2.72
Notes:
1. 2. 3.
Ultimate loss estimates in column (1) were taken from the 2001 Armtech workers’ compensation actuarial study dated June 18, 2001. Number of employees in column (2) was based on a report, “Districtwide Staffing at School and Nonschool Location,” by Independent Analysis Unit, Roger L. Rasmussen, Director, dated July 27, 2001. Payroll figures in column (4) were taken from Self-Insured Employer reports submitted to the State of California.
In recent years, we have generally observed higher loss cost trends in California workers’ compensation experience than those implied by Armtech’s actuarial estimates in the table above. Due to continued high escalation in costs and certain issues we identified in Armtech’s report (as described below), we have some concerns that current LAUSD ultimate loss cost estimates are understated.
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COMMENTS ON LAUSD’S ACTUARIAL STUDIES Until 2002, LAUSD traditionally had actuarial studies on its self-insured workers’ compensation program performed on a tri-annual schedule. The following comparison of estimates between its 1998 and 2001 studies illustrates the tremendous changes that can occur during intervening time periods.
CHANGES IN ULTIMATE ESTIMATES BETWEEN ARMTECH’S 1998 AND 2001 REPORTS
Fiscal Year
1998 Study (1)
2001 Study (2)
Increase/ (Decrease) (2)-(1) (3)
1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
33,812,233 37,201,151 37,162,412 40,988,489 42,680,914 48,603,910 58,015,236 56,897,807 58,899,654 48,905,249 52,541,400 59,805,625 65,513,585 60,964,653 66,473,722 69,024,584 71,955,345
34,436,732 37,459,524 37,655,272 41,138,861 43,231,773 50,241,450 64,010,466 59,616,455 63,063,173 52,863,052 63,473,759 75,358,248 80,076,006 88,101,015 93,611,774 104,395,934 104,349,585
624,499 258,373 492,860 150,372 550,859 1,637,540 5,995,230 2,718,648 4,163,519 3,957,803 10,932,359 15,552,623 14,562,421 27,136,362 27,138,052 35,371,350 32,394,240
Total
909,445,969
1,093,083,079
183,637,110
Note: Prior fiscal year comparisons are not possible as closed claims were apparently purged from Helmsman claim reports in the 2001 study.
Based upon a review of the Armtech report, it appears that the increases stemmed largely from the following factors: •
Larger than expected development in the last few years.
•
Increased expected development of claims beyond 17 years of maturity.
•
Much higher projected claim severities and trends.
•
Relatively weak case reserves established by Helmsman in 1998.
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We understand that LAUSD has now elected to perform actuarial studies on an annual basis and expects a 2002 study to be completed by May 2002. We approve of this decision, as cost estimates can change rapidly and, unfortunately, most California entities have seen significant deterioration in their workers’ compensation experience in recent years. In addition, LAUSD may want to consider expanding the scope of its actuarial work to develop more precise estimates and a better understanding of the trends and cost drivers affecting its workers’ compensation experience. Possible enhancements include: •
Separately analyzing medical, indemnity, and expense (primarily legal) components of claims.
•
Further refinement of data to identify trends and characteristics by location, worker classification, type of injury, litigation status, etc.
•
Utilization of indemnity claims counts to avoid potential distortions associated with low cost, but frequent, medical-only claims.
•
Examination of the duration of claims using lost time statistics.
Actuarial information and analysis can also be utilized to develop a method to allocate workers’ compensation costs to the sources of claims. Implementation of cost allocation programs that actually affect budgets and individual performance plans have been effective in changing behavior for private industry, for insurance pools where costs are shared, and for public entities that derive funds from several sources, e.g., the federal government. For a large public entity, however, implementation is often quite controversial due to the importance of core objectives (e.g., educating children), accountability issues, political debates, consensus on an “equitable” model, turnover in staffing and responsibility, and the fact that costs may remain the same and are simply being shifted within the organization. Even so, cost allocation schemes can be useful to identify problem areas, to heighten awareness of the cost of worker injuries, and to direct appropriate safety/loss control resources to reduce costs. Based on our review of LAUSD’s most recent actuarial study performed by Armtech, we believe that Armtech’s current ultimate loss estimates may be understated. We make the following observations and recommendations about its report. 1. A current, complete claims history is only available going back to fiscal year 1984-85 (17 years). In 1998 or 1999, it appears that Helmsman began to purge closed claims from its historical claims information for fiscal years 1976-77 to 1983-84. Unfortunately, claims remain open for many years and continue to develop beyond 17 years. LAUSD should request that its TPA construct a complete claims history going back to the inception of its self-insurance plan (fiscal year 1976-77) by adding back
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closed claim information in order to obtain a better understanding of the actual overall development of its workers’ compensation claims. In addition, other similar experience, i.e., state-wide industry patterns and trends published by the WCIRB, should be used to supplement LAUSD’s experience. 2. Funding recommendations and certain trend observations are based on projections using payroll figures as an exposure base. Apparently, Armtech used actual LAUSD payroll for fiscal year 1995-96 and applied a 3% trend rate to estimate future years’ payroll. This process may lead to distortions and underfunding as it does not appear to take into account increases in LAUSD’s employment levels in recent years. We recommend that actual payrolls be used through the most recent period. Payrolls for future years should take into account expected changes in employment levels and wage inflation. A comparison of the payroll projections in Armtech’s 2000 report and actual payrolls are shown on the table below.
LAUSD PAYROLL
Fiscal Year
1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 Notes: 1. 2.
Armtech Projected Payroll (1) 2,472,881 2,547,067 2,623,479 2,702,184 2,783,249 2,866,747
Actual Payroll (2) 2,474,286 2,630,000 2,907,040 3,242,874 3,407,097 3,841,319
Difference (2)-(1) (3) 1,405 82,933 283,561 540,690 623,848 974,572
Armtech projected payrolls in column (1) were taken from Exhibit WC-8 in its actuarial study dated June 18, 2001. Actual payroll figures in column (2) were taken from LAUSD’s Self-Insured Employer reports submitted to the State of California.
3. The impact of AB 749 should be considered in future funding analyses. 4. The actuarial analysis assumes that LAUSD has not purchased insurance to cover excess workers’ compensation losses since the inception of the self-insurance program. According to our interviews, this assumption may not be correct. Any excess coverage that is collectible should be considered within the actuarial analysis.
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WORKERS’ COMPENSATION CLAIMS ADMINISTRATION REVIEW
PURPOSE PwC performed a review of the District’s claims management program relative to its Workers’ Compensation Program. Our review included an analysis of the District’s program as well as management of its third party administrator, Helmsman Management Services, Inc. (Helmsman), utilized by the District. We reviewed the District’s claims management activities in comparison to “Best Practices” in the industry. METHODOLOGY Our approach to conducting this examination of the District’s claims management performance included interviews with the District personnel listed at the beginning of this report. We also reviewed numerous documents and reports concerning the District’s claims management activities. These documents can be placed in one of three major categories: • • •
Structure of the workers’ compensation claims organization within the District Internal procedures Vendor management
The documents reviewed included, but were not limited to, the following: •
The District’s Reference Handbook, which includes, among other items, procedures for reporting claims within the District.
•
A list of authorized medical providers to which employees should be referred following the reporting of a work-related injury or illness.
•
Procedures relative to the Early Return-to-Work program that have been developed by the District.
•
Policy guides concerning the District’s policies for Industrial Injury or Illness leaves or absences, including those resulting from acts of violence, and the additional benefits available to District employees under these policies.
•
Documents concerning the District’s procedures for “Reasonable Accommodations for Individuals with Disabilities,” which is utilized for both occupational and nonoccupational disabilities.
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•
The contract between the District and Helmsman, the District’s workers’ compensation TPA. Helmsman is a subsidiary of Liberty Mutual Insurance Company that operates as a third-party administrator for self-insured clients.
•
Special Service Instructions developed through negotiations between the District and Helmsman that established overall claim service expectations and practices.
•
Claim reports for various periods, which included information concerning the claims counts, the paid amounts, reserve amounts, and total incurred amounts of the District’s workers’ compensation claims, and various other data.
•
Information concerning the District’s OEHS, and some of the programs it has adopted in an effort to reduce the number of work-related injuries and illnesses.
