Public Risk October 2010

Published by the Public Risk Management Association

www.primacentral.org

October 2010

Determining the Value of Historic Assets

A Case Study of the Maryland State House Managing Employment Risk in a Slowing Economy:

A Roadmap for Public Entities Potential Pitfalls of Vendor Outsourcing:

Controlling the Risks of Vendor Contracts

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Volume 26, No. 9 | October 2010 | www.primacentral.org

The Public Risk Management Association promotes effective risk management in the public interest as an essential component of public administration.

Executive Director Lisa Lopinsky, CAE

Contents

President Laura Peterson, JD, MPA Director of Risk and Insurance University of Wyoming Laramie, WY Past President Ron Hayes Risk Manager Calcasieu Parish School Board Lake Charles, LA

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President-Elect Cindy B. Mallett, AIC, CWCP, ARM-P Risk Manager City of Gainesville Gainesville, GA Directors Betty Coulter Risk Management Director City of Asheville Asheville, NC

6 Determining the Value of Historic Assets A Case Study of the Maryland State House

Matt Hansen, MPA Director, Risk Management Division City & County of San Francisco San Francisco, CA

By Laura McWeeney, JD

Dan Hurley, CSP, ARM-P, MS Senior Director, Risk Management & Safety Norfolk Public Schools Norfolk, VA

10 Managing Employment Risk in a Slowing Economy:

John J. Nacht, ARM Risk Management Program Administrator State of Washington, Employment Security Dept.

Olympia, WA

A Roadmap for Public Entities

By Dennis Molenaar, Esq.

Dave Parker, ARM-P Risk Manager Pima County Sheriff’s Department Tucson, AZ

15 Potential Pitfalls of Vendor Outsourcing: Controlling the Risks of Vendor Contracts

By Joseph G. Jarret

Marilyn Rivers, CPCU, ARM, AIC Director of Risk and Safety City of Saratoga Springs Saratoga Springs, NY Editor Jennifer Ackerman, CAE Senior Manager, Communications 703.253.1267 • jackerman@primacentral.org Advertising Donna Stigler 888.814.0022 • donna@ahi-services.com

15 In Every Issue 4 News Briefs | 19 Advertiser Index | 20 Member Spotlight

Public Risk (ISSN 0891-7183) is published 10 times per year by the Public Risk Management Association, 500 Montgomery Street, #750, Alexandria, VA 22314 tel: 703.528.7701 • fax: 703.739.0200 email: info@primacentral.org • Web site: www.primacentral.org Opinions and ideas expressed are not necessarily representative of the policies of PRIMA. Subscription rate: $140 per year.

Back issue copies for members available for $7 each ($13 each for non-PRIMA members). All back issues are subject to availability. Apply to the editor for permission to reprint any part of the magazine. Periodical postage paid at Alexandria, VA, and additional mailing offices.

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October 2010 | Public Risk

1

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Message from PRIMA President Laura Peterson

What Keeps You Up at Night?

O

nce upon a time, I had a new boss at the State of Nebraska, who came in new to state government and our agency. She met with each division administrator. I prepared for my meeting, reviewed PRIMA’s briefing materials, sought advice from my wise public risk management colleagues and developed a nice presentation. I gave her an overview of risk management in general, outlined our risk management program and covered all the high-profile claims and issues of the time. At the end of the presentation, she asked me to come up with a top 10 list of things that keep the risk manager up at night. In preparing to change jobs recently, I was sorting through old papers and electronic files and I came across that list.

On my list, I found the faithful standbys, things covered frequently on PRIMAtalk or in this magazine. For example, how could I ever adequately value my historical property like Pulitzer Prize-winning novelist Willa Cather’s childhood home, the Arbor Lodge, home of the Arbor Day Foundation, or the amazing Nebraska State Capitol? Yes, we can say how much it would cost to build a replica using new materials but is that the same thing as seeing Willa Cather’s original home? Another seemingly timeless concern on my list was how to ensure a stable budget given the often conflicting unpredictabilities of the insurance market.

There were also things that would make my list today that really weren’t on my list then. You can read about one of those in this issue: employment risk. For me, employment risk has been slowly but surely rising up my top 10 list.

The other thing I noticed wasn’t on my list before but seems

to deserve a lot of my attention these days is risk related to technology. Whether it’s the risks related to Internet use at work, increasing use of social media on and off the job, or threats from hackers and viruses, our world in increasingly electronic and that comes with increased risks.

As I’m writing this, I’m preparing to leave the comfort zone of Nebraska State government, where I’ve been employed for almost 15 years, and undertake a new personal and professional adventure as I move west to become the director of risk and insurance for the University of Wyoming. By the time you read this, I will be settling in and working on my new top 10 list for the university. I know that I will be seeking the wisdom of our members through the Cybrary, PRIMAtalk and probably a few personal phone calls, emails, Facebook posts or visits. I know I will be able to count on our members as always to be a wealth of excellent advice and encouragement.

