The increase in liability claims against municipalities and the costs arising from them
Municipalities continually seek to provide a wide range of services to meet the needs of their citizens in furtherance of the public health, safety, and welfare. The Municipal Act is a consolidated law governing the extent of powers and duties, internal organization and structure of municipalities in Ontario. The new Municipal Act, which took effect on January 1, 2003, represents the first comprehensive overhaul of Ontario’s municipal legislation in hundred and fifty years and forms the cornerstone of a new, stronger provincial-municipal relationship. Municipalities are governed by municipal councils. The job of municipal councils is to make decisions about municipal financing and services. In Ontario, the head of a local (lower or single tier) municipal council is either called the mayor or the reeve. The members of council may be called councilors or aldermen. The local sphere of government consists of municipalities, which must be established for the whole of the territory of the Republic. The executive and legislative authority of a municipality is vested in its Municipal Council. A municipality has the right to govern, on its own initiative, the local government affairs of its community, subject to national and provincial legislation, as provided for in the Constitution. The national or a provincial government may not compromise or impede a municipality’s ability or right to exercise its powers or perform its functions.
The main objectives of local government in Canada are to provide democratic and accountable government for local communities, to ensure the provision of services to communities in a sustainable manner, to promote social and economic development, to promote a safe and healthy environment, and to encourage the involvement of communities and community organizations in the matters of local government. A municipality must strive, within its economic and administrative capacity, to achieve the objects. A municipality must structure and manage its administration, and budgeting and planning processes to give priority to the basic needs of the community, and to promote the social and economic development of the community, and participate in national and provincial development programs. (Dollard, 2005, 213-215)
In Canada, the municipalities have executive authority in respect of, and have the right to administer the local government matters listed in Part B of Schedule 4 and Part B of Schedule 5 of the constitution, and any other matter assigned to it by national or provincial legislation. A municipality may make and administer by-laws for the effective administration of the matters which it has the right to administer. Subject to section 151(4) of the constitution, a by-law that conflicts with national or provincial legislation is invalid. If there is a conflict between a by-law and national or provincial legislation that is inoperative because of a conflict referred to in section 149 of the constitution, the by-law must be regarded as valid for as long as that legislation is inoperative. The national government and provincial governments must assign to a municipality, by agreement and subject to any conditions, the administration of a matter listed in Part A of Schedule 4 or Part A of Schedule 5 of the constitution which necessarily relates to local government, if that matter would most effectively be administered locally, and the municipality has the capacity to administer it. A municipality has the right to exercise any power concerning a matter reasonably necessary for, or incidental to, the effective performance of its functions. (Berkowitz, 2004, 47)
The Risk Management Section of the local government in Ontario administers a self-insurance program for public liability risks, which is supplemented by purchased excess liability insurance policies. This section provides investigation and settlements of small claims arising from the City’s operation as a municipality and services to the public. The Risk Management Section also ensures the public interests are protected with appropriate insurance policies and recovery of damages to City assets caused by individuals and outside agencies. In Ontario, people experienced increased storm activity and a tornado causing over $250 million in damages. There were 8 airline crashes resulting in 700 deaths and over $1.5 billion in property damage claims. Despite record gas prices at the pumps, motorists continued to drive and auto physical damage claim frequency increased in 2005 contrasted to declines over the last 4 years. This caused an increase in liability claims against municipalities. Notwithstanding the above, the more difficult liability risks on hospitals, municipalities, errors and omissions continued to be subject to increased. Claims activity resulted in upward price pressure. This continued till the year 2006, especially for directors & officers and Errors & Omissions coverage. (Mukherjee, 2004, 327)
Liability claims handled by municipalities in Ontario
In Ontario the Liability Claims Unit of the municipality handles claims like Libel and slander claims, Professional negligence claims, Engineering insurance claims, Deterioration of stock claims, Fidelity guarantee claims, Personal accident claims, Legal expenses claims, etc.
Libel and slander claims are the claims made against any person for loss or damage to property or for personal injuries. For instance, a director making an alleged slanderous remark and the injured party sues for damages.
Professional negligence claims, for example, if any housing association alleging that plans other housing association designed for a fee had errors in them that will cost thousands of pounds in corrective building work.
