The public sector provides a broad range of services, and insuring their risks can be challenging. Within a single entity, such as a state, city or county, there are prisons, airports, police, etc., and entities that provide zoning ordinances, maintain bridges, run golf courses, and oversee water and sewer utilities.
“Public entities have a very broad range of risks that need to be analyzed,” says William F. Becker, Executive Vice President and National Practice Leader — Public Sector, Aon Risk Solutions. “Many of these risks are unique, and trying to find a set of carriers who understand that and will still take on those risks can be challenging.”
Smart Business spoke with Becker, Steven P. Kahn, Managing Director of Aon Global Risk Consulting, and Scott Saunders, Vice President of Aon Risk Solutions, about insuring the public sector.
What is included in the public sector?
The traditional definition is any governmental entity, encompassing cities, states, counties, towns and special districts, along with authorities, commissions, school systems, utilities, transits and airports. Aon’s practice group also supports nonprofits, political organizations, Indian Country and higher education institutions, both public and private.
How are insurance needs different for public sector entities?
Public entities see some of the same issues as private entities, but there are certain risks in the public sector that are not seen in private organizations because they provide services that other organizations do not, such as prisons, fire and police, zoning and bridge maintenance. Pursuant to sovereign immunity laws, the public sector may have caps on the amounts for which they can be held liable, or immunity from suits. Also, there are some coverages required by statute. For instance, private companies need D&O insurance to cover their directors and officers, but a public entity covers their public officials instead of directors and officers. While their basic exposures and risk factors are quite similar, the public entity-specific policies are worded specifically to insure these exposures.
How do caps and/or immunity from suits work for public entities?
In some states, there are caps on the amount of a claim against a governmental entity, capping its liability and reducing its costs. Many states have a per-claimant and per-occurrence cap. The cap differs by state and some states, such as California, have no caps. The caps would not apply to a claim in federal court if an entity is sued for discrimination, for example, and the caps do not apply to claims in other states.
Other states may have full immunity from certain suits, e.g., Michigan municipalities are immune from suits subject to certain exceptions, such as losses arising out of highways and sidewalks, motor vehicles and building maintenance, etc.
What issues may arise if public entities are not insured properly?
Government entities have a very limited ability to obtain funds from other sources. A large award could cause them to cut programs, impose a special tax assessment, or, in some cases, to declare bankruptcy, if allowed. This recently occurred in Boise County, Idaho, due to a zoning claim the county lost in court. The county issued a permit but wouldn’t let the developer move forward. The developer took the county to court and it lost a $4 million judgment. The county was not insured and it declared bankruptcy.
How can organizations best understand their risks and ensure they have the proper insurance?
A thorough and creative process is necessary to identify and measure exposure to risks of accidental loss. This is done by inspections, interviews, analysis of budgets and financial reports, analysis of past claims data, review of major contracts and knowledge of operations. The organization needs a knowledgeable partner to help it place the best available coverage at reasonable terms.
How can these entities determine exposures?
To complete a thorough analysis of their exposures, public entities should set up inspections, conduct interviews with department heads, walk through the facilities, look at budgets, financial reports, past claims data and contracts to understand what operations are being performed that fall under different units of local government.
Employees working in the governmental entity know the operations but are often unaware of the risk or insurance implications.
Why do public entities need professional help?
Risk professionals can look at insurance policy agreements and exclusions to make sure that nothing is left uninsured — or if something is left uninsured by design, the professional can ensure that everyone understands that the entity will retain the risk.
Some claims, like auto accidents, are straightforward, but other types can be subtle. For example, if the public entity denies a zoning permit to someone and is sued as a result, will it be covered? Will employment practices claims be covered if employees are terminated inappropriately?
In another example, if an airport, overseen by the city council, purchases coverage for bodily injury or property damage from the aviation insurance market, it should carry errors and omissions insurance for its oversight of the airport. The public entity may purchase E&O insurance from the carrier that is providing its general liability, but that carrier may not cover anything at the airport. Only someone well versed in insurance policies would recognize the gap between policies. If the airport policy doesn’t cover E&O and the general liability policy covers E&O but excludes the airport, there is uninsured exposure.
These more subtle exposures are the ones for which the public entity will need help from a knowledgeable partner.
William F. Becker is Executive Vice President, National Practice Leader – Public Sector, Aon Risk Solutions. Reach him at email@example.com. STEVEN P. KAHN, CPCU, ARM, is Managing Director of Aon Global Risk Consulting. Reach him at (949) 608-6418 or firstname.lastname@example.org. Scott Saunders is a Vice President with Aon Risk Solutions. Reach him at (412) 594-7583 or email@example.com.
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