•
Reports generated by OEHS, including incident rates, workers’ compensation claims by school sites, the “Safe School Inspection Guidebook,” and other materials.
•
Information provided by Helmsman describing its structure, procedures, and practices that are utilized to support the District’s workers’ compensation program.
•
Loss reports provided by Helmsman, including, but not limited to, the following: § § § §
First Report Efficiency (timeliness of claim reporting) PPO Management Report (extent of PPO utilization and related savings) Top 50 Medical Providers Workers’ Compensation Summary Report
We were not asked to conduct a claim audit of Helmsman’s claims management activities. Therefore our findings and recommendations are based on the interviews and our review of documentation. STRUCTURE OF THE CLAIMS FUNCTION The District has numerous personnel and departments that are primarily or partially involved in the management of its workers’ compensation claims and/or are involved in other benefit programs or policies applicable to occupational injuries or illnesses that are sustained by District employees. These positions may be found within Insurance Services/OGC, OEHS, Personnel Services, or other departments or groups.
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The District’s Office of General Counsel has formed a task force to study the District’s workers’ compensation program. This study, which was initiated in January 2002, includes a review of all personnel, departments, and functions that are involved in the management, processing, and oversight of workers’ compensation claims and other benefit plans that impact the District’s workers’ compensation results.
Insurance Services focuses on the oversight of Helmsman and its claims management practice. The Contract Supervisor, who is currently on a leave of absence, has been responsible for verifying that the services provided by Helmsman are in compliance with the contract. Since the Contract Supervisor is currently on a leave of absence, the Workers’ Compensation Claims Processing Supervisor, who was previously employed by Helmsman, has assumed some of these responsibilities. The assigned responsibilities include review of settlement proposals, assistance with return-to-work for the teaching staff, approval of vocational rehabilitation plans, and other oversight responsibilities. The District has also established a formal Early Return-to-Work program. This program was originally formed in 1993-94 to identify early return-to-work opportunities for employees who had sustained occupational injuries or illnesses but was expanded to include employees who were absent from work due to non-occupational injuries or illnesses. The Insurance Services Division’s Principal Administrative Analyst works with Helmsman to facilitate the return to work for employees who may have temporary work restrictions. Personnel Services (for certificated and classified employees) performs duties related to absence or leave record-keeping, to the administration of disability benefits available to employees, and to the assistance of employees who have long-term or permanent restrictions in returning to work. The District’s OEHS also has significant responsibilities relative to workers’ compensation. OEHS’ responsibilities focus heavily on the safety and health of almost one million students in the District, but efforts expended to improve the safety and health of the District’s students also inure to the benefit of the District employees and others who are on the District’s premises. OEHS also specifically addresses occupational issues and designates numerous resources to occupational injury and illness prevention. The District relies upon Helmsman to provide periodic loss reports to monitor claims activities and financial liabilities. Helmsman has managed the District’s workers’ compensation program since 1993 and assumed management of the previous TPA’s claims that were open at that time. The loss reports should therefore provide a comprehensive picture of the claim volumes and costs associated with the District’s workers’ compensation program. The District has access to Risktrac, Helmsman’s risk management information system. This access provides the District with the ability to run standard and ad hoc reports, as well as the ability to monitor the day-today activities of Helmsman’s adjusters. Helmsman also provides OSHA record keeping services for the District, as well as various loss control services.
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As described, there are numerous parties involved in various components of workers’ compensation management. Since many of these parties are in separate organizations within the District, the District has lacked a coordinated approach for management of workers’ compensation claims. For example, Insurance Services and OEHS both work extensively with Helmsman but have rarely coordinated activities with each other. While the District has developed and instituted a number of policies and procedures concerning various aspects of its workers’ compensation claims program or benefits to which disabled employees are entitled, the District lacks a central organization for oversight of these responsibilities. We suggest a more structured organization that more closely aligns the various functional groups and their responsibilities and makes each group accountable for its actions. INTERNAL DISTRICT PROCEDURES Claim Reporting The District has developed internal procedures for the reporting of new claims and for monitoring the workers’ compensation claims managed by Helmsman, and the District has published policies for its personnel to inform them of the steps needed to report and administer these benefits. However, data requested from Helmsman indicates that there is a significant delay in the initial reporting of workers’ compensation claims, in spite of the current toll-free reporting system that is available. We were informed by Helmsman’s representatives that the District has improved in the timeliness of its claim reporting. This was confirmed by the Workers’ Compensation Summary Reports for the contract years of 1997, 1998, 1999, 2000, and 2001 year-to-date, which provided the following information concerning the time lag time between the injury date and the date the claim is reported to Helmsman:
REPORT TIMELINESS Year
Mean
Median
0 – 3 Days
4 – 10 Days
11 + Days
1997 1998 1999 2000 2001 YTD
26.50 24.52 22.43 13.48 5.62
3 days 3 days 3 days 3 days 2 days
52.00% 50.51% 50.20% 52.75% 61.88%
22.36% 23.35% 23.53% 23.00% 23.27%
25.64% 26.14% 26.27% 24.24% 14.85%
Note: Figures in the more recent years, particularly the mean, may not be comparable to prior years due to their maturity, i.e., some late-reported claims have not yet been filed.
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Prior to receipt of the Summary Reports that had provided the data above, we reviewed a “report timeliness” report from Helmsman for the period of 7/1/2001 to 1/31/2002. The data received from Helmsman in this report still points to delays that could have a major impact on the initial handling of new claims. Helmsman’s data for the period of 7/1/2001 to 1/31/2002 indicates that the District’s claims were submitted to Helmsman, on average, 8.87 days after the injury occurred, with a median of 3 days. The lag times shown in this report may be greater in part because of the seasonal nature of the District’s claims (e.g., a greater number of claims are reported in the summer than at some other times of the school year). The distribution of initial reports is shown in the following table.
REPORTING TIME FOR THE PERIOD 7/1/2001 TO 1/31/2002 Claims Reported to Helmsman Within x Days of Injury
0 to 3 days 4 to 7 days 8 to 14 days 15 – 21 days 22 – 28 days 29+ days
Percentage of Claims Reported Within This period
Cumulative Percentage
55.79 18.04 11.13 4.64 2.72 7.68
55.79 73.83 84.97 89.60 92.32 100.00
While there appears to be a general trend toward improvement in the timeliness of claims reporting, current reporting delays still often prevent Helmsman from initiating its claims management activities until 6 or 7 days after an incident occurred. Prompt reporting is critical for the timely and effective management of workers’ compensation claims. Timely reporting means that the District and Helmsman can: •
Promptly contact the District representatives, the injured employee, and the medical provider.
•
Investigate the claim and obtain additional information that is necessary to properly manage the claim.
•
Ensure that the injured employee is being treated by one of the authorized medical providers.
•
Inform the medical provider of the District’s Early Return-to-work program.
•
Initiate efforts with the employee’s supervisor to place the employee back to work, possibly eliminating any lost time and the need to pay indemnity benefits, or to reduce them if disability still occurs.
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Facilitate referral to other medical services that may be needed (e.g., physical therapy, specialists).
California’s workers’ compensation statutes require a 3-day waiting period before indemnity benefits are payable. In other words, an employee must be disabled from work for 3 days before any indemnity benefits are payable to the employee. A delay in reporting means that Helmsman and the District cannot address their claims management responsibilities promptly, possibly resulting in a disability claim that could have otherwise been avoided or in a longer period of disability than would have otherwise occurred. The data shown in the lag time report for the period of 7/1/2001 to 1/31/2002 still indicates that 26.17% of claims reported during this time period were reported more than 7 days after the injury date. Claims should consistently be reported to the TPA within 24 hours of the District’s notification of the work-related injury. We understand that the District is implementing a method for reporting claims via the Internet. We believe that this Internet reporting capability, supported by additional communications and training for site administrators, is critical for workers’ compensation cost reduction. Authorized Medical Providers The California workers’ compensation statutes provide employees with the option to predesignate a medical provider for treatment if the employee later sustains a work-related injury or illness. If this predesignation is not made, then the District has the right to refer injured employees to medical providers that are on a list of authorized medical providers. This right to control the medical provider exists for the 30-day period following the work-related injury, after which point the employee may select his/her own treating physician. We were informed that few employees have made predesignations, so the District usually has the right to utilize this medical control method for most of its employees. The District has provided the authorized list of medical providers to its locations and to Helmsman to assist in the management of workers’ compensation claims. We were informed that District employees who report claims may not always be informed of these authorized providers, and may seek treatment from other providers. This list of authorized medical providers includes providers who are part of Helmsman’s network of workers’ compensation preferred medical providers. These preferred providers have agreed to treat injured employees at fee rates less than the California fee schedule and have agreed to provide Helmsman representatives with the information necessary to proactively manage workers’ compensation claims. The Workers’ Compensation Medical Savings Analysis Report for the annual period of 2/1/2001 to 1/31/2002 indicated that Helmsman’s bill review processes reduced medical bills to the California fee schedule by 19.83% or $13,251,121. Use of the Helmsman PPO Network reduced the medical bills an additional 4.53%, or an additional $3,028,265.