Engineering insurance claims, such as electrical or mechanical breakdown of a lift, or a cracked boiler.
Deterioration of stock claims, including loss of food following a freezer break down.
Fidelity guarantee claims, where an employee steals cash from the employer’s safe.
Personal accident claims, for example, one of the employees is physically assaulted while on duty and sustains a fractured kneecap.
Legal expenses claims, such as an employee alleging unfair dismissal. The employer has a good (better than 50%) chance of success at tribunal, but he needs to claim for the cost of defense in the form of legal expenses. (Cook, 2004, 219)
Liability insurance policies provided by municipalities in Ontario are such as Public liability: Protects the insured person from any legal liability to pay compensation for accidental bodily injury or accidental damage to property, Employer’s liability: Protects the insured person from any legal liability to pay compensation to employees for bodily injury arising from employment, Libel & slander also known as defamation in Scotland: Provides cover for damages and claimants’ costs and expenses in respect of claims made against the insured person, Professional negligence: Protects the insured person from a legal liability to pay claimants’ financial loss damages for a breach of professional duty while providing a service, usually under contract. (Madhav, 2006, 17)
Costs arising from the increase in liability claims against municipalities
Municipalities continually seek to provide a wide range of services to meet the needs of their citizens in furtherance of the public health, safety, and welfare. Commissioner of Municipal Administration of Ontario invites eligible insurance companies to offer their insurance premium rates per annum to undertake insurance coverage and social securities to the residents, particularly people affected by storm. The policies extend coverage to 1+4 members i.e. spouse, children and dependents. Percentage for no claim bonus which is made available to the beneficiaries during renewal of their respective policy, Maximum documentation required for authenticity of claims and proof of identification. Several certified medical centers were established in the municipalities to provide free treatment to the residents. Further the Insurance Companies are requested to provide a separate offer for assets like land, buildings, equipments plant & Machinery, raw materials, unsold goods, etc. The Insurance premium for insuring the storm affected people per family unit was quoted for one-year policies. The Agents commission was borne by the Insurance Company. The premium quoted also include death due to accident, loss of limb, permanent disablement, hospital expenses covering medicine, Maternity expenses and Education expenses. The municipality is paying 80% of the cost of premium for the policies and the balance 20% of the cost of premium is borne by the beneficiary.
Canadian municipalities issue Municipal bond. By rule, municipal bond issuers must pay an insurance premium to obtain insurance coverage for their bonds. In case the investors do not pay these premiums regularly, the municipalities have to pay them. These contribute in augmentation of costs. (Podolski, 2006, 87)
Statistics indicate that in Libel and slander claims the actual cost of “downtime” is as much as 8 times the cost of normal incidents, rising to something like 36 times if a court case follows. This again adds to municipal costs. The existing insurance policies are responsible for rising costs in Canadian municipalities.
Due to the above policies, in municipalities in Ontario each year thousands of claims are made through insurance. Because of the increase in liability claims against municipalities, the costs arising from them also increase.
In Canada, the annual expenditure of the municipalities are estimated, in relation to a commitment, in respect of actual costs, the average annual actual costs, calculated as the total of the actual costs associated with financing the commitment over the term of the commitment, divided by the number of years in the term of the commitment, and in respect of commitments that are not yet realized. The average annual implied costs, calculated as the total amount of the commitment that might be realized over the remaining term of the commitment, divided by the number of years remaining in the term of the commitment. Calculation liability means a calculation liability within the meaning of section 3 of the Canadian municipal regulation. (Lamb, 2004, 32)
The local governments in Canada stands opposed to proposals placing burdensome liability upon municipalities, including measures that seek to erode well-established principles of immunity or other defenses, and to proposals unfairly imposing cost-shifting upon municipal taxpayers. Revenue sharing taxes mean Class 4 property value taxes imposed by one municipality, a portion of which is paid over to another municipality as tax sharing revenue. Tax sharing revenue means revenue paid to another municipality as referred to in section 4 (a) of Canadian municipal regulation, or received from another municipality as referred to in section 4 (b) of this regulation. The provisions in this regulation, the terms used in this regulation are to be interpreted consistently with the recommendations and guidelines issued by the Public Sector Accounting Board as authorized by The Canadian Institute of Chartered Accountants.
