Reduce State Spending for Liability Insurance

The Legislature should further restrict the authority of state agencies to purchase liability insurance to save the state money.


Background
Under the Texas Tort Claims Act (Chapter 101.027) and Article 6252-19a V.A.C.S., state agencies are authorized to purchase insurance policies protecting the unit (agencies) and the unit s employees against claims.... However, most state agencies are precluded from purchasing tort insurance because the Legislature specifically prohibited expenditure of appropriate d funds for this purpose. Because no single state agency is responsible for providing direction on what types of policies should be purchased, many agencies are not aware of the most cost- effective options. As a result, there have been unnecessary expendi tures for insurance coverage.

The concerns of state agencies and institutions of higher education fall into two basic groups: those agencies funded with general revenue and those funded with local or special funds.

The agencies which are funded with gene ral revenue can pay claims out of the General Revenue Fund without affecting their direct appropriations or budgets. This is because the Legislature appropriates a separate amount from the General Revenue Fund and special and local funds to the Comptroller of Public Accounts for claims (Chapters 101, 104 and 110 of the Texas Civil Practice and Remedies Code Annotated, and federal court judgments) against the state. In fiscal 1992, over $15 million was paid from the Comptroller s appropriation from all funding sources. 1~ During the 1992-93 biennium, $14 million has been appropriated for claims from General Revenue Funds and $5 million from special or local funds. Agencies access this special appropriation by turning over claims against their agency to the Attorney General s office for processing.

Agencies with local funds (primarily universities) have more complex decisions to make. Agencies funded with local funds must reimburse the state the full amount of claims against their agency. These agencies face a potential budget loss up to the maximum amount payable under the Tort Claims Act ($250,000/$500,000 for personal injury and $100,000 for property damage). 2~ This potential erosion of their budget makes a $60,000 insurance premium appear reasonable. The loss to the state only becomes obvious when the actual losses are reviewed. For example, an insurance company may pay $3,500 in actual losses. The agency has pa id the insurance carrier $56,600 to underwrite its exposure. This is a situation that can be improved greatly.

If institutions of higher education (who hold the bulk of local funds) pooled the money they are currently spending for insurance, they could share the risk among themselves. They would retain control of expenditures and over a period of time, based on the actual loss experience, begin to reduce the amount of money required to fund the pool. Ideally, the fund would eventually be self-supporting. In the present situation, institutions of higher education are faced with ever-increasing insurance premiums.

Claims Process
One specific concern that needs to be addressed immediately is the amount of time it takes to process a claim against the state.

The Attorney General s office is required to process and approve claims against the state. Currently, the Tort Litigation division investigates and processes these claims once an agency has notified them of a claim and then makes a determination of whether to pay. The agency is notified of the Attorney General s decision and either agrees to payment of the claim or asks for modifications. The decision and accompanying documentation is included on a voucher which must be approved by an Attorney General division chief as well as the Deputy Attorney General. Once the Attorney General s office has authorized the voucher for payment, it is sent to the Governor s office . The voucher, signed by the Governor, is then sent to the Comptroller s office to be paid. The Comptroller s Claims division processes the voucher and returns the warrant to the Attorney General s office who exchanges the warrant for a release from the claimant.

This process takes about two months, for example, from the time a citizen is involved in an accident with a state employee to the receipt of the state warrant. 4~ This bureaucratic and time-consuming process has possibly resulted in agencies taking out insurance policies just to reduce the amount of involvement with the aggrieved citizen.


Recommendations
A. The Legislature should amend the Texas Tort Claims Act (Chapters 101, 104 and 110 of the Texas Civil Practice and Remedies Code Annotated) to require the Attorney General s Tort Litigation Division to approve purchases of insurance based on analysis as to whether the purchase is cost effective to the agency and the state.

While it seems appropriate to simply recommend that agencies cannot purchase insurance at all, there are situations which might prove in the best interest of the state to purchase insurance. In addition, the Attorney General s office has information on agencies exposures, risk and loss experiences, as well as up-to-date experience in interpreting insurance policies, which will enhance the state s purchases of insurance when it is cost effective. In addition, the Risk Management Division of the Worker s Compensati on Commission can analyze data on insurance claims and can provide input on cost and benefit. This process to gain the Attorney General s approval of purchase insurance should be neither burdensome nor time consuming.

B. The Attorney General s office should be required to improve its liability claims processing time.

To provide better customer service, the Attorney General s office should look to the insurance industry for ways to improve claims processing. In addition, the Attorney General s office should be granted the authority to set standards for state agencies to report claims timely.

C. The Legislature should require the Attorney General s office, in conjunction with the institutions of higher education, to study the appropriateness of establis hing an insurance pool or pools for institutions of higher education. The Attorney General should make a recommendation to the 74th Legislature.

Universities are spending millions of dollars a year on premiums for liability insurance policies. The net fiscal implications of implementing a pool could be a reduction in the costs that the universities pay for premiums. The result could be a more effi cient use of the universities financial and human resources. As an example, the University of Texas Medical B ranch at Galveston has established a pool for its physicians, which could be used as a model for a larger pool for all university physicians.


Implications
The advantages to the state of administering its own risks are significant. Texas government would: (1) retain control of funds that are currently paid to insurance companies, (2) be able to take remedial action (such as changing state employee actions that put the state at risk for claims) and (3) use the state s tremendous financial and human resources more efficiently and effectively in covering legitimate claims against the state.


Fiscal Impact
The fiscal impact cannot be estimated. The state could save some money assuming state agencies stop purchasing insurance policies and an additional amount is appropriated to the Comptroller s office to handle the claims.



Endnotes
1 For fiscal 1992, expenditures for claims from the General Revenue Fund totalled $3.9 million and expenditures from all other funds totalled $11.3 million.
2 Chapter 101.023, Texas Civil Practices and Remedies Code.
3 Office of the Attorney General s survey of state agencies and institutions of higher education, 1992.
4 Interview with Nathan Henderson, Investigator, Attorney General s Office, Austin, Texas, December 11, 1992.