So, what is on your top 10 list? What are the things that keep you up at night? Be sure to drop me a line and let me know and be sure to ask your PRIMA colleagues for their advice, it’s a great sleep remedy!

So, what is on your top 10 list? What are the things that keep you up at night?

Be sure to drop me a line and let me know and be sure to ask your PRIMA colleagues for their advice, it’s a great sleep remedy!

Sincerely,

Laura Peterson, JD, MPA 2010–2011 PRIMA President Director of Risk and Insurance University of Wyoming

October 2010 | Public Risk

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News Briefs

News

Briefs Detroit Public Schools Ordered to Rehire Officers In a second court ruling in a week, a Wayne County judge said that Detroit Public Schools (DPS) must immediately rehire 226 safety officers who were fired in July.

Wayne County Circuit Judge Robert Ziolkowski granted the DPS public safety officers—represented by Teamsters Local 214—a preliminary injunction, requiring DPS to rehire the officers immediately. He also denied the school district’s motion to stay, or suspend enforcement of, the injunction pending an appeal.

At the root of the court battle is a decision by Robert Bobb, DPS’ state-appointed emergency financial manager, to privatize school-based security officers through a one-year contract with Securitas Security Services USA. The workers received notices ending their employment at the conclusion of summer school last month.

The decision to replace the employees with lower-paid officers offered less training was criticized by the teachers union and security experts as unwise because of the growing youth gang violence in DPS buildings.

Huge Losses Put Federal Flood Insurance Program in the Red FEMA’s National Flood Insurance Program is the nation’s main flood insurer, created by law in 1968 as private companies stopped covering flood damage.

The program insures 5.6 million properties nationwide and aims to be selfsustaining by paying claims from premiums it collects.

Instead it’s running deeply in the red. A major reason, a USA TODAY review finds, is that the program has paid people to rebuild over and over in the nation’s worst flood zones while also discounting insurance rates by up to $1 billion a year for flood-prone properties.

Along with the huge losses from Hurricane Katrina, the generous benefits have forced the program to seek an unprecedented $19 billion taxpayer bailout.

“If this were a private insurer, it would be bankrupt,” said Robert Hartwig, president of the Insurance Information Institute, an industry think tank.

A USA TODAY review of FEMA records found that the owners of 19,600 homes and commercial buildings worth $25,000 or more have collected insurance payments that exceed the value of their property. The records exclude property addresses.

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Public Risk | October 2010

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Drug War Sends Bullets Whizzing Across the Border The first bullets struck El Paso’s city hall at the end of a work day. The next ones hit a university building and closed a major highway. Shootouts in the drug war along the U.S.-Mexico border are sending bullets whizzing across the Rio Grande into one of the nation’s safest cities, where authorities worry it’s only a matter of time before someone gets hurt or killed, reports the Associated Press.

At least eight bullets have been fired into El Paso in the last few weeks from the rising violence in Ciudad Juarez, Mexico, one of the world’s most dangerous places. And all American police can do is shrug because they cannot legally intervene in a war in another country. The best they can do is warn people to stay inside.

“There’s really not a lot you can do right now,” El Paso County Sheriff Richard Wiles said. “Those gun battles are breaking out everywhere, and some are breaking out right along the border.”

Police say the rounds were not intentionally fired into the U.S. But wildly aimed gunfire has become common in Juarez, a sprawling city of shanty neighborhoods that once boomed with manufacturing plants. It’s ground zero in Mexico’s relentless drug war.

Metrolink Offers $200 Million Settlement in Chatsworth Rail Disaster Metrolink and its former train operating contractor offered to pay $200 million to victims of the 2008 Chatsworth, Calif., rail disaster that killed 25 people, setting the stage for one of the costliest rail accident settlements in the nation’s history.

The proposed settlement fund, if approved by the courts, would relieve Metrolink and private contractor Connex Railroad of any additional liability, which federal law currently caps at a total of $200 million for passenger rail accidents.

But attorneys for the victims of the commuter train crash said the costs will far exceed that amount, and it’s unclear who would cover those costs. A Ventura County congressman has said he expects to introduce legislation that would raise the $200-million liability limit, given the severity of the accident, which also injured 135 riders.

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Determining the Value of Historic Assets

Determining the Value of Historic Assets

A Case Study of the Maryland State House

By Laura McWeeney, JD

One of the pillars of sound risk management is to ensure the appropriate level of property coverage before a loss. Coverage, in turn, is determined by the value of the asset. But, how is valuation achieved for a historic property like the Maryland State House in Annapolis, the crown jewel of the state? Clearly, “replacement cost new” with annual appreciation makes no sense.

After raising this issue with our broker partner, we came to the sobering realization that the State House may not be adequately insured. After envisioning the prospect of aluminum siding on the dome for a night or two, the State utilized valuable loss control hours provided by our broker for a historic valuation as a basis for coverage. In the interim and for the duration of the evaluation period, we proactively bumped our values in anticipation of an increase. In the end, the final valuation had a minor impact on the State’s excess property premium and resulted in an enormous increase in our level of comfort that this asset will be protected and preserved in the event of a loss.