The section 174 (2) of the Canadian municipal regulation establishes limit on borrowing and other liabilities of Community Charter. It provides that the municipality may not incur a liability if at the time it proposes to incur the liability, the annual cost of servicing the aggregate liabilities of the municipality for the year, as determined in accordance with section 3 of this regulation, exceeds 25% of the annual calculation revenue of the municipality for the previous year, as determined in accordance with sections 4 and 5 of this regulation, or incurring the liability would cause the annual costs to exceed the limit established by the local governments of Canada. (Border, 2002, 89)
The annual cost of servicing the aggregate liabilities of the municipality in Ontario for a year is the total of the annual expenditures for the year, determined for each of the defined types of calculation liability: Type 1 – general capital commitments: in relation to a liability of the municipality that is or includes a non-current commitment, is of a capital nature, and is not covered by the other four types. The calculation liability is the current and non-current commitments in relation to the liability. Type 2 – contingent capital commitments: in relation to a liability of the municipality that is a contingent commitment, is of a capital nature, and is not covered by the other four types. The calculation liability is the commitments in relation to the liability. Type 3 – debts under loan authorization bylaws: in relation to a liability of the municipality that is the amount of debt borrowed under a loan authorization bylaw, the calculation liability is the outstanding amount of that debt. Type 4 – unused borrowing under loan authorization bylaws: in relation to the amount of debt that is authorized by a loan authorization bylaw but not yet borrowed, the calculation liability is the amount not yet borrowed, excluding any amount authorized to be borrowed under section 179 (1) (c) of Canadian municipal regulation. The regulation guarantees of borrowing by others of the Community Charter, for which the borrowing authority has not yet expired. Type 5 – loan guarantees: in relation to any loan guarantee given by the municipality the calculation liability is the total amount the municipality would be or is required to pay under the guarantee. (King, 2004, 143)
Many definitions of risk management exist. Some describe it as a management discipline aimed at saving money, increasing productivity and improving the quality of service delivery. In this respect the purpose of risk management can be viewed as quite simply to identify and manage those factors that could prevent any organization from achieving its objectives. By practicing good risk management, an organization can reduce the amount of time and money it spends on handling losses associated with accidents, incidents and personal injuries. One benefit of effective risk management is therefore loss control, achieved through the adoption of preventive measures such as more frequent workplace inspections, better equipment maintenance and closer supervision of on-site contractors. Another potential benefit of risk management is actually using the process of assessing risks as an excellent opportunity to improve the organization, to bring about new initiatives like developing better health and safety procedures or instituting an arson-prevention scheme for the first time. In short, loss prevention and business improvement are different sides of the same risk management coin.
The liability risk means the risk relating to potential hazards, which could cause personal injury as opposed to damage to property. Liability risk covers the risks posed to individuals as the result of their presence on or association with the premises and plant the organization operates and manages or the programs and activities it runs.
It is very important for the organizations to understand their risks because: reported incidents and public awareness of rights to compensation appear to be on the increase. Companies sometimes referred to as “claims farmers” or “ambulance chasers” are encouraging people to make claims for compensation. Damaging legal actions can lumber organizations with increased costs of administration and insurance while detrimentally affecting their reputations. Employees can be adversely affected in terms of the stress or guilt they may feel following an incident in which they have been involved. And of course, major incidents can cause serious injury or death to employees, members of the public and others involved with an organization in some way. Municipalities are also organizations, and thus risk management is necessary for the municipalities. (Roberts, 2005, 43)
Need for Risk Management
Ontario Municipal has many years of experience working with public-sector organizations and has a full understanding of the risks they face. Its goal is to raise people’s awareness and understanding of the broad scope of injuries, accidents and incidents that can potentially occur to any individual involved with any organization. These can occur on or off the organization premises unless adequate measures are taken to assess, and control, the risks which day to day activities inevitably pose.