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Kaiser medical centers are on the District’s list of authorized medical providers but are not part of the Helmsman preferred provider network, so its fees may only be reduced to the state fee schedule. There are 21 Kaiser medical centers included in the 146 preferred providers. In our review, we were told that Kaiser medical centers are not as timely in the information they provide to Helmsman, and the Kaiser case managers are more difficult to contact, making it more difficult to verify treatment and disability, to monitor treatment, and to coordinate returnto-work opportunities. The amount of additional disability benefits that may result from an inability to get needed information from Kaiser or to coordinate treatment and return-to-work activities is unclear. The PPO penetration rate indicated by the Helmsman reports indicates that 40% to 47% of the medical treatment is administered by medical providers that are part of Helmsman’s PPO network. Helmsman gave us with a report of the Top 50 Medical Providers, which lists the 50 medical providers that received the greatest medical payments for workers’ compensation claims. This report listed 6 Kaiser locations in the Top 50, as well as a number of other providers that are not on the District’s authorized medical provider list. Many of the payments to these unauthorized medical providers are for treatment that occurs after the first 30 days of treatment, when the employee and/or his/her attorney may elect treatment from other providers. We recommend that the District review and evaluate the Authorized Medical Provider List to determine if some of the providers can be added to Helmsman’s PPO network with appropriate fee reductions and controls. If not, then the District should consider dropping non-participating and/or non-cooperative medical providers so the District can obtain the full benefit of the cost savings that exist in the Helmsman network. It may be even more important for the District and Helmsman to evaluate the case management activities and assistance being provided by the authorized medical providers. If some of the medical providers, such as Kaiser, cannot respond in a proactive manner and do not provide the necessary reports in a timely fashion, then they should be removed from the authorized list, regardless of whether they participate in the District’s non-occupational health plans. A medical provider’s refusal or failure to actively participate in the District and Helmsman’s case management activities can have far-reaching implications in the ultimate cost of the District’s claims. Industrial Injury Absence Benefits Under the program, District-certificated and classified employees who sustain work-related injuries or illnesses are generally entitled to up to 60 work days of industrial injury absence benefits, which pays the employee not more than the employee’s full normal salary, net of taxes. The District’s 305 sworn police officers are entitled to receive up to one year of industrial injury absence benefits. These benefits are reduced by the amount of workers’ compensation weekly benefits, which are non-taxable, that are paid by Helmsman Management Services. If the employee does not return to work within the entitlement period, the employee is then entitled to
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receive continuing pay charged against accrued illness benefits, including full pay and ½ pay benefits. Finally, if these benefits are exhausted, an employee can charge time against vacation pay. Since many of the District employees have long service periods and presumably have accrued substantial sick pay, the total period of time for which the employee may receive his/her full salary can be significant. Since long-term employees have presumably accrued substantial unused sick pay and vacation pay, an employee can be off work for many months without loss of any income at all. The presence of these additional benefits reduces or eliminates the financial incentive for employees to return to work, especially when disabled employees continue to accrue other benefits (e.g., retirement credit) during these periods of disability. These benefits, which are extended further if the employee is injured as a result of an act of violence or if he/she is a sworn police officer, were negotiated with the unions. These types of benefit packages are typically unavailable to corporate employees, who usually receive only the workers’ compensation benefits to which they are entitled. Therefore, because of these additional benefits, the District bears a cost for work-related injuries or illnesses that is greater than most corporations. We recommend that the District discuss these benefit plans and possible revisions with the various unions, since these benefit packages foster a claims management environment that creates a financial hardship for the District. This financial hardship may have a negative impact on employee pay, benefits, and/or retention if it cannot be curtailed. Some District employees may also elect to purchase short-term disability coverage through their unions. These policy premiums are not paid by the District, but are paid by the employees who choose to enroll. Therefore any benefits paid under these policies would not be coordinated with the Industrial Injury Absence Benefits or workers’ compensation benefits, and the employee would receive cumulative benefits that exceed his/her usual pay. The presence of these benefits would further erode any financial incentive to return to work. Return-to-Work Programs Early Return-to-Work Program The District has implemented an Early Return-to-Work (“ERTW”) program that is designed to facilitate return to work when medical providers have agreed to release employees to work on a modified duty basis. This program applies to occupational and non-occupational injuries or illnesses. This program policy, which was initiated in fiscal year 1993/94, is intended to address return-to-work issues for regular employees who have been off work (less than 60 days) but may return to work with temporary restrictions. The District first attempts to return employees to their regular position, and to change the job as needed to accommodate the temporary restrictions.
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If the case involves an occupational disability, the process is as follows: •
Some site administrators or department supervisors will allow employees to return to work without requiring any assistance or intervention by Helmsman or the ERTW program.
•
If the employee has not already returned to work and the treating physician has released the employee to return to work with restrictions, Helmsman will call, fax, or email the ERTW specialist indicating that the treating physician has provided Helmsman with work restrictions.
•
The Helmsman representative will first contact the site administrator or department supervisor to determine if a modified position is available or can be developed.
•
If the site administrator does not agree to place the employee back to work with the restrictions, then Helmsman contacts the ERTW representative.
•
The ERTW representative then contacts the site administrator to determine what else can be done to facilitate an early return to work.
It was estimated that the ERTW representative receives approximately ten (10) emails per day from Helmsman regarding employees who have been released to restricted duty, and that approximately 10% of these cases are handled between Helmsman and the site administrator. The remaining 90% require intervention by the ERTW office, and it is estimated that approximately one half of these remaining 90% are placed back to work. We were informed that many of the site administrators simply state that they do not have modified duty available. Based on these estimates, it appears that there are still significant opportunities for early return to work, since only 40% to 50% of the employees who are released with temporary restrictions are promptly placed back to work. Disabled employees who are not allowed to return to modified work will continue to receive temporary disability benefits in addition to supplemental benefits provided by the District. In contrast to most other industries, an additional explicit cost is expended by LAUSD, as injured teachers must be immediately replaced by substitute teachers. As such, the cost savings with a more proactive ERTW program could be significant. A review of the Workers’ Compensation Summary Report indicates that the District has a fairly consistent percentage of claims that result in lost time. These reports for the full contract years of 1997, 1998, 1999, and 2000 indicate that the percentage of lost time claims to the total number of claims that occurred during those years is 31.03%, 31.93%, 33.12%, and 30.85%, respectively. Decreases in the amount of Lost Time per claim would result in significant savings.
