City Attorney s Office: Litigation and Claims Management Performance Audit

Transcription

1 City Attorney s Office: Litigation and Claims Management Performance Audit June 2013 Office of the Auditor Audit Services Division City and County of Denver Dennis J. Gallagher Auditor

2 The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the proper and efficient use of City resources and providing other audit services and information to City Council, the Mayor and the public to improve all aspects of Denver s government. He also chairs the City s Audit Committee. The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee assists the Auditor in his oversight responsibilities of the integrity of the City s finances and operations, including the integrity of the City s financial statements. The Audit Committee is structured in a manner that ensures the independent oversight of City operations, thereby enhancing citizen confidence and avoiding any appearance of a conflict of interest. Audit Committee Dennis Gallagher, Chair Maurice Goodgaine Leslie Mitchell Rudolfo Payan Robert Bishop Jeffrey Hart Timothy O Brien, Vice-Chair Audit Staff Audrey Donovan, Deputy Director, CIA, CRMA Chris Horton, Audit Supervisor, PhD, CGAP, CRMA, CCSA Marcus Garrett, Lead Auditor, CIA, CGAP, CRMA Anna Hansen, Senior Auditor, CICA Bonnie Doty, Senior Auditor, MGPS You can obtain copies of this report by contacting us at: Office of the Auditor 201 West Colfax Avenue, Department 705 Denver CO, (720) Fax (720) Or download and view an electronic copy by visiting our website at:

3 City and County of Denver 201 West Colfax Avenue, Department 705 Denver, Colorado FAX Dennis J. Gallagher Auditor June 20, 2013 Doug Friednash, City Attorney City Attorney s Office City and County of Denver Dear Mr. Friednash: Attached is the Auditor s Office Audit Services Division s report of its audit of litigation and claims management. The purpose of the audit was to evaluate CAO s management of litigation costs and its performance management. As a result of the audit, we recommend that the stewardship of the Liability Claims Fund be transferred to Cash, Risk, and Capital Funding within the Department of Finance. We also make several recommendations regarding improvements to the litigation management technology and improvements to the management of internal and external costs. I appreciate the time you and your staff made to assist the audit team. If you have any questions, please call Kip Memmott, Director of Audit Services, at Sincerely, Dennis J. Gallagher Auditor DJG/cnh cc: Honorable Michael Hancock, Mayor Honorable Members of City Council Members of Audit Committee Ms. Cary Kennedy, Deputy Mayor, Chief Financial Officer Ms. Janice Sinden, Chief of Staff Ms. Stephanie O Malley, Deputy Chief of Staff Ms. Beth Machann, Controller Ms. Janna Young, City Council Executive Staff Director Mr. L. Michael Henry, Staff Director, Board of Ethics Mr. Scott Martinez, Deputy City Attorney To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

4 City and County of Denver Dennis J. Gallagher Auditor 201 West Colfax Avenue, Department 705 Denver, Colorado FAX AUDITOR S REPORT We have completed an audit of litigation management within the City Attorney s Office (CAO). The purpose of the audit was to evaluate CAO s litigation cost management and performance management. This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The audit has three findings. First, we found that assigning CAO authority over the Liability Claims Fund, a self-insurance fund, does not promote Citywide risk management. To allow for better assessment, monitoring, and mitigation of risk, as well as to increase accountability and transparency of the Liability Claims Fund s oversight, we recommend assigning oversight to the Department of Finance. Not only would such a reassignment better match practices in numerous states and municipalities, it would mirror the City s model of collaboration between CAO and the City s Risk Management regarding the Workers Compensation Fund. In addition, we identified ways that CAO could strengthen the management of its litigation management system, Practice Manager. Implementing these recommendations will allow CAO to evaluate effectively whether Practice Manager can meet CAO s needs or if another system is warranted. Finally, we determined that CAO s cost management controls can be improved. Specifically, we recommend a more formal and comprehensive system of evaluating outside legal services providers, as well as requiring internal legal staff to track their time for all cases. We extend our appreciation to management and staff of the City Attorney s Office who assisted and cooperated with us during the audit. Audit Services Division Kip Memmott, MA, CGAP, CRMA Director of Audit Services To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

