Let’s Settle This: The Role of Municipal Joint Insurance Funds

For The Westfield Leader

WESTFIELD — From allegations of racism and retaliation, to claims of wrongful termination, to workplace injuries or slip and falls, municipal lawsuits can sometimes read like the pages of a sordid dime-store novel. Even in situations where the municipality might clearly be in the right, these cases rarely see the inside of a courtroom.

Westfield Town Administrator Jim Gildea recently sat down with The Westfield Leader to clear up some common misconceptions surrounding the legal process and the driving force behind the decision to settle.

As a bit of background, Westfield, like hundreds of other communities across the state, belongs to a municipal joint insurance fund (JIF) that helps governing bodies to mitigate their liabilities and find realistic risk-management solutions. There currently are more than 50 JIFs across the state, which range in size from as few as five to as many as 89 participating communities.

“Think of the JIF as a coverage pool,” Mr. Gildea said. “Each municipality that belongs to a JIF pays into the collective fund and then sends a representative — usually a business administrator, member of the finance committee, or, occasionally, a council person — to act as a liaison on the board. It’s a collective decision process that helps to take some of the burden off of the individual governing bodies.”

According to information provided by the Garden State Municipal Joint Insurance Fund (GSMJIF) (whose members include Fanwood, Union and Holmdel), the first municipal JIFs were formed in the early 1990s in response to an economic imbalance that was making it hard for local-level governing bodies (and, by proxy, the taxpayers) to protect themselves against predatory lawsuits.

“[The state legislation that allowed the first JIFs to form] was extremely timely because in the mid 1980s, public entities found themselves in the midst of a crisis of insurability wherein coverage was either not available in the commercial marketplace or was unavailable because the cost was prohibitive,” the GSMJIF said via its website.

Today, JIFs help local governing bodies manage everything from building and vehicle insurance to workman’s comp and catastrophic liability. Municipalities also can opt into environmental JIFs that help to mitigate unpredictable challenges like storm-water management and natural-disaster recovery. By pooling their resources, participating municipalities, Mr. Gildea explained, can create the critical mass needed for self-insurance; jointly purchase excess insurance to cover large claims; and establish a specialized administration to effectively manage the program.

“Towns can pick the joint insurance funds that they are in, but there is a selection process that’s regulated by state law,” Mr. Gildea said, noting that most JIFs are formed between communities with similar socio-economic backgrounds. “For example, if a town wants to come into our JIF [Westfield is one of the founding members of the Suburban Municipal Joint Insurance Fund, one of the oldest JIFs in the state], they have to submit an application. The JIF then reviews that town’s recent experience — everything from lawsuits, employment practice liability issues, environmental issues, workers’ comp issues, operational issues…Does your town have a lot of flooding? Does your town have a lot of crime? All of those things factor in.”

Ultimately, Mr. Gildea explained, it is all about saving taxpayer money.

“Westfield pays about $1 million each year out of its annual budget to cover its membership in the JIF,” he said, “and while that’s not a small number, it covers all of our insurance costs [except for employee health insurance] for the year. With the way the market is fluctuating, it would be very cost prohibitive to try to cover those same expenses on our own.”

The state’s municipal JIFs represent the lowest level of organization in a (somewhat complicated) multi-tiered system of oversight. While all JIFs follow a similar structure, many municipal and county-level JIFs, Mr. Gildea explained, are overseen by the MEL (The Municipal Excess Liability Joint Insurance Fund), which is overseen by a risk-management group that sits at the top of the ladder.

The MEL, Mr. Gildea explained, consists of representatives from 19 different JIFs.

“It’s a lot of acronyms,” he said, “but basically, there’s a system in place that allows participating bodies to hold each other accountable. It also connects us to professionals who have access and resources that individual governing bodies may not.”

Each level of oversight, Mr. Gildea said, is maintained by a paid administrative staff of qualified professionals whose salaries are paid through the fund.

Before the formation of JIFs, the MEL notes on its website, local governments had two choices for their property/casualty programs — commercial insurance or individual self-insurance. As an example, the entity states, “commercial insurance has proven to be an expensive way to finance risk with insurance companies adding some $75 to the cost of every $100 in claims. Overhead for self-insurance is only about $25 per $100 in claims. The problem is that most local governments are not large enough to retain a substantial portion of the risk. Minimum size requirements effectively eliminate this choice for most local governments in New Jersey. Even government units large enough often lack the managerial resources to properly administer their programs.”

One of the primary roles of the JIFs and their subsequent oversight boards is to determine which lawsuits warrant time in front of a judge or jury, Mr. Gildea said.

“This happens all the time,” he said. “When somebody tries to sue a township or a governing body, the JIF has to reach a consensus as to whether it’s worth the elevated risk of litigation. Trial proceedings are wildly expensive — you’re talking hundreds of thousands of dollars in some cases — so it’s usually not cost-effective to take something to court if it can be avoided. Even when you know you’re right and you want to have the chance to make your case, it can be risky. There’s no way to know how a jury is going to react to a given situation.”

To avoid excess court costs, Mr. Gildea continued, the JIF will usually recommend that a municipality try to reach a reasonable settlement agreement instead.

“That’s why you see so many of these lawsuits wind up as settlements,” Mr. Gildea said. “It can be a bit frustrating at times because it limits the abilities of a governing body to defend itself against baseless allegations, but at the end of the day, this isn’t about the pride of the governing body. It’s about saving taxpayer money and acting as responsibly as possible.”

Participating members do not always have to take the recommendations of the JIF, Mr. Gildea said, but there are consequences for going against the grain.

“If a municipality decides to take something to court when the JIF told them to settle, they could be dropped from the JIF,” he said. “Again, the other participating members get a say in who stays and who goes, so if the board feels that one member is acting in a way that could negatively impact the rest of the group, they don’t have to allow that member to participate anymore.”

Each JIF establishes its own set of bylaws and regulations, Mr. Gildea said.

“In some cases, the JIF might come back and say ‘okay, go ahead and take this to court, but if you lose, we’re not paying your costs.’ Others will just vote you out,” he said. “It’s a bit of a tightrope walk. Most municipalities that participate in a JIF do so because they don’t want to overburden their budgets or their taxpayers with these types of unpredictable costs, so that’s where you really have to weigh your options and make the best decision you can.”

According to the MEL, by law, a JIF is a local governmental entity, not an insurance company. As such, JIFs are subject to all the laws covering local government, such as the open public meetings act, the public contracts law, the fiscal affairs law and the local officials’ ethics act. Because the members have a strong sense of ownership, they apply considerable peer pressure on each other to prevent accidents and reduce costs.

In order to help prevent litigious actions, Mr. Gildea continued, JIFs (with the cooperation of the MEL and the risk-management company) also provide valuable safety trainings for municipal- and county-level employees.

“It’s not all about reaction,” he said. “These entities are very proactive in finding ways to make sure that employees are properly trained and educated. These trainings really help us cut down on workplace accidents, which, in turn, helps us to avoid lawsuits. At the end of the day, it really all boils down to checks and balances.”

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