The valuation process also involved consultation with State stakeholders such as the State’s Department of General Services, Archives and Historical Trust. Not only were their catalogs, documents and resources helpful, but their involvement in this process ensured that they were invested in the process and confident of the evaluator’s conclusions. As a final benefit, the valuation report made proactive recommendations for the preservation of ornamental plaster, metal and woodwork through mold templates held in a secure off-site location for use in the event of a catastrophic loss. That feedback was returned to the stakeholders for follow up.

This journey was fascinating and I would like to share some information about the historic valuation process in the event that your public entity is considering valuation of your unique historic property.

The Maryland State House The Maryland State House in Annapolis, Maryland, is the oldest State House still in legislative use and the only State House to have ever served as the nation’s Capitol. The State House was originally constructed between 1772 and 1779 and in September 1790, Thomas Jefferson spent an enjoyable three hours on the balustrade of the dome with James Madison.

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Public Risk | October 2010

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All photos courtesy of the Maryland State Archives.

The State House served as the United States Capitol from November, 1783, through August, 1784, for the Continental Congress. During that time, George Washington came before Congress to resign his commission as Commander-in-Chief of the Continental Army and the Treaty of Paris was ratified marking the official end of the Revolutionary War. The State House is a registered National Historic Landmark and was constructed in three distinct phases: the Old State House, its timber-frame Dome built on top of the State House from 1785 through 1795, and the Annex, which was built from 1902 through 1906, as an extension of the original structure. One of the wonders of the structure is the Dome, the largest frame dome in the United States whose hand-hewn timbers are held together by wooden pegs reinforced by iron straps forged by an Annapolis ironmonger.

The Dome is topped by a five-foot-tall acorn whose purpose is to provide stability to an actual Ben Franklin lightening rod that anchors its center. Much to our delight, the Dome also sports its carpenters’ graffiti dated from 1800.

Today, the Maryland General Assembly convenes at the State House for three months annually and the leadership of the state: the governor, lieutenant governor, speaker of the House of Delegates and the president of the senate, continue to have offices in the Annex.

Landmark and Museum Quality Valuation Standards Given the uniqueness of this asset, there is little precedent for valuation of a building of this historic character. The valuators started with the normal “like kind and quality” assessment considering dimension, materials, structure and mechanical systems. With the obvious recognition that contemporary materials and craftsmanship would not adequately value the asset, the valuators then applied two more stringent standards—the landmark quality valuation and the museum quality valuation—to the structure.

Landmark quality valuation represents the cost of rebuilding the same structure on the same site to the standards outlined in the The Secretary of the Interior’s Standards for the Treatment of Historic Properties. Costs for this valuation include archeological investigation, the preservation of remaining historic materials, features and spatial relationships. This valuation focuses on the accurate duplication of the appearance of the original structure and does not include the costs for structures that are hidden from view. An example of landmark quality restoration could include reproduction of decorative plaster with pre-molded glass fiber reinforced gypsum with a skim coat of plaster.

In addition to those costs and conditions outlined for the landmark quality valuation, the museum quality valuation adds costs for extensive archeological investigation, material testing, the exact duplication of materials that are hidden from view and the use of historically authentic building methods.

An example of museum quality reproduction could include replacement of the original Tiffany stained glass with stained glass matching the color, pattern, texture and opalescence fabricated by experts who are knowledgeable of the Louis Comfort Tiffany Studio material and methods.

The Valuation Process With respect to the valuation process, cost data for “like kind and quality” reconstruction was first developed using industry services that compile databases of recent costs for similar buildings located in similar areas. Then, cost data for the more stringent standards was researched by an architect whose specialty is historic structures. The architect reviewed the few published documents regarding historic restorations both in the United States and in Europe and also interviewed historic restoration professionals and Maryland state building historians. Additionally, the architect reviewed the costs for other national restoration projects.

October 2010 | Public Risk

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Determining the Value of Historic Assets

There is no question that a structure such as the Maryland State House has a historical significance beyond that which can be captured by “like kind and quality” valuation.

After the significant building components of the State House were identified, investigated and valued, the valuators were able to establish ratios between “like kind and quality” values and the costs associated with the two higher standards of construction. Based upon precedent and research, valuators were able to estimate that landmark quality reconstruction might increase costs by more than 200 percent above normal cost and that museum quality restoration might increase costs by an additional percentage above that.

valued at landmark quality as the materials and craftsmanship required for building and raising the Dome according to museum quality standards, as monumental as they were in 1790, would be almost impossible today. For instance, “crooks” employed in the 1700s for the arched roof of the belfry may not be available at any cost. Costs for each of these sections were added to reach a final valuation that we referred to our broker and carriers, who worked with us to achieve the required coverage.