5 City and County of Denver Office of the Auditor Audit Services Division REPORT HIGHLIGHTS City Attorney s Office: Litigation and Claims Management Performance Audit June 2013 The audit assessed the efficiency and effectiveness of the City Attorney s Office s litigation management practices, including management of costs and performance. Background The City Attorney s Office (CAO) is responsible for performing a wide variety of legal and risk-related services for the City and County of Denver and its constituent agencies. This audit focuses on one portion of these services: litigation and claims management. The Civil Litigation Section oversees the claims process for both litigation and non-litigation claims. CAO also oversees the Liability Claims Fund, a self-insurance fund from which litigation and claims payments are made. Purpose The purpose of the audit was twofold: To understand how CAO manages litigation costs, including assessments of internal controls, the Liability Claims Fund, and the City s self-insurance practices; and To evaluate CAO s performance management, including assessing the impact of Practice Manager (a litigation management tool) and evaluating the performance management of outside legal services providers. Highlights The audit has three findings: Finding 1: Assigning CAO authority over the Liability Claims Fund does not promote Citywide risk management. CAO and Risk Management share responsibility for reducing the City s liability, but collaboration between the two agencies is inconsistent and fragmented. CAO is the primary steward of liability claims and litigation data. Without the same level of access, Risk Management does not regularly assess or monitor the City s civil liability risks. This arrangement runs contrary to City Charter, which indicates that self-insurance funds should be administered by the Department of Finance. Finding 2: CAO s litigation management system, Practice Manager, requires additional support and evaluation. The system is generally used as a document repository, rather than a comprehensive litigation management tool. Its limitations result in inefficiencies such as the inability to provide timely response to external parties, limited search functionality, and the inability to synchronize with other software systems, such as Microsoft Office s Outlook calendar. CAO does not have the internal support to make improvements. Finding 3: CAO could benefit from improved cost management practices. CAO uses outside counsel and other vendors to help defend their cases, the costs for which are significant. However, CAO s cost management controls do not align with best practices for monitoring and evaluating vendors. Internally, litigation attorneys are not required to track their time and case budgets do not include time projected to be spent by CAO litigators. For a complete copy of this report, visit Or Contact the Auditor s Office at

6 TABLE OF CONTENTS EXECUTIVE SUMMARY 1 INTRODUCTION & BACKGROUND 5 SCOPE 10 OBJECTIVES 10 METHODOLOGY 11 FINDING 1 12 Assigning Oversight of the Liability Claims Fund to the City Attorney s Office Does Not Promote Citywide Risk Management 12 RECOMMENDATIONS 19 FINDING 2 20 City Attorney s Office s Litigation Management System Requires Additional Support and Evaluation 20 RECOMMENDATIONS 24 FINDING 3 25 City Attorney s Office Can Strengthen its Cost Management Controls 25 RECOMMENDATIONS 30 AGENCY RESPONSE 31

7 EXECUTIVE SUMMARY Assigning Oversight of the Liability Claims Fund to the City Attorney s Office Does Not Promote Citywide Risk Management Fragmented governance and inconsistent collaboration between agencies responsible for reducing the City s liability the City Attorney s Office (CAO) and Risk Management (RM) inhibits formal assessment, monitoring, and mitigation of liability risks facing the City. Because it is the steward of the Liability Claims Fund, CAO has exclusive control over liability claims and litigation data and does not regularly share such information with RM. Without this information, RM cannot use its expertise to assess or monitor the City s civil liability risks and work to reduce and prevent future liability. Further, CAO s administration of the City s Liability Claims self-insurance fund lacks transparency and accountability. The City should follow the lead of peer jurisdictions and move oversight of the Liability Claims Fund to the Cash, Risk, and Capital Funding Division in the Department of Finance, which would institutionalize RM s access to data necessary for implementing its mission, and also enhance oversight of taxpayer dollars used to pay claims and litigation brought against the City. Fragmented Governance Inhibits Formal Monitoring and Management of Liability Risks across the City CAO does not formally assess or monitor trends in civil liability risk for several reasons, including a lack of risk management expertise and a heavy workload. Further, the CAO Claims Division has full control over data that would be used to engage in such risk management and prevention activities and does not regularly share such information with RM. According to CAO management, sharing these data with RM would violate attorney-client privilege because CAO does not consider RM a client. 1 As such, CAO only shares limited civil liability risk information and data with RM on an adhoc basis. Due to its lack of access to information about liability claims and lawsuits, RM does not regularly assess or monitor the City s civil liability risks. In contrast, the CAO Employment Division and RM share information on a regular basis regarding workers compensation claims and litigation, and even collaborate to develop City policies for preventing claims through increased worker safety. RM oversees all aspects of the workers compensation program, including the Workers Compensation Fund, and handles all workers compensation claims for the City. Further, as the administrator of the Workers Compensation Fund, RM is a client of CAO when workers 1 The attorney-client privilege protects communications between a client and lawyer and extends to information given for the purpose of obtaining legal representation. A similar but qualified protection exists under the work product doctrine, through which thoughts and research of both lawyers and non-lawyers developed because of litigation are protected from the discovery processes. Sharing work product with a person other than the client may result in a waiver of either protection and potentially lead to disclosure of information to another party. Because attorney work product includes legal advice, there is great value to the City, when involved in litigation, to ensure that attorney-client privilege and work product protections are maintained. Further, attorneys have an ethical duty of confidentiality, and failure to adhere to this duty may result in sanctions for the attorney. See e.g., Bell, Craig D.; Spahn, Thomas E.; and Rizek, Christopher S., "A Guide to the Attorney-Client Privilege and Work Product Doctrine for Tax Practitioners" (2007). William & Mary Annual Tax Conference. Paper P a g e 1 Office of the Auditor