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We were informed that the employee’s participation in the Early Return-to-Work program is voluntary. That is, an employee may choose to reject an offered modified position if the employee so desires without any impact on his/her industrial injury or illness benefits. The District has the right under the workers’ compensation law to discontinue workers’ compensation benefits to employees who have refused to return to restricted duty that meets the attending physician’s restrictions, and Helmsman, as the District’s TPA, has exercised this right. However, employees whose workers’ compensation benefits have been reduced are still entitled to Industrial Injury Absence Benefits without reduction, so there is no compelling reason for employees to return to work until these benefits have been exhausted. We recommend that the District develop a comprehensive Early Return-to-Work program that is mandatory in all cases. That is, the site administrator or department supervisor should be required to take employees back to restricted work. This will create a challenge for some of the site administrators, but they will be able to obtain some degree of benefit from the employee’s presence at work, and the District will reduce its workers’ compensation and industrial injury and illness benefits. The return to work will also act as a type of physical therapy or conditioning for the employee, by helping the employee to gradually increase his or her activity so that the employee will be able to return to full work at an earlier point. The employees should be required to accept a job offer that meets the restrictions imposed by the attending physician. We suggest that the District hold further discussions with the unions to enlist the unions’ support in removal of this right to reject modified duty. Reasonable Accommodations Committee The ERTW program was not intended to address cases where employees have been released to return to work with permanent restrictions. Based on the information we were provided, it appears that the process for returning employees to work that have permanent restrictions is less structured. The District’s OEHS office may perform an ergonomic evaluation of the position in question, and the Personnel Division and the Reasonable Accommodations Committee will be involved. The Reasonable Accommodations Committee, which was formed in 1978, is comprised of a number of personnel from the following areas: • • • • • • •
Certificated Placement Early Return-to-Work Special Education Classified Personnel General Counsel Insurance Services Facility Services
• •
Budget School Administration
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The District’s Medical Director
The Reasonable Accommodation Committee takes the following steps when an employee is released to return to work with long-term or permanent restrictions: •
The site administration or supervisor is contacted to determine if accommodations can be made. If so, the process stops at this point and a copy of a report is provided to the Coordinator of Personnel Services for the Disabled (“the Coordinator”).
•
If the site administrator cannot accommodate the position, then a form is sent to the Coordinator.
•
The Coordinator contacts the employee and the site administrator to determine if the process can be pursued further.
•
If the site administrator still cannot accommodate, then a formal process is initiated which requires completion of an application.
•
The application is sent to the employee and medical information must be attached along with other information.
•
Upon receipt of the application, copies are sent to the Medical Director, who contacts the employee for an examination.
•
In some cases the Medical Director and Coordinator may discuss and determine a solution.
•
If necessary, the case goes to the full committee, which makes a determination about the case.
It is recommended that the process that is now followed by the Reasonable Accommodations Committee and the Coordinator be modified for accelerated action and be integrated with the Early Return-to-Work Program, with close alignment with OEHS for ergonomic evaluation purposes. There should be a central clearinghouse for all employees who are released to return to work so that employees with temporary, long-term, or permanent restrictions can receive prompt attention and can be returned to productive work as soon as possible.
Litigation Management
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Compared to other California employers, including governmental employees, District employees who file workers’ compensation claims eventually litigate a high percentage of their cases. A report provided by OEHS indicates that 47% of the open claims from the period of 11/1/94 to 11/30/01 are in litigation. While many of the litigated claims may be from previous periods, the degree of litigation results in higher claims costs per claim and higher allocated loss adjustment expenses (legal defense costs and other costs associated with investigating a specific claim). In late 2001 the District’s OGC and Helmsman reviewed the list of defense attorneys, evaluated the procedures followed by defense counsel, and evaluated the professional services provided by each firm. Based on this evaluation, the District and Helmsman reduced the list of defense firms, and selected 14 defense firms to represent the District in workers’ compensation litigation. These firms were jointly selected and were provided with specific guidelines, fee arrangements, etc. The District and Helmsman have continued to review the performance of the defense firms selected through the recent evaluation process. We agree with this process, and recommend continuous review of the defense firms selected to insure that these firms continue to provide the District and Helmsman with the level of services promised. Claims Cost Tracking/Allocation The District has not developed a cost allocation method for charging workers’ compensation claims costs to the responsible locations, so each of the 900 District locations are presumably unaware of the workers’ compensation costs for which they are responsible. While we understand that most of these locations are schools and that their primary attention should be on educational issues, inattention to cost issues can also divert available funds from the desired area (e.g., educational resources for students and faculty), to other areas. The District has an obligation to compensate its employees for injuries or illnesses sustained on the job, but it should seek to satisfy these obligations in the most cost-effective method possible. If District locations, whether they are schools, offices, or maintenance centers, were more aware of the costs they are contributing to the District’s workers’ compensation liabilities, it is believed that it would provide increased motivation for responsible cost control. We suggest that the District initiate a tracking mechanism so that the various departmental and school site administrators can be provided with information concerning the workers’ compensation costs at their sites. We believe that the distribution of this information will cause site administrators to place more importance on workers’ compensation management, including more participation and cooperation with the District’s Early Return-to-Work program.
VENDOR MANAGEMENT
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The District uses Helmsman to provide claims administration services for its workers’ compensation program. Helmsman also provides supplemental claims services which other TPAs sometimes outsource to other organizations but which Helmsman has developed internally. For example, Helmsman provides a variety of medical management and medical bill review services, including but not limited, to medical bill review and re-pricing, utilization review, peer review, telephonic case management, and field case management. Helmsman is a nationally recognized third party administrator in the workers’ compensation arena and has additional resources that can assist the District in the management of its claims. The District has negotiated special service instructions concerning Helmsman’s responsibilities. The special service instructions include the settlement and reserve authority granted to Helmsman, the provision of specific reports, and other reporting requirements. The District does not have a program for periodic claim audits, but claim reviews are being performed by Insurance Services when Helmsman submits files for settlement authority or for reserve reviews. We were informed by the Insurance Services representative that Helmsman was performing its responsibilities satisfactorily. We received copies of the current and past claims administration contract between the District and Helmsman. We noted that the current claims administration fees were quoted on a “Life of Contract” basis, as opposed to a “Life of Claim” basis. Past contracts were quoted on a “Life of Claim” basis. If the District changes its workers’ compensation TPA at some point in the future, then additional fees must be paid to Helmsman for the handling of these claims, or the District will be required to transfer the claims to the newly selected TPA, which will charge additional fees for assuming responsibility for these claims. We recommend that the District investigate whether future TPA contracts can be negotiated on a “Life of Claim” basis, since many of the District’s claims do not close as promptly as in other states or with other employers. We also recommend that the District strengthen the claims management standards that Helmsman must follow in administration of the District’s claims. The claim standards, which should be included as part of the contract, should provide objective standards for evaluation of Helmsman’s services, and should provide a mechanism for adjusting Helmsman’s fees based on compliance with these agreed-upon standards. PwC recommends that the District conduct periodic reviews to evaluate Helmsman’s services as well as the activities performed by various District departments or groups who have workers’ compensation responsibilities. These audits should incorporate the following criteria. •
The review should focus on Lost Time claims. Medical Only claims comprise a large percentage of the number of claims, but contribute minimal costs when compared to the cost of Lost Time claims.
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•
The results of the audit should be shared with Helmsman, and the District and Helmsman should prepare action plans for any areas found to be deficient.
•
The criteria for the claim review should include the criteria shown in the table on the following pages, with the inclusion of specific metrics to provide objective performance measurements.
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Criteria
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Helmsman Responsibilities
Reporting
The completeness and timeliness of the reporting of new incidents by the District.
The timeliness of intake, set-up, and assignment of a new claim
Contact
The District’s contact with the injured/ill employee to be sure that the employee is continuing to receive necessary information.
The timeliness and thoroughness of initial contact with the employee’s supervisor, the employee, and the medical provider, and ongoing contact to ensure that the claim is being monitored properly.
Investigation
The information provided by the District site, as well as any OEHS investigation that might have been initiated as a result of a severe injury.
The adjuster’s efforts to obtain information concerning the incident, possible pre-injury conditions, injuries, or illnesses that might affect the employee’s recovery, and whether a third party was responsible for the incident.
Compensability Determination
Confirmation that the injury or illness arose out of and in the course of employment. Further investigation if fraud or abuse are suspected.
Indemnity Payment
Coordination of District industrial injury absence benefits with the workers’ compensation benefits paid by Helmsman.
The timing and accuracy of temporary disability benefits paid to disabled employees, and coordination with the District’s industrial injury absence benefits.
Medical Management
Development of the District’s approved medical provider list, and utilization of the approved medical providers for the initial treatment and for continuation beyond the initial 30 days.
Referring employees to the authorized medical providers when the employee’s supervisor did not initiate the referral, control over additional medical treatment to the extent permitted by law, and assisting the medical provider in obtaining the medical services required for the employee’s treatment.
