Risky Management

by Kelly Thornton and Kevin Crowe | inewsource
This article was updated 12/09/10. See correction below.

The cost of handling claims and lawsuits against the city of San Diego has more than tripled in recent years, and the tab is still running in a few of the most expensive legal battles, including those against developer Roque de la Fuente and the city’s own police officers.

The city has spent almost $130 million processing, settling, paying out or litigating thousands of cases over the past eight years, according to an analysis by the Watchdog Institute, a nonprofit investigative reporting center based at San Diego State University.

But the system the city uses for evaluating risk is significantly flawed, and some public officials said the problem could undermine the city’s ability to rebound financially.

The city auditor has found that San Diego is managing liability with an overworked, disorganized and unaccountable staff that relies on inefficient and outdated methods of analyzing claims and calculating insurance needs.

And, there is no coordinated effort among departments to prevent claims in the first place. These practices, the auditor says, waste scarce taxpayer funds and result in greater liability for the city.

“The city needs to rethink business as usual and think of risk as a citywide issue and not an isolated incident-by-incident issue,” said Assistant City Auditor Chris Constantin.

Risk Management officials and their bosses in the mayor’s office disagreed with some of the report’s findings and recommendations, but said they would embrace a citywide approach to managing liability. The obstacle is finding the money to do it.

“There’s always room for improvements,” said Jay Goldstone, the city’s chief operating officer. “We’re trying to figure out how to close out a $72 million budget gap. Adding money to departments like that is unfortunately not in the cards.”

\Navigating the complex and uncertain landscape of municipal liability can be tricky and expensive. The stakes are high: A miscalculation in deciding whether to settle or go to court can cost millions – even bankrupt a city.

In its analysis of claims and lawsuits against the city, the Watchdog Institute found:

  • The volume of claims and lawsuits has decreased slightly in recent years, but the cost of paying or fighting them has more than tripled, from a low of $8.3 million in 2003 to a high of $25.5 million in 2009. The cost decreased to $11.4 million in 2010. The figures include money paid to outside attorneys but not to city staff lawyers. The city was reimbursed for some of the legal expenses by insurance companies, but officials said they were unable to calculate that number.
  • Although the city has 137 in-house attorneys, including 27 in the civil litigation unit, the city estimated it has spent more than $34 million dollars on outside lawyers since July of 2006. The Watchdog Institute found that spending hit $11.9 million in 2009. The institute also found in the last eight years the city paid almost $18 million to one firm, Latham & Watkins, which has won big cases while charging the city $750 an hour.
  • The City Attorney’s Office had no computerized way to track lawsuits before it installed a system two months ago. The city doesn’t even know its win-loss ratio. “That data would be helpful, but unfortunately we don’t have it,” Gina Coburn, spokeswoman for the City Attorney, wrote in a mid-November email.
  • Among the most expensive cases: $6.7 million to win a fight with Mount Soledad homeowners who claimed ruptured city water pipes caused a devastating landslide; $6.3 million for 15 years of legal wrangling – and counting – with de la Fuente, who won a $94.5 million judgment against the city for breach of contract that was later overturned on appeal; $8.7 million to battle the San Diego Police Officers Association over pension benefits and other issues.

Goldstone defended the Risk Management department he oversees, complaining that auditors started out to do a routine review of the department but when they found no fault with the way claims are handled internally, they expanded the scope of the audit because “they probably felt they couldn’t release an audit that didn’t have something to find.”

Auditors said they expanded their audit when they discovered more problems than anticipated. “We found such systemic issues that the better value to the public of our audit was looking at the entire citywide view of risk management, not one specific unit of one department,” assistant auditor Constantin said.

The auditor’s report, issued in August, gives the numbers and analysis by the institute a behind-the-scenes perspective. It portrays a system with little inter-departmental communication; one that has not learned from past mistakes.

Obvious hazards, such as damaged sidewalks, aren’t fixed in time to prevent another accident and another claim, the report said.

For example, the city had prior notice in at least 10 of the 56 cases related to dangerous conditions resulting in injury in 2009. Had the condition been fixed beforehand, the claim would have been prevented.

The auditors also said the city’s inadequate review of its insurance policies could be costing the city money.