8 compensation issues are involved, and, therefore, data and information can be shared freely between the two departments and is protected by attorney-client privilege. Assigning Responsibility for the Liability Claims Fund to Risk Management Would Improve the City s Liability Risk Management and Fund Accountability Both the City Charter and common practice in other organizations indicate that self-insurance funds, such as the Liability Claims Fund, should be overseen by professional financial risk managers. City Charter indicates that, as a rule, the Manager of Finance should administer self-insurance funds, and that any deviation from this practice should be an exception. 2 Although the City Charter indicates a policy preference that self-insurance funds be administered by the Department of Finance, the Liability Claims self-insurance fund remains under CAO s purview. In addition to the guidance provided by City Charter, we identified numerous public sector organizations that assigned oversight of liability self-insurance funds to a risk management function located outside the law department. Our analysis of a benchmark study of peer jurisdictions conducted by CAO in 2012 revealed that seven of eleven peer jurisdictions allocate this responsibility to risk management departments; one city shows a shared responsibility between the risk management department and the law department; and one city does not have a risk management department. In addition, auditors found that the City of Arvada, the City of Aurora, and the State of Colorado, all of which operate under the same legal framework as the City and County of Denver, also assign responsibility for their liability self-insurance funds to their respective risk management departments. Because CAO is the primary steward of the Liability Claims Fund, there is little accountability and transparency for the claims and litigation management processes. CAO does not permit any entity or person except the client to access case information or provide input regarding litigation strategy. In fact, the only other entity evaluating settlements or payments from the Liability Claims self-insurance fund is the City Council, and this oversight occurs only when payments exceed a threshold of $25,000 for property damage claims and lawsuits or $5,000 for other liability claims and lawsuits. 3 However, from 2009 through 2012, CAO paid a total of $637,000 for claims and lawsuits from the Liability Claims Fund without any third-party oversight from City Council. Further, as much as 69 percent of all non-litigation claims in 2012 fell below the City Council-approval thresholds and were paid by CAO out of the Fund. In addition, City Council can only assess the claim presented for their oversight and without aggregate information cannot identify trends or propose preventative actions. To enhance the transparency and accountability of the Liability Claims self-insurance fund and to ensure greater oversight of liability risks to the City, the Mayor should assign the oversight of the Liability Claims selfinsurance fund to the Department of Finance and should direct the Manager of Finance to place the Liability Claims self-insurance fund under the administration and management of the Cash, Risk, and Capital Funding (CRCF) Division. This move would not require final approval of settlements but would allow CRCF to provide input from a citywide risk perspective on claims and litigation that impact the Liability Claims Fund 2 City Charter Title I, Part Denver Revised Municipal Code 20-1 requires City Council to approve any payments above these thresholds. City and County of Denver P a g e 2