Medical Cost Containment
Development of the District’s approved medical provider list, and utilization of the approved medical providers for the initial treatment and for continuation beyond the initial 30 days.
Review and re-pricing of medical bills in compliance with the California fee schedule, and utilization of the preferred provider organization to the extent possible. Additional services include utilization review, peer review, concurrent review, retrospective review, and other review services designed to ensure appropriate medical costs.
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District Responsibilities
Helmsman Responsibilities
Disability Management
Efficient utilization of the District’s Early Return-to-Work program to avoid lost time or reduce lost time by disabled employees to return them to modified or regular duty. Timely utilization of the Reasonable Accommodations Committee and OEHS when additional resources required.
Frequent contact with medical providers to facilitate an early return to work, coordination with District personnel to return employees to work, utilization of case management services to reduce the disability period, utilization of outsourced or state resources to rehabilitate the employee when required.
Reserving
Providing complete information to Helmsman.
Providing reasonable estimates of the probable ultimate cost of the claim, based on information available and obtained at any point in the life of the claim.
Settlements
Timely review and approval of settlement proposals when proposed by Helmsman
Timely review, analysis, and settlement of cases within Helmsman’s settlement authority (< $10,000). Timely review, analysis, and submission of settlement proposals in excess of Helmsman authority.
Litigation Management
Continuing review and evaluation of defense counsel selected for litigation defense.
Continued management of claims and direction of defense counsel. Continuing review and evaluation of defense counsel selected for litigation defense. Review of defense counsel fee bills.
Potential Recoveries
Providing information concerning injuries potentially caused by third parties (e.g., motor vehicle accidents, machine injuries, off-premises injuries) .
Investigation of the potential responsibility of third parties, timely notification to these third parties, pursuit of reimbursement when third party fully or partially liable.
Staffing
Staffing adequacy and supervision of District workers’ compensation programs
Staffing adequacy and supervision of Helmsman program, evaluation of workloads, turnover ratios, and other management issues.
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LIABILITY CLAIMS ADMINISTRATION REVIEW PwC’s review of the District’s Liability program was limited to a review of the current contract between the District and Carl Warren & Company (“Carl Warren”). This contract, which was signed on 10/22/97, was extended in April 2000 for the two-year option periods for fiscal years 2000–01 and 2001–02, at the annual capped rates of $720,660 and $745,883, respectively. Computer costs in addition to the above fees are $13,000 and $14,000, respectively. We did not review the claim volume or total fees charged by Carl Warren to determine the reasonableness of the fees when compared to other claims administrators, which typically charge on a per-claim basis rather than on a Time and Expense basis. The contract fees are quoted in a Time and Expense method, which includes hourly rates for claims administration services, and expense rates for items such as mileage, photography prints, photocopies, stenography services, office expenses at 15% of services, and one-time file set-up fees. The annual fee caps are contingent upon a maximum of 775 new claims for each contract year. This contract also provides information concerning the responsibilities and fees of the District and Carl Warren. There were no additional claim management standards attached to the contract. Industry Best Practices would include the addition of claims management standards and expectations by which the TPA’s performance can be measured. Some of these standards relate to: • • • • • • • • • •
Set-up and assignment timeliness Contact with the District representative, the claimant, and any witnesses Investigation timing and thoroughness Consideration of potential recoveries Damages documentation Liability evaluation Subrogation Evaluation and settlements Litigation management, and Reserves.
We suggest that the District enhance its contract with Carl Warren to establish objective claims management standards by which Carl Warren’s performance can be measured.
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APPENDIX 1 LIST OF INTERVIEWEES
Dr. Joseph Zeronian, Chief Financial Officer, LAUSD Mr. Hal Kwalwasser, General Counsel, LAUSD Ms. Wendy Macy, Associate General Counsel, LAUSD Mr. Jesus Melendez, Staff Counsel, LAUSD Mr. Richard Sheehan, Special Counsel to the Board, LAUSD Ms. Anita Ford, Director, Personnel Commission, LAUSD Mr. Thomas Killeen, Administrator, Certificated Personnel, LAUSD Mr. Leon Cazes, Certificated Personnel, LAUSD Ms. Irene H. Yamahara, Associate Superintendent, LAUSD Mr. Jay Brakensiek, Deputy Director, Environmental Health & Safety, LAUSD Ms. Yi Hwa Kim, Deputy Director, Environmental Health & Safety, LAUSD Mr. Arnold E. Giroux, Senior Safety Officer, Environmental Health & Safety, LAUSD Ms. Michelle Mistri, Workers’ Compensation Claims Processing Supervisor, LAUSD Ms. Janice Sawyer, Principal Administrative Analyst, LAUSD Ms. Millie Miyazaki, Contracts Supervisor, LAUSD Ms. Karen Hemingway, Consultant, Former Director of Contract and Insurance Services Branch, LAUSD Ms. Laurie Parker, National Account Services Manager, Helmsman Management Services, Inc. Mr. Robert Tokin, Claims Manager, Helmsman Management Services, Inc. Mr. Robert Dickerson, Area Claims Manager, Helmsman Management Services, Inc. Mr. Ronald Stuckey, Team Manager, Helmsman Management Services, Inc. Mr. Moises Coria, Team Manager, Helmsman Management Services, Inc. Ms. Ariam Alemseghed, Team Manager, Helmsman Management Services, Inc. Ms. Felice Bautista, Team Manager, Helmsman Management Services, Inc. Mr. Tom Snow, Partner, KPMG LLP Mr. Steven Miller, Sensus Consulting
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APPENDIX 2 SAMPLE BROKER SERVICE AGREEMENT
SERVICE AGREEMENT This Agreement, effective as of ________________, by and between [INSURED] and [BROKER]. WITNESSETH WHEREAS, [INSURED] desires to obtain certain administrative, advisory, insurance brokerage and claims services with regard to its insurance and/or risk management program; and WHEREAS, [BROKER] maintains a staff of professional insurance executives, claims examiners, and clerical personnel who are experienced in the provision of services of the kind sought by [INSURED]; and WHEREAS, [INSURED] and [BROKER] desire to enter into an agreement whereby [BROKER] will render services as required by [INSURED] as follows: NOW, THEREFORE, it is hereby mutually agreed by the parties as follows: I.
Service to be provided by BROKER BROKER will provide [INSURED] with various insurance brokerage and consulting services with respect to [INSURED]’s casualty insurance program as outlined in the attached Service Specification (Addendum 1). Various services may be provided by subsidiary or associated companies of BROKER.
II.
Commencement and Term of Agreement This Agreement is for the period commencing ________________ 2002 and terminating _____________ (unless extended by mutual agreement by BROKER and [INSURED]).
III.
Cost of Services It is agreed that BROKER’s fees for services rendered under the terms of this Agreement are as outlined in the attached Schedule of Fees (Addendum 3).
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The fees will be billed monthly by BROKER to [INSURED] unless mutually agreed upon to be paid at some other date, and such invoices are due upon receipt of such by [INSURED]. This agreement and fee are for services specified based on the current exposures and with no significant changes in conditions or coverage requirements. If such significant changes do materialize, an appropriate adjustment of remuneration will be negotiated. IV.
Personnel BROKER will assign its personnel according to the needs of [INSURED] and according to the disciplines required to complete, in a professional manner, the appointed task. The BROKER team providing service to [INSURED] is as specified in Addendum 2 attached hereto. BROKER retains the right to substitute personnel with comparable skill sets and experience with reasonable cause and to so notify [INSURED]. However, BROKER will endeavor to maintain representation consistency and will provide [INSURED] with 30 days notice of change, if possible. For its part, [INSURED] retains the right to terminate this Agreement in accordance with Article VII herein if it does not approve the change in personnel. In addition, [INSURED] reserve the right to request a change in personnel when and if they believe it becomes necessary due to non-performance or breach of professional behavior or similar such other cause.
V.
Requirements of [INSURED] [INSURED] will make available such reasonable information as is required for BROKER to conduct its services. Such data will be made available as promptly as possible. It is understood by BROKER that the time of [INSURED] personnel is limited, and judicious use of that time is a requirement of this Agreement. [INSURED] will endeavour to attend meetings with BROKER and various claims personnel whenever BROKER believes it is in the best interest of [INSURED] to do so. Expenses incurred by [INSURED for attendance at meetings shall be [INSURED]’s responsibility. [INSURED] will make payments of the service fees as set forth in Section III of this Agreement.