Shaping Fire-Safe Communities is a Risk Management Tool of municipalities in Ontario. The possibility of a risk management system that meets the diverse needs of the fire services in municipalities across Ontario has been realized through the “Shaping Fire-Safe Communities (SFSC)”. SFSC is a leadership program for the Ontario Fire Service that introduces an easy-to-follow process to evaluate community and organizational risks and to develop strategies and tactics to mitigate these risks through long-range master fire planning. The Shaping Fire-Safe Communities initiative represents a significant advancement in the support and resources provided by the Office of the Fire Marshal on the topic of master fire planning, and are a “first of its kind” in Canada. The system has been launched into several municipalities across Ontario. (Deb, 2006, 96)
Risk management procedures undertaken by Canadian Municipal Corporation
The Government of Canada has introduced modernized management practices in order to make the Canadian municipalities more citizen-focused and better prepared to meet Canadians’ changing needs and priorities. This Integrated Risk Management Framework forms an essential part of these modernization efforts. The Integrated Risk Management Framework for the Canadian municipalities strengthens risk management practices within the Public Service. In doing so, the Integrated Risk Management Framework supports the four management commitments such as, citizen focus, values, results and responsible spending. The Integrated Risk Management Framework advances a citizen focus by strengthening decision-making in the public interest and placing more emphasis on consultation and communication. Similarly, it respects core public service values such as honesty, integrity and probity at all levels, and contributes to improved results by managing risk proactively. Integrated risk management also supports a whole-of-government view grounded in rational priority setting and principles of responsible spending.
The Integrated Risk Management Framework is comprised of four related elements. Element 1: Developing the Corporate Risk Profile. This results in identification of the organization’s risks through environmental scanning, assessment of the current status of risk management within the organization, and identification of the organization’s risk profile. Element 2: Establishing an Integrated Risk Management Function. This results in analysis, communication and application of management direction on risk management, implementation of approaches to make integrated risk management operational through existing decision-making and reporting structures, and building up of capacity through development of learning plans and tools. Element 3: Practicing Integrated Risk Management. This results in a consistent application of common risk management process at all levels, integration of results of risk management practices at all levels into informed decision-making and priority setting, application of tools and methods, and ongoing consultation and communication with stakeholders. Element 4: Ensuring Continuous Risk Management Learning. This results in establishment of a supportive work environment where learning from experience is valued and lessons are shared, development of learning plans into an organization’s risk management practices, evaluation of the results of risk management to support innovation, learning and continuous improvement; and both internal and across government sharing of experiences and best practices.
Following the guidelines of the Integrated Risk Management Framework, the Canadian Municipal Corporation developed new programs and risk management procedures to lessen the risk factors. It focused on identifying and minimizing risks to prevent an incident; containing damages or harmful effects in the event of an incident; compensating or restoring and recovering following an incident; and providing feedback to improve the risk management system. It works in four phases namely Identifying operations and assets at risk, Minimization of risk, Containment, Compensation, restoration and recovery. (Anand, 2006, 55)
Identifying operations and assets at risk
In risk management all of the operational areas and assets of the department are identified, This include owned or leased real and personal property, such as machinery, buildings, transport, inventories and art treasures, volunteers, contracting for construction, goods and services, and ongoing sources of supply, cash, accounts payable and lending, internal audit, information storage and transfer, transportation and electronic data, services to the public or other departments, governmental activity, etc. The perils are identified to establish probable exposure, i.e. the degree of risk and its cost, determine alternatives for minimizing them and develop control procedures. Some of the perils that threaten operations and assets and create risks include fire, collision, theft, fraud, security leaks, violence, climate and earthquakes. Factors influencing risks are identified. They include: acts of nature; human inefficiency, negligence, error, and willfulness; and physical factors such as the availability and quality of materials and the state of a particular technology. Risks to employees and to certain personal property like are treated in separate Treasury Board policies issued by the Human Resources Branch. This includes injury and illness, motor vehicles and other employee-owned transportation, personal property during relocation, and personal property in Crown-owned living accommodation, Damage to employees’ effects within the scope of employment. (Fletcher, 2003, 276)
Minimization of risk
The minimization of risk is the second phase of risk management. It is founded on a thorough analysis of the identified risks in order to assess their potential threat to operations and assets, and to determine the degree of exposure (frequency and severity) as a basis for avoiding risk by eliminating or radically reducing the risk by considering alternatives to current or proposed activities, when acceptance of the risk is inevitable, developing and implementing cost-effective risk control practices such as loss prevention and reduction, including safety training, early detection, security precautions, emergency procedures or design changes and minimizing the financial consequences by considering options such as self-underwriting, when the risks are clearly internal to the government, ensuring that contractors have adequate insurance, or transferring the financial exposure to insurers; and planning and budgeting appropriate measures for potential containment, compensation, restoration and recovery.