Finally, the valuators considered the three sections of the building and based upon the level of construction, age and function, recommended the appropriate standard of valuation for each. For example, the Old Senate Chamber is clearly significant in terms of the nation’s history. Since the state is currently reconstructing the chamber to the appearance it had in 1783, when George Washington resigned his commission as commander-in-chief of the Continental Army, the valuators recommended museum quality valuation for the Old State House. Landmark valuation was recommended for the Annex, which is currently in legislative use. By necessity, the Dome was

There is no question that a structure such as the Maryland State House has a historical significance beyond that which can be captured by “like kind and quality” valuation.

After all, the State House is only one of 2,430 sites that have been officially designated as a National Historic Landmark. Following the historic valuation, the State can now anticipate that its crown jewel will be protected and preserved for the next 231 years. Our new mission: the Maryland Governor’s Mansion perhaps?

Laura McWeeney, Esq., is the director of insurance for the State of Maryland.

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Managing Employment Risk in a Slowing Economy

Managing Employment Risk in a Slowing Economy:

A Roadmap for Public Entities

By Dennis Molenaar, Esq.

The difficult economic conditions of the last few years are on top of everyone’s mind thanks to the news media, and rightfully so. Challenging economic circumstances are not only having an adverse impact on individuals, but also proving destructive to public entities across the nation. The weak economy is affecting cities and counties all over America; it seems that no one person or group is entirely immune.

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Public Risk | October 2010

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One only has to take a quick look at recent news stories to see the economy’s powerful effect on municipalities nationwide. Earlier this year, Kansas City closed nearly 50 percent of the district’s public schools, eliminating more than 700 jobs, in an attempt to address a $50 million budget deficit. Last summer, Jefferson County, the largest county in Alabama, faced the largest municipal bankruptcy ever—a $3.9 billion deficit—and subsequently cut services drastically and laid off 25 percent of its workforce. And, according to CNNMoney.com, in 2008 alone, more than 45,000 government layoffs were announced. And this appears to be just the tip of the iceberg. This issue is not something that will be resolved in the short term.

Increasingly, public entities will require close scrutiny of the workforce; all entities should be reviewing documentation and personnel files in preparation of layoffs.

These recent events are the result of practicality and the diligent efforts of municipalities to stay in the black—even cities and towns need to cut back in tough times. But the choice by governments to reduce staff is challenging and complex, as elected officials are beholden to those who voted them into office. A variety of issues must be taken into consideration, such as the need for services mandated by law, while guarding against looming shortfalls in revenues.

Mitigating Risk Workforce reductions are not only laden with emotion and subject to security issues, but also can open up an organization to possible claims of discrimination and the potential for lawsuits. Even the most well-reasoned layoffs can result in unintended consequences, particularly when involving departments where a large number of staff may be in a protected class.

by the public entity they represent and make a decision: which benefits are absolutely essential and which are simply “nice to have”? Finding the balance between public expectations of government programs and ever-growing budget deficits will help these entities continue to remain solvent, while reducing the need to drastically cut staff.

This audit of services encompasses an entity-wide look at staging programs and services currently provided, and ultimately helps build an organization-wide plan, making cuts the responsibility of the entity as a whole. The process requires a combined effort from elected officials, legal counsel, human resources staff and department heads.

One consideration is to remove or reduce programs that are no longer federally funded. Local governments may have assumed responsibility for services once sponsored by the federal government, such as daycare/latch key, parks and recreation, jail education or elderly transportation.

However, eliminating these programs entirely is not always the answer. Just as individuals and families are developing creative solutions to save money in a tight economy, some governments have done the same, including combining services, such as parks and recreation in the summer with street and road cleanup in the winter; contracting with outside vendors; letting other agencies take responsibility; utilizing volunteers; and enlisting religious or civic groups to perform the service. Furthermore, the level of services offered can be reduced, by providing joint city-county services, cutting some office hours and even closing during certain times or days.

For these reasons, prior to considering job eliminations, risk managers, in conjunction with legal and human resources, need to take a hard look at the services offered

October 2010 | Public Risk

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Managing Employment Risk in a Slowing Economy

Though involuntarily terminating employees is never an easy task, it can sometimes be an unavoidable one. With thoughtful consideration and careful planning, the risks associated with staff reduction can be greatly reduced, making the process as straightforward as possible.

Making the Hard Choices But once services are reassessed, if a financial shortfall remains, it may be time to consider reducing staff numbers.

Though it may be tempting to use financial hardship as an excuse to clean out the “dead wood” in a particular group, remember that unless performance problems are well-documented and have previously been discussed with the poor performers, removing problem employees and economically based staff reductions are two entirely separate issues, and should be treated as such.

There are a number of appropriate ways to begin to decide which employees will be laid off.

• Seniority. This is a fairly easy practice to implement, as deciding who will be let go is as simple as reviewing his or her hire date. Unfortunately, the seniority approach often results in the loss of new, good talent and leaves the organization vulnerable to large number of openings in several years. It also could result in issues if a disproportionate number of those employees are of a protected class.

• Position needs. More difficult to administer, this strategy involves working with department managers and assessing the needs for specific staff positions. It’s a very cost-effective approach that helps maintain staff in areas where they are needed the most but is also very subjective and could be abused by managers.