VI.
Records and Information BROKER understands the confidentiality of the information it receives and acknowledges that such information will be used only for the purpose of meeting the objectives of this Agreement. Further, any output from this Agreement is to be kept confidential and is for the sole use of [INSURED]. The handling of all information
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received from [INSURED] or its designated representatives will be subject to the Confidentiality Agreement between [INSURED] and BROKER, a copy of which is included in Addendum 4 herewith. [INSURED] will have full and free access to all documentation and information that BROKER prepares under or in connection with this agreement, even after this agreement terminates, in accord with the Record Retention policy, which is referred to in the Confidentiality Agreement. VII.
Termination Either party may terminate this Agreement, subject to an accounting and payment being made as herein provided for services performed during the period this Agreement was in effect, by delivering to the other party written notice of its intention to terminate. In the event that [INSURED] terminates this Agreement, a minimum of ninety (90) days advance notice must first be given to BROKER. In the event that BROKER terminates this Agreement, a minimum of ninety (90) days advance notice must first be given to [INSURED]. The length of notice requirement may be altered by mutual agreement. Upon termination of the Agreement, it is agreed that the net earned service fee should be based upon the period of time this Agreement was in effect, upon a pro-rata basis, subject to a minimum of 50% if termination occurs during the first three months of this agreement, and pro-rata thereafter. Any excess fees paid shall be refunded, and any fees due and owing shall be paid, and any other necessary adjustments will be settled as further described in Addendum III Service Fees. It is further agreed that the services set forth herein shall cease upon the termination date and BROKER will have no further responsibility to [INSURED] concerning the claims consulting and risk management program in force after such termination. Notwithstanding termination of this Agreement, however, [INSURED] may retain the services of BROKER to complete outstanding projects, resolve outstanding claims and for specified consulting purposes. [INSURED] shall give written instructions to BROKER for any services it requires BROKER to perform following termination of the Agreement, and the parties shall agree upon an hourly rate or project fee and a specified period for service. BROKER shall provide [INSURED] with a monthly time and expense billing for such special project work [at the end of each month]. It is further agreed that following termination of this agreement, BROKER will at the request of [INSURED] arrange for the immediate transfer of relevant documentation, including but not limited to claims, loss control, marketing, policy correspondence and other relevant data to a third party as specified by [INSURED]. The parties will not be liable to each other, whether in contract, tort or otherwise, for any loss, increased expenses or diminution of their respective assets resulting directly or indirectly from the legal termination or non-renewal of this Agreement.
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Performance Review and Renewal In September/October of each year or at some other mutually agreed upon date, [INSURED] and BROKER shall have a performance review as to the respective fulfillment of the spirit and intent of this Agreement. At this meeting, an annual service program will be agreed upon by [INSURED] and BROKER, and a stewardship report, consisting of a schedule of services performed and any major events during the course of the previous 12 months, shall be submitted by BROKER. Additionally, as provided by Section III, Cost of Services, performance related fees, if any, and any change in annual service fees shall be agreed upon at this meeting for any subsequent renewal period.
IX.
Governing Law The validity, construction, performance and enforcement of this Agreement shall be governed by and construed in accordance with the laws of the state of [California].
X.
Disputes In the event of a dispute between the parties to this Agreement, the said parties agree to the Dispute Resolution as described in the attached clause in Addendum 5 hereto.
XI.
Headings The headings contained herein are for convenience of reference only and are not intended to define, limit or describe the scope or intent of any provision of this Agreement.
XII.
Entire Agreement This Agreement represents the entire Agreement between the parties as to the subject matter hereof, superseding all prior agreements, oral or written, and may not be modified except by a written supplemental agreement signed by parties. The failure of either party to enforce at any time, or for any period of time, the provisions of the Agreement shall not be construed as a waiver of such provisions or of the rights of such party thereafter to enforce each and every provision thereof.
XIII.
Declaration of Other Income and Compensation BROKER agrees to prepare an annual schedule declaring all income and other remuneration earned by performing any services not covered by this agreement that are provided to [INSURED]
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XIV.
Cooperation with [INSURED] Advisors. BROKER agrees to provide full cooperation to the [INSURED] and its designated risk management advisors.
XV.
Inspection BROKER agrees that during the Service Agreement effective period and for a period of twelve (12) months after the expiration or termination thereof, [INSURED] or its designated representatives shall have the right to audit all records and accounts related to this Agreement. Both parties acknowledge that they have read this Agreement, understood the Agreement, and agree to be bound by its terms and conditions.
PARTIES OF AGREEMENT: BROKER By:_________________________ Date: ____________________ Title: _________________________
[INSURED] By:________________________ Date: ____________________ Title: _________________________
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ADDENDUM 1
SERVICE SPECIFICATION This Service Specification applies to the Casualty Insurance Program(s) that BROKER may subsequently be contracted to handle on behalf of [INSURED]. The tasks to be performed shall include at minimum, but not necessarily be limited to the following. ACTIVITY Risk Transfer •
Assist in the gathering, dissemination and collation of statistical, exposure and renewal details for insurers.
•
Design of insurance program structures
•
Support and guidance in respect of advanced Risk Management procedures and instruments
•
Negotiation of terms and conditions with insurers.
•
Placement of program as required and agreed.
Documentation •
Preparation of market presentations to include full underwriting submissions.
•
Provide Binders, Cover Notes, slips or other documentation evidencing renewal, at the time of renewal
•
Provide schedules of insurance within two weeks of inception
•
Policy issuance, review and correction of the policy - within 120 days of inception.
•
Administer policy changes as required.
•
Maintenance and delivery of open items list.
Financial/Actuarial •
Premium calculation, invoicing, collection and allocation assistance
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•
Premium and claims collection and procedures and remittance as applicable.
•
Assist in determining of self-insurance retentions/deductibles and indemnity limit review, and estimating ultimate projected losses, or estimating self-insured loss reserves. Any actuarial work certifying the reasonability of [INSURED] reserves will be performed at an additional cost to be agreed upon between the parties.
•
Evaluate and report on financial impact of various program structures presented at renewal. Produce comparisons of prior risk costs to current/proposed program costs. Support [INSURED]’s budgeting process.
•
Market security analysis - BROKER will not in any circumstances act as an insurer nor will it guarantee or otherwise warrant the solvency of any insurer or market, but will assess the financial soundness of the insurers and reinsurers proposed to be approached to participate in [INSURED]’s insurance programs and will discuss with [INSURED] or its designated representatives any concerns that may arise.
Claims Services •
Provide coverage interpretation (non-binding) to policy form and periods applicable to loss.
•
Collating and monitoring of claims statistics. Quarterly reports to be provided to [INSURED] and their designated representatives.
•
Provide claims statistics upon request.
•
Definition of claims procedures and instructions.
•
Assist in handling/management of all claims presented to insurers including participating in loss meetings and monitoring/facilitating significant claims to conclusion and tracking insurer’s subrogation efforts.
•
Assist in identifying and negotiating with any third party claims administrators.
•
Accompany [INSURED] and/or the adjuster to the site of any significant loss.
•
Assist [INSURED] in arranging for salvage and track salvage recoveries.
•
Serve as [INSURED]’s advocate in claims recoveries from the insurers.
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Risk Evaluation and Control •
Assist in identification and evaluation of exposures including review of contractual exposures, review of new or modified products or services , etc.
•
Design and coordinate risk engineering program; evaluate the need for unbundled engineering services; review insurer life safety recommendations from engineering reports and provide advice on the feasibility and need for implementation of recommendations, including coordinating any necessary correspondence or discussion or disputes relating to recommendations.
•
Assist [INSURED] and its designated representatives in the due diligence activities, as requested, relating to evaluation of the casualty insurance issues and needs that such a merger or acquisition transaction may entail. Such evaluations shall be conducted at no additional cost or fee to [INSURED], nor shall the absence of such evaluations cause the parties to adjust remuneration under this agreement.
•
Other programs as may be agreed.
Electronic Communication and Information •
E-mail connection with [INSURED] Risk Management Department and other designated representatives’ offices as required.
