February 2, 1999

To:Corporate Services Committee and Budget Committee

From:Chief Administrative Officer and

Chief Financial Officer and Treasurer

SUBJECT:EXTERNAL LEGAL FIRMS RETAINED FOR INSURANCE

CLAIM DEFENCE

Purpose:

To report on specific information relating to external legal firms retained by the City of Toronto for insurance claim defence purposes.

Funding Sources, Financial Implications and Impact Statement:

There are no funding implications relating to this report.

Recommendation:

It is recommended that this report be received as information.

Council Reference/Background/History:

At its meeting of July 29, 30 & 31, 1998, City Council referred the following motion to the Corporate Services Committee:

"BE IT RESOLVED THAT the Chief Administrative Officer and the Chief Financial Officer and Treasurer be requested to report to the October meeting of the Corporate Services Committee and the Budget Committee on:

-a list of all outstanding claims where external legal firms are retained, including all ABC's;

-a process on how firms are selected;

-the firms that are retained and annual billings by each; and

-how much has been drawn from the Insurance Reserve Fund (now total at $40.6 million) in the last five years and to which firms, and a projection on how much would be paid in the future five years."

In a joint report (October 16, 1998) the Chief Administrative Officer and the Chief Financial Officer and Treasurer reported for information purposes to the November 9, 1998 Corporate Services Committee and the November 18, 1998 Budget Committee that staff is in the process of compiling available insurance claims data to address City Council's motion from its July 29, 30 & 31, 1998 meeting, as noted above.

The Corporate Services Committee received the foregoing report and requested the Chief Administrative Officer and the Chief Financial Officer and Treasurer, in their forthcoming report, to address the former insurance reserve fund from which litigations such as the Jane Doe case was funded. The Budget Committee reports having requested the Chief Administrative Officer and the Chief Financial Officer and Treasurer to provide a further report on this matter to the Budget Committee in January 1999.

Comments and /or Discussion and/or Justification:

City Council's July 29, 30 & 31, 1998 motion as referred to the Corporate Services Committee requested a report on four items relating to external legal firms retained for insurance claim defence. Each of the four items is re-written below, followed by the information requested.

Item 1

A list of all outstanding claims where external legal firms are retained, including all ABC's.

Table 1 shows that 832 open claims against the City of Toronto are being defended by fourteen different external legal firms. The distribution of open claims among external legal firms is as follows:

Table 1

Outstanding Claims Assigned to External Legal Firms

The municipal defendants in these claims includes various Departments in each of the former Toronto municipalities as well as agencies, boards and commissions which were insured under the same policy as a former municipality, i.e., CNEA, Cityhome, Heritage Toronto, Hummingbird Centre etc. ABC's not covered here include TTC, Toronto Hydro Electric Commission, Parking Authority of Toronto, etc.

Item 2

A process on how firms are selected

The fourteen external legal firms defending the City of Toronto were retained through a variety of processes which are summarized in Table 2 below.

Table 2

Process of Selection of External Legal Firms

Insurance companies offering liability policies to municipalities usually encourage some level of claim retention or deductible to be assumed by the municipality before the insurer participates in paying the claim. Historically, when retention levels were low, insurers required greater control over the selection of legal firms to defend claims because they had more financial interest in the claim. Many of the external legal firms used by the City today were originally retained by an insurance company on behalf of the municipality. Such legal firms have developed a specific expertise in the defence of municipal insurance claims and consequently they have become a valuable asset to municipalities and municipal insurers.

External legal firms form a significant role in defending the City of Toronto's interest in insurance claims. The Chief Financial Officer & Treasurer in consultation with Legal Services and the City Clerk's Office is currently finalizing claims procedures which will address the assignment of required insurance claims defence to either the City's internal Legal Services litigation solicitors or to external legal firms. The City's insurance company, Liberty Mutual Insurance Company, has confirmed their acceptance of the use of internal City solicitors to defend liability insurance claims made against the City. Claims which are politically sensitive, involve serious bodily injury or require a particular legal expertise will be assigned to external legal firms on the basis of matching the nature of the claim to the speciality of the legal firm. The assignment of insurance claims for legal defence will be a function of the Finance Department's Insurance & Risk Management Section.

Item 3

The firms that are retained and annual billings by each

Table 3

Annual Billings by Each Retained External Legal Firm

Item 4

How much has been drawn from the insurance Reserve Fund (now total at $40.6 million) in the last five years and to which firms, and a projection on how much would be paid in the future five years.

At its November 9, 1998 meeting, Corporate Services Committee requested that this report address the former insurance reserve fund from which litigation such as the Jane Doe case was funded.