Tracking of insurance coverages and limits is informal and not documented, the auditors found, saying, as a result, the city risks purchasing unnecessary or insufficient insurance coverages and paying excessive premiums.

The city is self-insured up to $4 million per case – double what the city paid before 2008. Also since 2008, liability insurance premiums increased 42 percent, from $4.9 million in FY 2008 to $7.1 million in FY 2010, according to the audit.

Officials with one of the city’s insurance carriers, American Insurance Group Inc. (AIG), did not return a call seeking comment. Goldstone said the city’s multiple insurers were spooked by multiple ongoing investigations of city finances and “a lot of the activities going around the previous city attorney (Michael Aguirre) and the fact of how sort of sue happy he was.”

The city’s Risk Management Director, Greg Bych, said the city’s rates increased because the city had suffered large losses and was involved in a lot of litigation at the time.

However, an AIG expert attributed rate hikes to the extreme financial troubles within AIG that resulted in a $182 billion government bailout.

“It’s completely in keeping with the financial stress that AIG is suffering,” said Thomas Gober, a certified fraud examiner, former state insurance regulator and FBI consultant who is part of several legal teams investigating AIG. “If an insurance company is in stress, there are really only two things they can do: Increase the premiums coming in, and decrease the claims going out.”

The auditor also found that the fund from which claims and lawsuits are paid is $49 million less than the $59 million it should be, which means the city has not set aside enough money to cover what it expects to pay out in claims and lawsuits. The mayor’s office told the auditor it hoped to make up half that amount by 2014, and so far has been able to put $7 million more into the fund, but cautioned that “this goal is presently being reassessed given the economic downturn and continued decline in general fund revenues.”

Goldstone said the underfunding is not unusual or alarming. In fact, he said, it was deliberate.

“We didn’t add money to the general fund or workers’ comp or the public liability reserve and we felt very comfortable not doing that and yet not creating any greater exposure or risk to the city,” Goldstone said. “It was either that or not funding some other programs.”

No decisions have been made for the next budget, he said. He estimated the reserve account was 15 to 20 percent funded.

Mayor Jerry Sanders declined to comment for this story and referred inquiries to Goldstone.

Councilman Carl DeMaio said he is concerned the auditor’s recommendations will not be implemented because of budget constraints and because the report was not well-received by the Risk Management department and the mayor’s office, which oversees it.

“Take a look at the money that we are shelling out,” he said. “These are considerable losses and every dime that is paid out is a dime less toward actual provision of services to taxpayers.

“It’s reflective of poor management controls that we see in every city department,” DeMaio said. “I see this report as a call to action that we need to fundamentally rethink city government…It’s so important that if you don’t fix Risk Management, it will undermine our ability to restore the city’s finances.”

Outside Counsel

City Attorney Jan Goldsmith said when he took office in 2008, he was shocked by the amount of money spent on outside counsel.

“It was huge, and it was obvious that we had to rebuild the law firm…and make it to a point where we have confidence to handle these cases in house…It was a terrible waste of taxpayer dollars to use Latham & Watkins essentially as a division of the city attorney’s office.”

Two years ago, Goldsmith said, the city was paying Latham & Watkins $750 an hour, a figure he called “outrageous.” His own attorneys make about $49 an hour.

Goldsmith said he negotiated Latham down to $550 an hour on the cases they were already handling. He said he was ethically compelled to continue to retain outside counsel on some ongoing cases because it would have been more costly to start over with another lawyer. Goldsmith said he has only hired outside counsel on a couple of new cases, none from the Latham firm. In fact, expenses for outside counsel decreased from $11.9 million in 2009 to $2.7 million in 2010 through Oct. 28.

A Latham spokesman said the firm’s average rate for all attorneys working on city matters was closer to $400 an hour, while Goldsmith was likely citing an hourly rate for senior attorneys who bill in the $750-per-hour range. The firm noted it had successfully sued to recover legal fees from insurance companies.

“A primary reason why municipal clients engage a firm of the caliber of Latham & Watkins is that we often save them money in the long run,” the firm spokesman said, adding: “The total collections from insurance companies equal or exceed the amounts billed by Latham to the City for work since January 1, 2005 — with approximately $18.5 million collected to date.”