•
Use of BROKER developed Risk Management Information system to compile claims, underwriting and other information pertaining to [INSURED]. Such data held in such system shall remain the property of [INSURED], and upon termination of this agreement, BROKER shall provide for such information to be transferred at the request of the [INSURED].
Meetings/Miscellaneous •
Scheduling of and attendance at meetings between [INSURED], its designated representatives, BROKER and with insurers; BROKER and [INSURED] will meet no less than quarterly, except if mutually agreed.
•
Provision of insurance market intelligence, and agreed developments such as claims incidence and advice of new products. Quarterly reports and updates will be provided.
•
Mid-term strategic review.
•
Fee/service negotiations.
•
BROKER seminars and conferences.
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•
Contract Reviews for insurance and risk management implications.
•
Routine day-to-day inquiries to and from [INSURED] and the [INSURED] operating companies and their designated representatives.
•
Ad hoc reporting and meetings as circumstances or incidents may require.
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ADDENDUM 2
BROKER Team providing services to [INSURED]
Location
Responsibility
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ADDENDUM 3
SCHEDULE OF FEES Casualty Insurance program: $__________. This fee is in lieu of Commissions that may normally be paid to BROKER by the insurance carriers. All efforts shall be made to negotiate placements on a net of commission basis, however, when it is not possible or advisable to do so, BROKER will issue a credit to the fees under this Agreement in a like amount to be applied against any past due or future installments of remuneration under this Service Agreement. In the event that BROKER is required to return any such commissions that were credited against the Fees under this agreement, [INSURED] will reimburse BROKER for the appropriate amount so returned. This fee contemplates all travel, administrative and other out of pocket expenses.
N.B. 1. The above amount is payable in equal monthly installments, or as otherwise agreed to by BROKER and [INSURED]. 2. BROKER also receives revenue as follows: (a)
Interest/investment income on clients’ funds held while in transit. The clients’ funds are held in Insurance Broking Accounts, the operation of which are subject to the regulations established by BROKER’s Regulator.
(b)
Revenue based upon the volume and profitability of insurance business placed with a given insurer or reinsurer over a given period. These payments recognize the services BROKER provides to the insurer or reinsurer over the given period and are not directly related to the services provided to [INSURED].
(c)
Placing the reinsurance business of insurers, some or all of who may be utilized for underlying insurance contracts. The reinsurance placement is a separate contract subject to its own terms and conditions, including those relating to remuneration. The amount and source of any income earned on facultative re-insurance placed specifically for [INSURED]’s program will be disclosed to [INSURED].
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3. BROKER is a member of a major international group and companies within the group may be used by BROKER in performing services for [INSURED]. These companies, in the absence of an agreement with [INSURED], may be paid for the services they provide in a manner similar to the remuneration received by BROKER. Also, some of the companies within the group act as reinsurance brokers and in that capacity may be instructed by insurers with whom [INSURED]'s business has been placed to place reinsurance business on their behalf. The reinsurance business is a separate contract subject to its own terms and conditions including those relating to remuneration. All remuneration that can be specifically related to the [INSURED] account will be disclosed to [INSURED]. It is understood that any commissions received by BROKER from the markets, such as from internal reinsurances, will be disclosed to [INSURED], who will receive benefit from them unless specifically agreed between BROKER and [INSURED]. 4. Casualty Insurance Program The Casualty Insurance Program includes the following policies:
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ADDENDUM 4
Confidentiality Agreement between [INSURED] and BROKER Group CONFIDENTIALITY AGREEMENT This Confidentiality Agreement dated as of _____________ 2002, between [INSURED] with offices at___________________________ (“[INSURED]”) and BROKER Group (“Recipient”) with offices at _________________________________________________. NOW, THEREFORE the parties hereby agree as follows: 1.
Subject to the terms herein provided, [INSURED] will provide BROKER with Information from time to time for the purpose of BROKER effecting placement of various classes of insurance for [INSURED].
2.
As used in this Agreement, the terms “Information” means product, financial, marketing, organizational, technical and other information, specifications, know-how, materials, data and other communications, oral or written, disclosed or provided by or on behalf of the [INSURED].
3.
Recipient will keep all Information confidential. Recipient will not disclose any information to any third party, except to Recipient’s employees and prospective Insurers and Reinsurers, who need to know such Information for purposes of submitting bids regarding placement of [INSURED]’s various classes of insurance and will use the Information only in connection with the foregoing. Notwithstanding the foregoing, with respect to information that has been marked as Highly Sensitive, Recipient shall obtain [INSURED]’s prior written consent before disclosing such Highly Sensitive Information to prospective Insurers and Reinsurers. In addition, before disclosing Highly Sensitive Information to prospective Insurers and Reinsurers, Recipient shall have any such Insurers and Reinsurers sign a copy of the letter agreement attached hereto. As regards information that has been provided to Recipient prior to the effective date of this Agreement, Recipient shall treat such Information with such care as is given to confidential information to which it has access, according to the customs and practices in Recipient’s field.
4.
Recipient undertakes that each of its employees in receipt of Information (the “the Employees”) shall be informed of the confidential nature of Information and shall agree to be bound by this Agreement prior to first disclosure of Information and that the Employee shall not use or disclose Information for any purpose other than those permitted under this Agreement. Recipient further undertakes that no Information shall be disclosed to a prospective Insurer until such Insurer has signed the agreement annexed at Schedule 1 hereto.
5.
All information shall remain the property of [INSURED]. Upon the written request of [INSURED] (a) all tangible Information (including all copies thereof) consisting of
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documents prepared by or for the benefit of Recipie nt, shall be promptly returned to [INSURED] and (b) all documents prepared by or for the benefit of Recipients (including all copies thereof) which are within the definition of Information shall be destroyed, with such destruction certified in writing to [INSURED] by Recipient. Notwithstanding the foregoing Recipient may retain one copy of such tangible Information in its files to the extent required by law. 6.
The obligations of confidentiality and non-use set forth in this Agreement shall not apply to any portion of the Information which: (a)
is or becomes public or available to the general public otherwise than through the act or default of Recipient, its employees or prospective Insurers and Reinsurers to whom Information is disclosed.
(b)
is obtained by Recipient from a third party who is lawfully in possession of such Information and is not subject to an obligation of confidentiality or non-use owed to [INSURED] or others; or
(c)
is previously known to Recipient prior to disclosure to Recipient by [INSURED] under this Agreement and is not obtained or derived directly or indirectly from [INSURED]; or
(d)
is disclosed by Recipient pursuant to a requirement of law, provided that Recipient has complied with the provisions set forth in paragraph 7.
7.
If Recipient becomes legally required to disclose any Information or any of the matters referred to in paragraph 8, Recipient will give [INSURED] prompt notice of such fact so that [INSURED] may obtain a protective order or other appropriate remedy concerning any such disclosure and/or waive compliance with the non-disclosure provisions of this Agreement. Recipient will fully co-operate with [INSURED] in connection with [INSURED]’s efforts to obtain any such order or other remedy. If any such order or other remedy does not fully preclude disclosure or [INSURED] waives such compliance, Recipient will make such disclosure only to the extent that such disclosure is legally required and will use its best efforts to have confidential treatment accorded to the disclosed Information.
8.
Except as consented to in writing by [INSURED], Recipient will not disclose to any third party other than prospective Insurers and Reinsurers as herein permitted (a) the fact that the Information has been made available or that discussions or negotiations may be taking place between [INSURED] and Recipient with respect to the transaction referred to in paragraph 1, or (b) the terms, conditions, status or other aspects of any such negotiations, whether pending or concluded between [INSURED] and Recipient.
9.
Recipient acknowledges that [INSURED] makes no representation or warranty as to reliability, accuracy or completeness of any of the Information, except for any such representation or warranty that may be made in any definitive written agreement that has been or may be executed and delivered with respect to the transaction referred to in paragraph 1. Recipient agrees that neither [INSURED] nor any of the agents,
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representatives or employees of [INSURED] shall have any liability to Recipient arising from the Information or such transaction except as may arise out of any such definitive agreement. 10.
Nothing herein shall be construed as giving Recipient any right, interest in or ownership of Information and with respect to any portion thereof, which is or becomes public information and is now or hereafter becomes covered by any patent. Recipient’s rights with respect thereto shall be subject to all rights of the patent owner and/or licensee.