Analysis of liabilities include potential liabilities, Property liability, Crown servants’ liability, Underwriting analysis, Financial analysis, Political and diplomatic considerations, Administration, Contracting, Contractor-controlled insurance, Government-specified insurance and Government-controlled insurance. (Bandura, 2003, 35)
Containment is the third phase of risk management. Its primary purpose is to respond quickly to, and control, damaging incidents while they are happening, prevent the effects from spreading, and provide for continuation of the damaged service or function. In effect, the containment phase entails implementation of all contingency plans developed earlier to minimize losses through the activation of emergency organizations, physical systems and procedures. An important prerequisite to this phase is ensuring that contingency plans and systems are kept up to date and in good working order and, as far as possible, that people are trained and procedures are rehearsed. (Dos, 2006, 77)
Compensation, restoration and recovery
Risk management, after the occurrence of a damaging incident, includes compensation, restoration and disaster recovery. Compensation is the settlement and payment of claims by or against the Crown or its servants. Restoration, an element of recovery, is the use of approved funding to repair or replace damaged, lost or stolen Crown property. Recovery entails completion of the longer-term measures initiated during containment to return operations to normal as soon as possible. Both compensation and restoration involve investigation and assessment of the facts of a harmful or damaging incident. It includes details of what happened, who was involved, and which official language used, etc. provides estimates and an explanation of damages. It describes the scene, the geographic location and distances from key areas and locations, the terrain, climatic conditions, time of day and exact nature of the incident. It explains the causes of incident. It provides expert advice and witnesses in connection with the incident. It analyzes political or diplomatic issues, provides the number and dollar value of any claims made and received, considers relevant statutes or other compensations. The corrective action and risk management summarizes briefly the procedures the department has in place to manage the risk of such incidents, as well as the department’s approach to any corrective action required to minimize further incidents in the future. (Sen, 2001, 98)
Effect of risk management procedures on tax payers
Risk management procedures undertaken by Canadian Municipal Corporation have facilitated the tax payers greatly. In reality, municipalities face a wide range of liability risks and purchasing insurance alone is neither the most viable nor necessarily the most practical way to address their potential for causing harm. By implementation of proper risk management procedures the municipalities can overcome their risks. This results in reduction in cost, which again results in reduction of taxes. Risk management procedures undertaken by the Canadian municipalities resulted in cost effective services. Cost Effective Services often realize a substantial cost savings as claims decrease over time resulting in lower W/C insurance premiums. Thus the logistical issues are significantly decreased resulting in substantial financial savings for the municipalities and real value for both the municipalities and its taxpayers. The Taxpayers were thrilled with risk management procedures undertaken by Canadian Municipal Corporation, which eased the test for permissible tax reduction strategies. But, despite a generally high level of voluntary compliance in the Canadian municipalities with well-developed tax systems, a level of non-compliance arises for a variety of reasons or causes, such as, uncertainties in the law or complexities in calculating the right amount of tax significantly increase the risk that the correct amount of tax is not collected due to honest error, or ignorance and confusion over obligations from either the taxpayer or the revenue authority. Some taxpayers choose to avoid or evade assessing, and paying, the correct amount of tax. Some taxpayers are able to assess, but are unable to pay the right amount of tax due to the circumstances they face. Some times the cases of internal breakdowns in administrative processes lead to taxpayers not complying. (Harold, 2005, 331-332)
In conclusion it could be stated that Municipal Liability Insurance in Ontario continues to be a substantial challenge resulting in a limited number of markets willing to write this class of business. In Ontario the Municipal Sector is affected by the broad exposures being downloaded to them, increases in claims frequency and severity and growth of court bodily injury awards. The continued increase in damage awards is an alarming trend. Municipalities can protect themselves through diligent risk management practices. However, in serious injury cases, even the best risk managed efforts may not produce the standard of perfection that the courts sometimes seem to think is achievable in the real world.
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