Assumption of MetroAccess Risk Financing

Transcription

1 Finance & Administration Committee Action Item III-A November 3, 2011 Assumption of MetroAccess Risk Financing

2 Washington Metropolitan Area Transit Authority Board Action/Information Summary Action Information MEAD Number: Resolution: Yes No TITLE: Assumption of Risk Financing for MetroAccess PURPOSE: To obtain Board approval for WMATA to: 1) Negotiate with the MetroAccess contractor and execute a contract modification to transfer risk financing responsibility to WMATA and to modify the appropriate policies to provide for the payment of liability claims from WMATA's claims reserve for all paratransit contractors and subcontractors, including taxicabs, but excluding claims for intentional torts, criminal offenses, and worker's compensation; (2) Modify the current WMATA policy governing Liability Reserves to include losses to nonrevenue vehicles or to real property; and (3) Modify the current WMATA policy governing Allocated Loss Adjustment Expenses (ALAE) to include Litigation Units applicable to the Office of General Counsel. DESCRIPTION: 1) It has been the practice at WMATA to operate the paratransit service (MetroAccess) through a contractor. The current paratransit contractor, MV Transportation, Inc., is responsible for operating the MetroAccess service utilizing mostly vehicles owned by the Authority. In virtually all United States jurisdictions including the District of Columbia, Maryland and Virginia, the owner of a licensed road vehicle is legally liable for any bodily injury or property damage liability which may result from the operation of that vehicle, provided the operator is a permissive user. Under the current paratransit contract structure, WMATA`s automobile liability and any first party physical damage risk, is assigned contractually to the paratransit contractor, MV Transportation, Inc., at a cost to WMATA of approximately $4 million annually. An indemnification provision in WMATA's favor requires the paratransit contractor to guarantee their contractual liability obligation with insurance. Specifically, the paratransit contractor is required to carry Automobile Liability (AL) insurance with combined single limits of at least $5 million per occurrence and with WMATA designated as an additional insured party. Additionally, General Liability (GL) insurance with combined single limits of at least $5 million per occurrence and in the annual aggregate, and Workers Compensation coverage with statutory coverage and with Employers Liability coverage with limits of $1 million for

3 each accident or illness is required. As is common practice among large transportation contractors, the Automobile Liability insurance placed by MV Transportation is part of their Blanket Automobile Liability/ General Liability insurance program covering all of their client service, and is not specific to WMATA operations. MV's coverage carries limits of $3 million per occurrence in excess of a $2 million self-insured retention (SIR). The annual charges assessed to WMATA for the assumption of risk covers the cost of the coverage described above and generally pays for claims within the $2 million SIR. Most of the historical loss occurs within the $2 million SIR, yet the contract operator is not obligated to fund the liability with cash reserves. The exposure to WMATA under this type of arrangement is that a contract operator may find itself in a position where it would not be able to honor its contractual liability (i.e. indemnification) in which case, the open liability resulting from MetroAccess claims would become WMATA's responsibility, at least to the extent that they fell within the $2 million per occurrence SIR carried by the contractor. Since MetroAccess vehicles are owned by WMATA, the liability for bodily injury and/or property damage lies with the Authority. WMATA`s contractual transfer of that liability to a contractor is only as good as the contractor`s willingness and financial ability to settle and pay outstanding claims. Since the financial viability of any company or contractor could possibly become compromised in any number of ways, staff is recommending that the Authority assume direct control over risk financing and claims management for the MetroAccess service. The Authority would discontinue the payment of approximately $3.5 million in annual risk charges (in the form of reimbursing the contractor for insurance) in favor assuming the costs of liability coverage and claims administration directly. This is consistent with Metro`s goal of using every resource wisely. Consistent with the manner in which liability claims are currently administered by the Authority for its operations, MetroAccess claims would be administered through the Office of Risk Management. Legal representation will be provided by outside counsel retained by RISK. It is likely that this action will necessitate a modest increase in staff to RISK, but funding to cover the cost of outside counsel will be provided from the claims reserve. Operating costs for these services would be offset by the reduction in insurance payments to the paratransit contractor. Additionally, this action will not entirely relieve the paratransit contractor of its responsibility to carry a sufficient amount of Physical Damage and General Liability insurance to cover other liabilities which may arise in the course of providing MetroAccess service. Under the current contract structure, WMATA would still be obligated to reimburse the contractor for those costs which are estimated at $0.5 million annually. In the event the Board determines to assume the financial responsibility and direct control over ensuing claims, the paratransit contract will be appropriately modified. Language will be implemented discontinuing the annual payment of insurance costs to the contractor, and WMATA will need to indemnify and defend the paratransit contractor from any bodily injury/ property damage liability. Intentional torts (and any criminal acts) on the part of the contract operator, subcontractor, or its employees and agents will be expressly excluded in the