• Service reduction. By reducing the availability of a public service, it follows logically that a staff reduction may also result. While fairly easy to administer, there is significant risk of such an approach becoming a political hot potato, particularly if it is a service of interest to a large portion of the public.

Once the most practical method is determined, implementation can begin. Some suggestions for making it as seamless as possible for both the public entity and employees: • Exhaust available options. Prior to layoffs, ensure that all other alternatives have been explored. Reduce the number of temporary and part-time employees. Offer early retirement buy-out options. Establish an abbreviated work week.

• Communicate early and often. Tell employees as soon as possible of the coming changes. Hold individual meetings with affected employees. Make information readily available to all staff members so concerns can be addressed and the spread of misinformation diminished.

• Ease the transition. If possible, make assistance available to employees. Consider offering outplacement programs like vocational rehab, family financial planning and health care/benefits meetings.

• Document everything. Document all actions and why those decisions were made. Have a clearly written

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Public Risk | October 2010

plan on staff reductions and be sure to follow it. Each step of the process of employee reduction, termination or furloughs should be closely scrutinized by legal. Prepare legal counsel with documentation and personnel files to ensure that there is not a violation of a federal law or an unintentional appearance of discrimination. Most insurance carriers are willing to provide assistance with employment practices and employment issues.

• Make security a priority. All it takes is a quick look at a newspaper to realize that workplace safety cannot be taken for granted—the recent case of a terminated employee of a Connecticut beer distributor who returned to the workplace with a gun is one example. Employing proper security practices can help ensure that your employees are protected from a potentially dangerous situation. Your entity should also train employees to recognize warning signs such as employees making threatening remarks about supervisors and other employees. When layoffs do occur, ensure current employees are safe from retaliation.

Keeping Legalities in Mind Layoffs come with a host of potential legal claims, stemming from a number of existing laws and government organizations: EEOC, state commissions against discrimination, the Family and Medical Leave Act, Americans with Disabilities Act, Sarbanes-Oxley, Uniformed Services Employment and Reemployment Rights Act, Age Discrimination in Employment Act and the Civil Rights Act, are just a few examples.

So it is important that risk managers ask themselves, do we have the right to reduce staff or employee hours of work?

The quick answer is yes, absent a contract, union agreement or other employment manual, and as long as staff or work hour reductions are not discriminating against a protected person or in violation of a federal or state law. All decisions regarding staff reductions should include the insight of experienced legal counsel, lest an organization risk putting itself into a unforeseen legal position.

Though involuntarily terminating employees is never an easy task, it can sometimes be an unavoidable one. With thoughtful consideration and careful planning, the risks associated with staff reduction can be greatly reduced, making the process as straightforward as possible.

The key to a successful reduction is that of careful planning, documentation and review by legal and human resource specialists. We must keep in mind the long-term impacts that these actions will have on individuals, families and the public entities.

Dennis Molenaar, Esq. is vice president of risk control for OneBeacon Government Risks.

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Potential Pitfalls of Vendor Outsourcing

Potential Pitfalls of Vendor Outsourcing:

Controlling the Risks of Vendor Contracts

By Joseph G. Jarret

As public entities are increasingly being pressured to adopt private business concepts designed to assist government to be run more like a business, governments are becoming more reliant on external, private vendors to provide services necessary to attend to the needs of the general public.

While many public managers carefully manage their relationships with their vendors in terms of performance, it is the risk manager who is expected to take the lead on risks inherent in contracting with a particular vendor.

Selecting the Vendor As a result of public sector procurement policies, most public entities award bids to the lowest responsible vendor. The effectiveness of the due diligence necessary to insure the public entity is selecting a responsible vendor will often depend upon the extent of the involvement of the risk manager. This is especially true for those entities that, due to fiscal stress, do not have the luxury of merely passing the vendor contract on to the entity’s attorney. As such, the risk manager should insure that reasonable inquiries are made into a vendor’s ability to meet the requirements for the proposed service as well as the vendor’s financial ability to deliver its services throughout the life of the agreement. The public entity derives the maximum bang for its buck when inquiries are made, at a minimum, into the quality and experience of the vendor staff, the vendor’s familiarity with the public sector way of doing things, and whether the vendor relies on third parties or partners to provide its services. Finally, it’s most helpful to know whether the vendor enjoys a solid reputation in the business community as compared to one that is frequently involved in litigation, or other activities that casts doubts on its ability to provide the services needed.