9 proposed settlements. Further, reassigning administration of the Liability Claims Fund would allow the City Attorney s Office to designate CRCF as a client in cases that impact the Liability Claims Fund. Further, CAO could share important risk information freely with CRCF, allowing CRCF to assess or monitor the City s civil liability risks and work to reduce and prevent future liability. Because this reassignment may take several months to implement, CAO should work with RM in the interim to conduct an assessment of liability trends over the past five years to-date, and use that information to determine if selfinsurance remains the best policy for protecting the City against liability risks. In addition, CAO should develop and implement a plan to assess liability trends at least quarterly until the Liability Claims self-insurance fund is reassigned to the Department of Finance. City Attorney s Office s Litigation Management System Requires Additional Support and Evaluation Without proper administrative and technological support, CAO management cannot effectively assess whether their current litigation management system, Practice Manager, needs to be upgraded or replaced. A 2011 agreement between CAO and the City s Technology Services department (Technology Services) expressly stating that CAO is solely responsible for addressing software needs related to Practice Manager coupled with the loss of an in-house IT staff position in late 2012 have created a situation whereby CAO does not have adequate technical administrative support for its litigation management system. CAO should work with Technology Services and the Budget and Management Office to determine the IT staff support and funding needed to adequately address CAO s technological needs. Practice Manager Currently Limits Access to Reliable and Timely Management Information Practice Manager limits CAO management s ability to monitor individual and organizational performance, as well as impairs the efficiency of attorneys and paralegals, which reduces overall organizational effectiveness. In most instances, Practice Manager is only used as a repository for documentation rather than a comprehensive litigation management tool. In fact, CAO management determined that many reports generated by Practice Manager, including the Pipeline Report a report designed to provide an overview of all open cases contain unreliable data. Consequently, CAO personnel must use several subsequent processes to facilitate monitoring efforts, including manually re-creating and verifying data generated by Practice Manager. Several additional system limitations noted by CAO personnel contribute to office-wide inefficiencies including but not limited to the inability to provide timely response to external parties, limited search functionality, and the inability to synchronize with many other basic software systems used by CAO, such as Microsoft Office s Outlook calendar. At present, Practice Manager is not a reliable or useful management tool. CAO Hopes to Address Technology and Personnel Limitations with Monies from the City s Innovation Fund CAO management has focused limited resources on an office-wide assessment of software needs, which it hopes to fund with the City s Innovation Fund (ifund) 2013 monies. However, successful implementation of Practice Manager by the City of Minneapolis suggests that if CAO dedicates the proper resources, process P a g e 3 Office of the Auditor

10 changes, and technical support, the current litigation management system could meet its needs. The CAO should upgrade Practice Manager to maximize its capabilities, using the City of Minneapolis as a model. To mirror the successful implementation of Practice Manager demonstrated by the City of Minneapolis, CAO should work with Technology Services to establish one or more dedicated IT staff positions with ifund monies or revisit their IT shared services agreement. In addition, CAO should improve internal processes to assist in the successful implementation of any software litigation management system not limited to Practice Manager. This may include but should not be limited to specifying and restricting the Types and Categories fields and developing an internal process for establishing and enforcing a file naming convention for all documents stored in Practice Manager. Failing to prioritize and address these processes will limit any improvements gained through updating or replacing the ligation management system. Further, CAO should conduct updated office-wide training on the litigation management system to improve utilization and understanding by internal office personnel. Once Practice Manager is optimally executed, CAO should perform a follow-up assessment to determine whether Practice Manager meets its needs or if a replacement litigation management system is needed. If Practice Manager is still insufficient, CAO should allow the current contract to expire and use the savings to replace Practice Manager or petition for 2014 ifund monies, among other viable budget sources. City Attorney s Office Can Strengthen its Cost Management Controls CAO cost management controls can be strengthened to provide more formal evaluations of outside vendors and additional management information. CAO utilizes outside vendors, such as outside counsel or expert witnesses, to help defend their cases. CAO spent $3.3 million on outside vendors in the period 2009 through Of this total, CAO spent approximately $1.5 million, or 46 percent, just in Further, outside counsel costs spiked from 2011 to 2012 by 272 percent. CAO cost management controls do not align with best practices for monitoring and evaluating of external parties, such as outside counsel. A formal performance-based evaluation of the outside counsel firms at the end of each project would hold them accountable for their performance in a standardized, impartial, and transparent way. Therefore, CAO should develop and implement a formal performance-based evaluation of the outside vendors at the end of each project. CAO s internal cost management controls also should be enhanced. Implementing more extensive case budgets and requiring litigation attorneys to track their time for each case would provide CAO management with additional information to be used in assessing Citywide risk areas, evaluating staff workload, and evaluating possible organizational inefficiencies. Therefore, CAO should implement a formal and consistent time tracking policy for CAO staff. Further, CAO should develop written policies and procedures regarding time tracking to ensure greater consistency and more useful time tracking data. To provide additional information, CAO should require case budgets to account for all costs internal and external. In addition, CAO should provide written guidance for attorneys to develop these comprehensive case budgets for each case. City and County of Denver P a g e 4