4 indemnification language, as will claims under worker's compensation. 2) Physical damage to vehicles and to real property is currently covered by WMATA`s Property insurance and is subject to a deductible of $1 million per occurrence. There are sufficient maintenance budgets for revenue vehicles in Bus and Rail to cover the deductible, however there are no budgeted funds set aside specifically for damage to non-revenue vehicles or to real property. For example, if a police vehicle or WMATA structure sustains damage, there is no budgeted source of funding available to cover the deductible. The office of Risk Management recommends including reserves for this type of first party physical damage costs to WMATA`s Liability Reserve account, and charging subsequent nonrevenue vehicle or real property losses to that account. It is further recommended that any subrogation recoveries for physical damage costs charged against that account be credited to same. Expanding the Liability Reserve account to include reserves for losses to nonrevenue vehicles and real property will centralize the administration of deductible costs. 3) Allocated Loss Adjustment Expenses (ALAE) are loss adjustment expenses that are charged to (i.e. allocated to) a claim file opened in the fiscal year in which the loss occurred. Examples of ALAE include outside attorney's fees, Independent Medical Examinations (IMEs), medical chart reviews, property damage appraisals, and surveillance related to specific third party liability or Workers Compensation claims. Currently ALAE are charged to the claim files by Third Party Claims and Workers Compensation Claims, but not by the Litigation Units in COUN, where such costs are currently applied against a litigation budget. Expanding the Liability Reserves to include ALAE for Litigation Units will provide a more accurate representation of loss values in the fiscal year in which they occur. FUNDING IMPACT: Project Manager: Carol D. Kissal; Raj Srinath; Christian T. Kent Project CFO / TRES / ACCS Department/Office: Annual Expense Type Amount A. Insurance costs currently paid to Paratransit Contractor $4,000,000 B. Potential deduction upon WMATA assumption of Risk $(3,500,000) Financing * C. Estimated annual cost of WMATA purchased insurance $ 800,000 premium D. Estimated annual loss claims to be paid by WMATA (incl. $1,000,000 ALAE) E. Estimated annual cost of additional personnel and retaining $200,000 outside counsel (RISK) F. Estimated annual MetroAccess reallocated insurance expense (A+B+C+D+E) $2,500,000

5 G. Estimated savings with WMATA risk financing (F - A) $(1,500,000) This action is anticipated to have a positive impact on the operating budget of approximately $1.5 million as the result of eliminating approximately $3.5 million in insurance expense currently paid to the paratransit contactor, and reallocating the remaining risk financing expense among the participating departments/offices. WMATA currently pays the paratransit contractor approximately $4 million annually for the cost of Automobile and General Liability insurance. Approximately $3.5 million of this expense can be removed from the paratransit contract expenditures when WMATA assumes risk financing. Of the $3.5 million removed from the paratransit contract expense, approximately $1 million will cover annual claims (including ALAE) to be paid from the Liability Reserve in Risk Management. It is estimated that the annual cost of Automobile and General Liability insurance premiums to WMATA for the MetroAccess service will be approximately $800,000. The absorption of additional work for claims adjudication and litigation by Third Party Liability will require additional personnel costs estimated at $200,000 annually. Under the General Manager/Chief Executive Officer's authority, the budget for Risk Management will be modified to reflect the information above. The reprogramming will be reported to the Board. * The remaining $0.5 million will most likely continue to be paid to the paratransit contractor to cover their General Liability and other insurance costs which must remain in place. RECOMMENDATION: To obtain Board approval for WMATA to: 1) Negotiate with the MetroAccess contractor and execute a contract modification to transfer risk financing responsibility to WMATA and to modify the appropriate policies to provide for the payment of liability claims from WMATA's claims reserve for all paratransit contractors and subcontractors, including taxicabs, but excluding claims for intentional torts, criminal offenses, and worker's compensation; (2) Modify the current WMATA policy governing Liability Reserves to include losses to nonrevenue vehicles or to real property; and (3) Modify the current WMATA policy governing Allocated Loss Adjustment Expenses (ALAE) to include Litigation Units applicable to the Office of General Counsel.

6 Washington Metropolitan Area Transit Authority MetroAccess Risk Financing Finance and Administration Committee November 3, 2011

7 Current Liability Insurance Program Metrorail Metrobus MetroAccess $145M Commercial Insurance $5M Self Insured Retention (SIR) $145M Commercial Insurance $8M SIR $145M Commercial Insurance $3M* $3M (Contractor Policy) $2M SIR (Contractor) *WMATA is an additional insured on Contractor s blanket liability insurance policy with WMATA is an additional insured on Contractor s blanket liability insurance policy with limits of $3M in excess of $2M SIR (deductible). WMATA is not an additional insured for the $3M in excess of $5M, but WMATA is indemnified by Contractor.

8 Proposed Program Metrorail Metrobus MetroAccess $145M Commercial Insurance $5M SlfI Self Insured dretention(sir) $145M Commercial Insurance $8M SIR $145M Commercial Insurance MetroAccess Specific Liability Insurance, $6M $2M SIR

9 Current Liability Program Claims and Expenses Average claims handled d per year: 200 Average cost per claim: $4,700 Total annual cost of claims: < $1M Metro pays contractor $4M/year for insurance Estimated annual cost to contractor, including insurance coverage and payment of claims $2.5M

10 Proposed Program Expenses and Estimated Savings Current arrangement costs WMATA up to $1.5M more than if risk financing was handled internally If handled internally, WMATA would purchase liability insurance with limits it of $6M excess of $2M SIR Annual Premium ($6M excess) $800,000 Estimated annual claims $1,000,000 RISK resources to adjust claims $200,000 Contractor s physical ldamage ins $500, Total Annual Cost $2,500,000 Current Contractor Insurance Charge ($4,000,000) 000) Estimated Annual Savings $1,500,000

11 Recommendation Board approval to negotiate with MetroAccess contractor and execute a contract modification to transfer risk financing responsibility to WMATA Board approval of the following policy changes: Expand liability loss reserves to include damage to WMATA property Permit COUN to charge outside loss adjustment expenses to liability loss reserve Pay claims against the contractor, subcontractors (including taxis), but excluding claims for intentional torts, criminal offenses, and worker s compensation

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