General liability insurance claims are funded on the basis of the date when the claim occurred, not when the claim was made or settled. This means that insurance claims litigation concerning claims occurring in 1986, such as the Jane Doe case (occurrence date August 24, 1986) were generally paid from an insurance reserve fund which was established during a period of self-insurance for Toronto municipalities. The former insurance reserve fund known as the Metropolitan Municipalities Liability Trust Account (the "MMLTA") was funded by contributions from the former Toronto municipalities Metro (including its Boards, Agencies and the Licensing Commission), Toronto, Etobicoke, York and East York to pay claims which exceeded a $10,000 deductible and which occurred in the years 1986, 1987 and 1988. Consequently, three separate reserve funds were established, namely, the 1986 MMLTA, 1987 MMLTA and the 1988 MMLTA. The MMLTA funds were administered by the former Metropolitan Treasurer on behalf of the members contributing to the funds. However, with respect to the Jane Doe case, the final settlement amount paid in 1998 was drawn from the former Metro Insurance Reserve Fund because sufficient funds were not available from the 1986 MMLTA.

Table 4 shows the amount drawn from each of the MMLTA funds in the last five years.

Table 4

Amount Drawn From the MMLTA Funds (last 5 years)

Amounts drawn from the MMLTA funds in the last five years include payments to external legal firms for insurance claims defence, payments to claimants and consultants. Table 5 shows a summary for each external legal firm of how much has been drawn from the MMLTA funds in the years 1993, 1994, 1995, 1996, 1997 & 1998.

Table 5

Summary of Amounts Paid to External Legal Firms from the MMLTA Funds (last 5 years)

City Council's motion from its July 29, 30 & 31, 1998 meeting to the Corporate Services Committee makes reference to an insurance Reserve Fund total of $40.6 million. Insurance reserve funds are established to meet the deductible provisions of insurance policies, to provide for premiums in respect of external insurance coverage and to finance losses in excess of external coverage. Funds to pay claims made against the former Metro municipality were available from the MMLTA funds as indicated above and from the Metro Insurance Reserve Fund depending on the occurrence date giving rise to the claim and anticipation of projected settlement costs. The January 1^st opening balances from the MMLTA funds and the Insurance Reserve Fund for the last five years, as indicated in Metro's Annual Financial Statements and Reports, is outlined in Table 6. Metro's Annual Financial Reports show only a combined opening balance for the three MMLTA Funds.

Table 6

Year End Balances of MMLTA Funds & Insurance Reserve Fund (last 5 years)

* estimate

The Insurance Reserve Fund balance of $40.6 million, noted in Council's motion, arises from the April 16, 1998 Report to the Budget Committee from the Chief Financial Officer & Treasurer on the Establishment of City Reserves and Reserve Funds. The report provided the preliminary estimate of the accumulation of Insurance Reserve Funds from the amalgamated seven Toronto municipalities as at January 1, 1998. This amount was created as follows:

Reserve FundPreliminary Estimate

East York insurance reserve fund33,330

Etobicoke general insurance reserve424,169

Etobicoke insurance reserve fund2,189,469

Metro insurance reserve fund20,036,460

North York insurance reserve fund10,142,434

Scarborough self insurance reserve836,205

Toronto insurance reserve614,194

Toronto public liability insurance reserve fund5,101,977

York insurance reserve2,035

York insurance reserve fund1,059,013

40,583,442

Preliminary analysis of historic claims data from the former municipalities in relation to the retention levels under the City of Toronto's current insurance policies indicate that the City will absorb approximately $10,985,000 in claims costs annually. In addition, payments of insurance premiums, adjusting fees, insurance broker fees and risk management administration costs associated with loss prevention and computer system licensing will be approximately $5,061,000 for a total annual insurance and risk management cost of $16,046,000. In conjunction with the 1999 Budget process, determinations are being made as to the contributions necessary to meet the insurance and risk management expense obligations of the City.

Conclusions:

Currently there are 832 outstanding claims against the City which are covered by the various liability insurance policies of the former municipalities and have been assigned to external legal firms to defend the City's interest.

Insurance claims procedures are being prepared by the Finance Department, Insurance & Risk Management staff for approval by the City's insurance company and City Council. The procedures will recommend the continued use of external legal firms to defend liability claims made against the City in order to benefit from the expertise in municipal insurance claims which is available in the legal community. Whenever possible, litigation solicitors in the City's internal Legal Services will be assigned insurance claims defence work. Such assignment will however be governed by the nature of the insurance claim and the availability of internal staff to accommodated such additional work loads.

A total amount of $5,931,775 was drawn in the last five years from the former insurance reserve funds known as the 1986, 1987 & 1988 MMLTA funds. Of that total, $2,895,181 was paid to external legal firms. It is projected that the amalgamated City will pay approximately $11 million annually from an insurance reserve fund for insurance claims falling within the City's retention. Historically, an average annual expenditure of approximately $2.8 million was paid to external legal firms defending insurance claims against the amalgamated Toronto municipalities. It is anticipated that included within a projected annual total retained claims cost of $11 million will be a continuing expense for external legal firms of approximately $2.8 million. Over the next five years these figures may fluctuate depending upon changes to the City's insurance policy deductible levels and through the promotion of risk management related loss prevention/reduction programs for the City of Toronto.

Contact Name:

Len Brittain, Director of Treasury & Financial Services, 392-5380

E-mail: lbrittai@toronto.ca

M.R. GarrettW.A. Liczyk

Chief Administrative OfficerChief Financial Officer & Treasurer

:JM

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