11 INTRODUCTION & BACKGROUND City Attorney s Office Manages Litigation for the City and County of Denver The City Attorney s Office (CAO) is responsible for performing a wide variety of legal and risk-related services for the City and County of Denver and its constituent agencies. This audit focuses on one portion of these services: litigation and claims management. CAO also oversees the Liability Claims Fund, a self-insurance fund from which litigation and claims payments are made. Civil Litigation Section Responsibilities CAO s Civil Litigation Section provides litigation and claims services for CAO and the City. These services include defending the City against lawsuits in state and federal court, including alleged violations of civil rights, employment law, and even liability for damages to personal property. In addition to defending the City against lawsuits, the Claims Division of the Civil Litigation Section also processes and manages non-litigation claims against the City rising from incidents such as a personal injury in a public building or damage to a private vehicle during an accident with a City-owned vehicle, among other issues. The Civil Litigation Section also includes the Employment Division, which represents the City in personnel actions, including appearing before the Career Service hearing officers when personnel disciplinary actions are appealed by employees. The Employment Division also includes attorneys who focus on workers compensation issues. Workers compensation matters are paid out of the Workers Compensation Fund, a self-insurance fund. Although workers compensation is not the focus of this report, oversight of the Workers Compensation Fund provides an important benchmark against which to compare oversight and processes related to the Liability Claims Fund. Other CAO Responsibilities Other CAO divisions include Municipal Operations, which provides services in myriad areas, including land use, financial matters, compliance, and general municipal law. Municipal Operations also negotiates and drafts contracts, leases, and other key written documents. Prosecution and Code Enforcement responsibilities include handling municipal and traffic citations, and representing the Department of Excise and Licenses. Human Services Legal Services and Airport Legal Services are responsible for providing a suite of legal services related to Denver Human Services and Denver International Airport, respectively. Administration, including the City Attorney, is responsible for the overall management of CAO. Budget CAO has a 2013 budget of approximately $25 million. The budget is primarily dedicated to personnel services CAO management, attorneys, and staff support. CAO has 187 budgeted positions, of which about half are attorneys and half are support personnel, such as paralegals and legal secretaries. Personnel services and other General Fund functions account for approximately $20 million of the overall budget. P a g e 5 Office of the Auditor

12 CAO also has approximately $5 million in special revenue funds for prosecution, code enforcement, and litigation claims. Of this $5 million, the Liability Claims Fund was allocated $2 million from the General Fund for According to the Budget and Management Office (BMO), the Liability Claims Fund is not swept at the end of the year; rather, any unused monies remain in the fund and BMO works with the CAO Administration Division to project the amount of money needed for the following fiscal year based on cases that are likely to be resolved during that time period. Table 4 in Finding 1 provides information about total expenditures from the Liability Claims Fund in the period 2009 through Claims Process The claims process, overseen by the Civil Litigation Section, comprises two distinct but connected processes, which can be understood as simply non-litigation claims and litigation claims. The claims process generally begins with non-litigation claims and involves multiple steps, as illustrated by Figure 1. The claims process begins when a person seeking damages files a notice of claim with the Mayor s Office, the agency allegedly involved in the incident, or directly with CAO. Once CAO receives the claim, an adjuster then determines whether the City is liable for the claim. The City is immune from some types of claims under the Colorado Governmental Immunity Act (CGIA, discussed further below). If CAO determines that the City has immunity from the claim under CGIA, the claims adjuster will send a letter of denial and close the claim. If the claims adjuster determines that the City is not immune from liability for a claim, the claims adjusting process begins. This process includes fact collection and damage documentation, determining of the cost of the damage, and potentially offering settlement to the claimant, when appropriate. If the claimant does not accept the settlement offer, he or she may decide to file a lawsuit and proceed to litigation. All settlements over $25,000 for property damage claims and $5,000 for all other liability claims are submitted to City Council for approval. Persons alleging wrong-doing by the City or one of its employees must follow this claims process before proceeding to litigation if the claim alleges violation of state law. However, in cases of federal law, a potential litigant may serve notice to the Mayor s Office with intent to file a lawsuit without first filing a notice of claim with the City and going through the claims process. Once such notice is received by the Mayor s Office, one or more litigators within the Civil Litigation Section are assigned to the case and begin to develop a strategy for defending the City against the lawsuit. This strategy may include, but is not limited to, determining if the potential lawsuit can be dismissed for reasons including a lack of jurisdiction or, if an opportunity exists to file a motion for summary judgment, seeking a speedy decision in the City s favor when the facts appear to overwhelmingly exonerate the City from liability. Generally, lawsuits work their way through the judicial system at varying speeds depending on the parties involved, the complexity of the facts and theories involved in the case, and the courts rules and dockets. Most civil liability lawsuits defended by CAO are resolved prior to trial, whether through motions to dismiss, summary judgment, settlement, or other outcomes. City and County of Denver P a g e 6