11.
For the purposes of this Agreement, specific information disclosed as part of Information shall not be deemed to be in the public domain or in the prior possession of Recipient merely because it is embraced by more general information in the public domain or by more general information in the prior possession of Recipient.
12.
This Agreement constitutes the entire agreement between [INSURED] and Recipient relating to the subject matter therein and supersedes and replaces all prior writings, discussions and rights relating thereto. This Agreement may only be amended by a written instrument signed by both parties hereto. No obligation of any kind is assumed by or implied against either party hereto. No obligation of any kind is assumed by or implied against either party hereto except for those obligations expressly stated herein.
13.
This Agreement shall be governed by and construed in accordance with the laws of the State of [California].
14.
Delay or failure to exercise any right or remedy hereunder shall not impair such right or remedy or be construed as a waiver thereof or as acquiescence in a breach of this Agreement. Any single or partial exercise of any right or remedy shall not preclude any other or further exercise thereof or the exercise of any other right or remedy.
15.
This Agreement shall survive any termination or successful completion of Recipient’s obligations in connection with the transaction referred to in paragraph 1 and of discussions between Recipient and [INSURED] concerning such transaction, and shall be binding upon Recipient and its successors for a period of five (5) years from the date hereof, and shall inure to the benefit of and shall be enforceable by [INSURED], its successors and assigns.
For [INSURED] By:
______________________ Name: Title:
For BROKER Group
By:
______________________ Name: Title:
By:
______________________ Name: Title:
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Confidentiality Agreement between [INSURED] and BROKER Group
SCHEDULE 1
CONFIDENTIALITY AGREEMENT
ABC Insurance Company (“ABC”), located at .........................................................., will be provided with information confidential to [INSURED] (“[INSURED]”) in connection with a possible transaction with [insert BROKER Group subsidiary company] (“BROKER”) and [INSURED]. [INSURED] has authorized BROKER to provide such confidential information provided that ABC agrees to be bound by the terms and conditions of the attached Confidentiality Agreement. A copy of the agreement between [INSURED] and [BROKER] is attached for information. Please acknowledge ABC’s acceptance of such agreement by signing below.
AGREED AND ACCEPTED: ABC Insurance Company
By:
_________________________
Date:
_____________________
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APPENDIX 3 SAMPLE TABLE OF CONTENTS FOR EMERGENCY PROCEDURES MANUAL INTRODUCTION – BASIC EMERGENCY INFORMATION DRILL/EMERGENCY STATUS REPORT EMERGENCY PHONE DIRECTORY CONTACT NAMES AND NUMBERS OF EMERGENCY TEAM MEMBERS EMERGENCY OPERATIONS CONTINGENCY SIGNALS MAPS OF SCHOOL/LOCATION SCHOOL EMERGENCY DISASTER PLAN STUDENT EMERGENCY INFORMATION CARDS 1.0
INITIAL RESPONSE 1.1 DETERMINE TYPE OF EMERGENCY 1.2 DETERMINE LEVEL OF EMERGENCY 1.3 DETERMINE IMMEDIATE RESPONSE ACTIONS
2.0
IMMEDIATE RESPONSE ACTION 2.1 STAND BY ALERT 2.2 DUCK, COVER AND HOLD 2.3 SHELTER IN PLACE (LOCK DOWN) 2.4 SECURE BUILDING 2.5 EVACUATE BUILDING 2.6 OFF-SITE EVACUATIONS 2.7 ALL CLEAR
3.0
EMERGENCY PROCEDURES 3.1 ACTS OF VIOLENCE/DISORDERLY CONDUCT 3.2 BIOLOGICAL OR CHEMICAL THREAT 3.3 BOMB THREAT/HOSTAGE TAKING 3.4 BUS DISASTER 3.5 SMOG ALERT 3.6 HEAT STRESS/EXHAUSTION 3.7 EARTHQUAKE 3.8 EXPLOSION/THREAT OF EXPLOSION 3.9 AIRCRAFT AND/OR MOTOR VEHICLE CRASH 3.10 FIRE ON SCHOOL GROUNDS 3.11 FIRE IN SURROUNDING AREA 3.12 FLOODING 3.13 LOSS OF UTILITIES 3.14 ANIMAL DISTURBANCE
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4.0
EMERGENCY TEAMS 4.1 INCIDENT COMMAND TEAM 4.2 INSURANCE RISK MANAGEMENT TEAM 4.3 CRISIS INTERVENTION TEAM 4.4 FIRE/RESCUE TEAM 4.5 FIRST AID TEAM 4.6 ASSEMBLY AREA TEAM 4.7 STUDENT AND STAFF ACCOUNTING TEAM 4.8 SUPPLY AND EQUIPMENT TEAM 4.9 SECURITY TEAM 4.10 MAINTENANCE AND UTILITY TEAM 4.11 STUDENT/PARENT REUNION TEAM
5.0
EMERGENCY INFORMATION 5.1 ALERT SYSTEM 5.2 SCHOOL BUS ROUTES 5.3 EMERGENCY PHONE NUMBERS 5.4 EMERGENCY SUPPLIES AND EQUIPMENT 5.5 EVACUATION ROUTES 5.6 EMERGENCY DRILLS
6.0
GUIDELINES FOR MEDIA RELATIONS IN CRISIS OR EMERGENCY SITUATIONS
7.0
USE OF SCHOOL FACILITIES BY THIRD PARTIES (AMERICAN RED CROSS)
8.0
RESPONSIBILITIES OF ADMINISTRATIVE STAFF
9.0
RESPONSIBILITIES OF TEACHING STAFF
10.0
RESPONSIBILITIES OF CUSTODIAL AND CAFETERIA STAFF
11.0
RESPONSIBILITIES OF SECURITY STAFF
12.0
RESPONSIBILITIES OF BUS DRIVERS
13.0
FORMS 13.1 FORM A – ANNUAL EMERGENCY PLAN CHECKLIST 13.2 FORM B – BIOLOGICAL AND CHEMICAL THREAT RESPONSE CHECKLIST 13.3 FORM C – BOMB THREAT REPORT 13.4 FORM D - DAMAGE REPORT AND ASSESSMENT
Los Angeles Unified School District
13.5 13.6 13.7 13.8 13.9 14.0
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FORM E - EMERGENCY DRILL RECORD FORM F – EMERGENCY DRILL EVALUATION AND RECOMMENDATIONS FORM G – IMPLEMENTATION OF (NEW) EMERGENCY PROCEDURES FORM G – INJURY AND MISSING PERSONS REPORT FORM H – STUDENT RELEASE LOG
SAMPLE LETTERS TO PARENTS/GUARDIANS 14.1 SAMPLE A – HEALTH ADVISORY (SMOG ALERT) 14.2 SAMPLE B – EARTHQUAKE PREPAREDNESS DRILL 14.3 SAMPLE C – SCHOOL CLOSURE DUE TO HEAVY RAINS
SPECIFIC POINTS BY SECTION – Suggested added content 1.2
DETERMINE LEVEL OF EMERGENCY Define in greater detail the three levels of emergency.
2.0
IMMEDIATE RESPONSE ACTION Include procedures for the following as needed: • • • •
Inside Classroom Inside School Building (library, assembly hall, etc.) On School Grounds but Outside School Buildings Going to (Early Morning Events) and From School including Out of Area Trips
Include how to notify local district superintendent. 3.0
EMERGENCY PROCEDURES Include procedures for the following as needed: • • • •
Inside Classroom Inside School Building (library, assembly hall, etc) On School Grounds but Outside School Buildings Going to (Early Morning Events) and From School including Out of Area Trips
Determine transparent procedures for coordinating, identifying and reporting missing students, teachers and staff. 4.0
EMERGENCY TEAMS
Los Angeles Unified School District
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Include backup personnel for teams. Determine priorities for the transport of injured to hospital. Expand procedures to protect and minimize damage to the school site, staff and students. 8.0 THROUGH 12.0 Include responsibilities for emergencies that occur during working (school) and nonworking (non-school) hours. Include non-emergency responsibilities as applicable i.e. maintenance of stored water containers and other supplies.