October 2010 | Public Risk

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Potential Pitfalls of Vendor Outsourcing

The Vendor Contract For many public entities, the days of the risk manager passing vendor contracts on to in-house legal staff without so much as a glance are quickly fading away. In order to reduce the frequency and severity of risks inherent in contracting with outside vendors, the public risk

Whoever coined the phrase, “the devil is in the details” may have had a vendor contract in mind. With the proliferation of private vendors being asked to perform functions that until now have been performed by government, comes the increase in both the number and complexity of vendor contracts. Such contracts often contain language that can translate into unintended risks that could prove to be contrary to the best interests of a public entity. Language that on its face seems innocuous, may in reality either expose the entity to costly risks, or limit the entities remedies in the event of a breach of the agreement. For instance, vendors are generally fond of one size fits all contracts that contain, among other things, a requirement that the public entity hold harmless and indemnify the vendor against all claims. Or, a clause that requires venue (the location where a lawsuit would be litigated) in a state other than where the public entity lies. Further, some agreements permit the vendor to cancel the contract with minimal notice and without penalty while simultaneously requiring the government to give written, formal notice and likewise be susceptible to penalties for not strictly adhering to the notice process. Finally, vendor contracts should include references to the government’s right to monitor the performance of the vendor while requiring the vendor to submit appropriate reports, including, but not limited to, financial reports, audit reports and internal control reports, depending upon the level of risk the vendor’s services provides.

manager must be

Alternative Dispute Resolution

an integral part of

Because most vendors view litigation for what it often is— a costly, protracted, resolution process that is confiscatory of their time, energy and fiscal resources, not to mention downright unnerving—pre-suit mediation and arbitration clauses are appearing in vendor contracts with greater frequency. To belabor the obvious, mediation is an alternative dispute resolution tool that has most commonly come to mean a process by which an impartial third party assists

the contract team.

in reconciling a dispute between two contracting parties.

Arbitration, while also an alternative dispute resolution tool, differs from mediation in that, while a neutral mediator attempts to reach a settlement by facilitating a dialogue between the parties, an arbitrator listens to both sides of an argument, and like a judge, renders a decision, thus putting an end to the dispute. To be sure, neither party to a vendor contract favors litigation. In fact, one of the more frustrating aspects of contentious litigation for the vendor and the public entity alike is the inability of the parties to communicate with one another once suit is filed as well as the inability to predict with any degree of certainty, the outcome of the dispute. The parties quickly go from being colleagues to foes, a scenario that sometimes ends long-standing, professional relationships.

While mediation often times proves to be a useful tool in disposing of claims at an early stage in order to avoid lengthy and expensive litigation, the risk manager should closely scrutinize the pre-suit mediation clause.

Some of the more common, and less favorable (from the government’s standpoint) clauses are those that permit the vendor to select the mediator, or require the government to absorb the entire costs of mediation, or that mandate that the outcome of the mediation is binding on the parties. All of the clauses put the government at a marked disadvantage.

The other contract clause favored by vendors is the binding arbitration clause. In extreme cases, a binding arbitration clause can compel the government to pay a substantial fee upfront to pursue a complaint, travel long distances to a location of the vendor’s choosing for the hearing, argue their case before an arbitrator who depends on the vendor for future business and be bound by the arbitrator’s decision with no right to appeal. A more balanced arbitration clause will mandate that the parties jointly agree on the identity of the arbitrator, the venue of the arbitration hearing, the manner in which the arbitrator’s fee is satisfied and by whom, and whether or not the decision is binding.

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Calendar of Events The Public Risk Management Association (PRIMA) hosts or sponsors a wide variety of educational programs for public risk practitioners. These meetings and events provide an optimum forum for public risk professionals to acquire new knowledge or skills, exchange ideas and expand peer networks.

In summary, all vendor contracts should be in writing and should cover the government’s expectations and responsibilities, and the scope of work and fees, type and frequency of reporting on the status of work involved. Alternative dispute resolution clauses should be carefully scrutinized to ensure they are not contrary to the best interests of your entity, and a process for changing the scope of work performed, and an agreement as to the ownership of any work product produced as a result of the contract should be clearly articulated.

Further, an acknowledgement that the vendor is subject to your state’s open records or open government laws as applicable, subject to the government’s regulatory review through internal or external auditors, and responsible for taking appropriate measures to protect any information deemed private (such as certain employee health or other personal information) through appropriate security measure. Finally, there should exist language that the performance of the contract by your entity is subject to the availability of public funds.

Protecting Your Data It is not unusual for some vendors to be granted access to much of the same data as the public entity’s employees. It is advisable to share data with a vendor in such a manner that sensitive and proprietary data is not transmitted, stored and processed among a wide range of networks that are outside of the influence of your entity’s internal controls and security policies. Prudence dictates that a vendor’s standards, policies and procedures relating to the manner in which they handle data entrusted to them be scrupulously reviewed. It is important to know what internal controls, record maintenance, backup systems and security systems are being employed by the vendor. Further, the risk manager should know whether the vendor has an adequate contingency plan in place to protect the data entrusted to it, whether the vendor conducts background checks on employees, and whether an audit of the work performed in the past by vendor for other public entities has been conducted.

For many public entities, the days of the risk manager passing vendor contracts on to in-house legal staff without so much as a glance are quickly fading away. In order to reduce the frequency and severity of risks inherent in contracting with outside vendors, the public risk manager must be an integral part of the contract team. This translates into taking the time to become fluent with your entity’s purchasing/procurement protocol, a review of those lawsuits that have been filed in the past due to a breach of a vendor contract by either party, insuring that due diligence as to the reputation of prospective vendors is accomplished, and taking the time to painstakingly read the fine print. The devil just might be in the details, but he can be fleshed out with a little perseverance.