Goldsmith said the office should hire outsiders when the office lacks expertise or manpower to handle a particular case, or when the office has a conflict.

Both Goldsmith and Goldstone struck a familiar theme when they put the blame for the huge spike in legal expenses and insurance rates squarely on the shoulders of former City Attorney Aguirre. They said he lacked confidence in his own lawyers, hired expensive outside lawyers and made insurers nervous with his litigious nature.

Aguirre said Latham & Watkins was first hired by the city council under his predecessor, Casey Gwinn, to defend the city in major lawsuits that could have cost hundreds of millions of dollars. The firm won all three.

“Isn’t it funny how two years later it’s still my fault,” said Aguirre, who left office in December 2008. “The idea of trying to blame me even two years later is so ludicrous. That just shows you how desperate they are.”

Aguirre noted the most expensive year for fighting claims and lawsuits was $25.5 million in 2009 – after he’d left office. He noted that his lawyers sued the city’s insurance companies, ultimately forcing them to pay millions of dollars of the city’s legal bills. For instance, the city announced a $5.5 million settlement with AIG, its liability insurance carrier, about the same time the federal government was giving the company bailout money.

And, Aguirre argued, it’s the city council that must approve the hiring of outside counsel – not the city attorney.

“You cannot blame the city attorney for hiring outside counsel. The city council had to approve that. Does it look like I had a lot of influence with the city council? Do you think they ever did anything just because I asked them to? Sanders and (former Councilman Scott) Peters were happy to have Latham protect them in those big cases. Latham did a great job for the city.”

To fight or not to fight

Pablo Gomez and two friends were walking to their car downtown when they were approached by a couple of drunk men in January 2004. A fight broke out at Market Street and Third Avenue. When police arrived, Gomez was trying to get away from the melee.

Officer Joseph DeVeaux ran after Gomez and ordered him to stop. When Gomez turned to face the officer, DeVeaux knocked Gomez into the air and then to the sidewalk with a force that sent the 26-year-old law firm clerk into a three-week coma with severe brain damage and long-term medical problems. Gomez’s head was smashed onto the pavement, causing a major skull fracture and injuries that required three brain surgeries. For a while, he couldn’t speak or walk.

Gomez filed a negligence and battery claim against the city and the police officer. His lawyer, Mike Marrinan, a veteran of such cases, said the city rejected the claim and refused to settle. Attorneys from a Los Angeles firm represented the city.

A Superior Court jury awarded Gomez more than $11 million in damages in 2008. To avoid a lengthy and expensive appeal process, both sides agreed to settle for $2.3 million plus a $1.2 million annuity. The Gomez case became the 10th most costly for the city in recent years.

“When they were evaluating the case and whether they ought to try to settle it, that evaluation was grossly deficient. And the result pretty much shows that,” Marrinan said.

Several prominent attorneys who have won cases against the city said the City Attorney’s office historically has made poor decisions about proceeding with cases that ultimately cost more to fight than settle.

“They would never have to spend that money if they were a little more realistic in assessing the case and then working to try to resolve the case,” said respected attorney Vincent Bartolotta, who represented de la Fuente.

“I think the city has a difficult time discriminating between good cases and bad cases. They just throw them altogether and fight them all,” said Michael Conger, who won two cases that are among the city’s most expensive in recent years. “A case they could have gotten rid of early, later cost them a lot more.”

When a reporter read those comments to Goldsmith and two of his top deputies, they laughed. Said Andrew Jones, chief of the criminal division: “Every plaintiff’s attorney says that.”

The data:

The City of San Diego’s Risk Management Department produced a set of payment records relating to claims and lawsuits dating from January 1, 2003, through October 28, 2010 as a result of a California Public Records Act request filed by a reporter for the Watchdog Institute. The data set included more than 37,000 records of almost $130 million in payments to law firms, plaintiffs, consultants and other expenses associated with handling claims and lawsuits.

Correction: A previous version of this article incorrectly stated that an audit report concluded the city had prior notice of dangerous conditions in 25 percent of cases related to dangerous conditions. That figure is 10 cases, or 18 percent.

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