PRIMA’s calendar of events is current at time of publication. For the most up-to-date schedule, visit www.primacentral.org.

Webinars 2010 October 13 Protecting our Children: Keeping our Communities and Schools Safe November 17: FREE for Members!

Winning Strategies for Contractual Risk Transfer

PRIMA Annual Conferences June 5–8, 2011 PRIMA 2011 Annual Conference Portland, OR Portland Convention Center June 3–6, 2012 PRIMA 2012 Annual Conference Nashville, TN Opryland Hotel June 2–5, 2013 PRIMA 2013 Annual Conference Tampa, FL Tampa Convention Center

Joseph G. Jarret is law director for Knox County, Tenn., a federal and state mediator and a former public risk manager.

October 2010 | Public Risk

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Spr e a d t h e Wor d a n d W i n !

PRIMA’s Member Get a Member Campaign PRIMA’s Member Get a Member Campaign lets you earn valuable incentives while you spread the word about PRIMA’s great member benefits. Help us recruit other public entities to join the ONLY association devoted to risk management in the public sector and you could receive: • Recruit one new member and receive 30% off your next year’s membership dues.

• Recruit two new members and receive 50% off your next year’s membership dues.

• Recruit three new members and receive complimentary next year’s membership.

• Recruit four or more new members and receive one complimentary registration to PRIMA’s 2011 Annual Conference in Portland, Oregon.

If you recruit four or more members, you also will be entered into a drawing for an all-expenses paid trip to Portland for PRIMA’s 2011 Annual Conference, including transportation and hotel accommodations!

How do you get started?

Visit www.primacentral.org and click on the Membership link under About PRIMA. Find the special Member Get a Member application and distribute to your fellow public entity peers. When they enter your name in the referral box, you get the credit and the discount!

In addition, each new member recruited through this campaign will receive a 10% discount off of their first year’s membership dues!

Don’t Delay! To qualify for the campaign incentives and the Grand Prize, new members must join PRIMA by March 31, 2011!

Help us grow your Association…spread the word and win!

Advertiser Index

Advertiser Index Carl Warren & Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 9 Genesis Underwriting Management Company.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 2 Midlands Management Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 5 Munich Reinsurance America. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 13 Paladin Managed Care Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inside Front Cover SAMBA Safety. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 9 States Self-Insurers Risk Retention Group, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inside Back Cover Travelers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outside Back Cover

Has your entity launched a successful program? An innovative solution to a common problem? A money-saving idea that kept a program underbudget? Each month, Public Risk features articles from practitioners like you. Share your successes with your colleagues by writing for Public Risk magazine! For more information, or to submit an article, contact Jennifer Ackerman at jackerman@primacentral.org or 703.253.1267.

USPS Statement of Ownership, Management, and Circulation (All Periodicals Publications Except Requester Publications) – PS Form 3526

1. Publication Title Public Risk 2. Publication Number 0891-7183 3. Filing Date 09/08/10 4. Issue Frequency 10x/Year 5. Number of Issues 10 6. Annual Subscription Price $140 7. Complete Mailing Address of Known Office of Publication (Not printer) (Street, city, county, state, and ZIP+4®) Contact Person Jennifer Ackerman 500 Montgomery St. #750, Alexandria, VA 22314-1581 Telephone (703) 253-1267 8. Complete Mailing Address of Headquarters or General Business Office of Publisher (Not printer) PRIMA, 500 Montgomery St. #750, Alexandria, VA 22314-1581 9. Full Names and Complete Mailing Addresses of Publisher, Editor, and Managing Editor (Do not leave blank) Public Risk Management Assoc. (PRIMA), 500 Montgomery St. #750, Alexandria, VA 22314-1581 Publisher (Name and complete mailing address) Jennifer Ackerman, CAE, PRIMA, 500 Montgomery St. #750, Alexandria, VA 22314-1581 Editor (Name and complete mailing address) Same as editor Managing Editor (Name and complete mailing address) 10. Owner (Do not leave blank. If the publication is owned by a corporation, give the name and address of the corporation immediately followed by the names and addresses of all stockholders owning or holding 1 percent or more of the total amount of stock. If not owned by a corporation, give the names and addresses of the individual owners. If owned by a partnership or other unincorporated firm, give its name and address as well as those of each individual owner. If the publication is published by a nonprofit organization, give its name and address.)

(By Mail and Outside the Mail)

b. Paid Circulation

Full Name Public Risk Management Association Complete Mailing Address 500 Montgomery St. #750, Alexandria, VA 22314-1581 11. Known Bondholders, Mortgagees, and Other Security Holders Owning or Holding 1 Percent or More of Total Amount of Bonds, Mortgages, or Other Securities.

If none, check box  Full Name Complete Mailing Address 12. Tax Status (For completion by nonprofit organizations authorized to mail at nonprofit rates) (Check one)  Has Not Changed During Preceding  Has Changed During Preceding The purpose, function, and nonprofit status of this organization and the exempt status for 12 Months 12 Months (Publisher must submit explanation of change with this statement) federal income tax purposes: 13. Publication Title Public Risk 14. Issue Date for Circulation Data Below August 2010 15. Extent and Nature of Circulation Average No. Copies Each Issue No. Copies of Single Issue 10x/yearly membership magazine During Preceding 12 Months Published Nearest to Filing Date 1707 1500 a. Total Number of Copies (Net press run) (1) Mailed Outside-County Paid Subscriptions Stated on PS Form 3541 1481 1392 (Include paid distribution above nominal rate, advertiser’s proof copies, and exchange copies)

(3) Paid Distribution Outside the Mails Including Sales Through Dealers and Carriers, Street Vendors, Counter Sales, and Other Paid Distribution Outside USPS® (4) (4) Paid Distribution by Other Classes of Mail Through the USPS (e.g. First-Class Mail®) c. Total Paid Distribution (Sum of 15b (1), (2), (3), and (4)) (1) Free or Nominal Rate Outside-County Copies included on PS Form 3541 (2) Free or Nominal Rate In-County Copies Included on PS Form 3541 (3) Free or Nominal Rate Copies Mailed at Other Classes Through the USPS (e.g. First-Class Mail) (4) Free or Nominal Rate Distribution Outside the Mail (By Mail and Outside the Mail)

d. Free or Nominal Rate Distribution

(Include paid distribution above nominal rate, advertiser’s proof copies, and exchange copies)

(2) Mailed In-County Paid Subscriptions Stated on PS Form 3541

(Carriers or other means)

3

3

0

0

0

0

1484 0 0

1395 0 0

0

0

140

50

140 50 e. Total Free or Nominal Rate Distribution (Sum of 15d (1), (2), (3) and (4) 1624 1445 f. Total Distribution (Sum of 15c and 15e) 83 55 g. Copies not Distributed (See Instructions to Publishers #4 (page #3)) 1707 1500 h. Total (Sum of 15f and g) 91.38% 96.53% i. Percent Paid (15c divided by 15f times 100) 16. Publication of Statement of Ownership  If the publication is a general publication, publication of this statement is required. Will be printed in the October 2010 issue of this publication. Publication not required.

17. Signature and Title of Editor, Publisher, Business Manager, or Owner Jennifer Ackerman, editor Date 09/08/10

October 2010 | Public Risk

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Member Spotlight

Spread the Word and Win! Each month, Public Risk features a member who has gone above and beyond in a feature column titled “Member Spotlight.” Do you know someone who deserves recognition, has made a contribution or excelled in their profession?

If so, we’d like to hear from you for this exciting column, as PRIMA shines the spotlight on its members.

To be considered for the Member Spotlight column, contact Jennifer Ackerman at jackerman@primacentral.org or 703.253.1267.

I

n May, PRIMA members participated in a member needs assessment survey, where the Association learned invaluable information about its members. One thing that stood out in the survey results was how satisfied PRIMA members are with the Association and that, overwhelmingly, members would recommend PRIMA membership to their peers.

The result? A new program launched in September called PRIMA’s Member Get a Member Campaign.

PRIMA’s Member Get a Member Campaign lets government members earn valuable discounts while spreading the word about PRIMA’s great member benefits. The program is designed to allow members to recruit other entities to join the only association devoted to risk management in the public sector and receive discounts on membership or even a free Annual Conference registration.

“The Member Get a Member Campaign is a great way for our members to toot PRIMA’s horn,” said Lisa Lopinsky, CAE, PRIMA executive director. “And we will reward those who do with some great incentives!”

With this campaign, PRIMA government members can win: • Recruit one member and receive 30% off your next year’s membership dues.

• Recruit two members and receive 50% off your next year’s membership dues.

• Recruit three members and receive complimentary membership dues for next year.

• Recruit four or more members and receive one complimentary registration to PRIMA’s 2011 Annual Conference in Portland, Oregon.

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Public Risk | October 2010

All members that recruit four members will also be entered into a drawing for an all-expense paid trip to Portland for PRIMA’s 2011 Annual Conference, including transportation and hotel accommodations.

There are a few simple rules to follow in order to get started: • Applications received without the recruiter’s name listed will not count as a referral and will not receive discounted membership pricing.

• New member must be referred by a PRIMA government/ public entity member to qualify.

• One member equates to one government member, or two of the following types of members: associate, corporate affiliate, associate members, organizational or individual.

• Membership applications and payment must be postmarked by March 31, 2011, to receive the referral credit.

• The “Member-Get-a-Member” campaign may not be combined with other PRIMA membership discount offers.

• Recruiters do not qualify for multiple incentives.

• Only government members of PRIMA who recruit new members qualify for campaign incentives.

Help us grow your Association! Visit www.primacentral.org and click on membership to get the special Member Get a Member Application. For more information, contact Jessica Konrath at jkonrath@primacentral.org or 703.253.1270.

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