Warning! Buying cheap insurance through school co-ops can be hazardous to the financial health of Oklahoma school districts and the taxpayers who fund them.
It’s a tough lesson that many Oklahoma school districts are learning the hard way — through the school of hard knocks.
In the Yukon school district, a tentative settlement has been reached that would require taxpayers to pay $100,000 through increased property taxes over three years to settle a bullying lawsuit. The proposed settlement, which still must be approved by a judge, came after school group insurer Oklahoma Schools Property and Casualty Cooperative folded under financial pressure, leaving former members to wonder whether assessments will be levied against them to pay off financial claims.
In Pittsburg County, a different insurance cooperative is suing the McAlester school district. The Oklahoma Schools Risk Management Trust wants a judge to declare that the district’s policy doesn’t cover damage caused by an underground pipe break that flooded Parker Intermediate School last August, necessitating about $200,000 in repairs and unexpected expenses. The break occurred the day before school was set to start. The pool insurance group wants the judge to order the district to pay the insurance group’s attorney fees, as well.
El Reno Public Schools also face major insurance issues. It’s been more than a year since baseball-size hail hammered multiple El Reno schools, but adjusters representing Oklahoma Schools Risk Management Trust’s re-insurers and the school’s damage appraisers are still far apart in how much money El Reno schools are owed for repairs. School representatives place the loss at about $8.8 million, but the insurers only want to pay $3.3 million, said El Reno Superintendent Craig McVay.
It’s buyer beware when it comes to school districts purchasing insurance through shared risk pools, warns Oklahoma Insurance Commissioner John D. Doak.
“School leaders need to know that these types of arrangements are not regulated and are not backed by a guaranty fund,” Doak said. “The last thing we want is for a natural disaster or a major lawsuit to leave multiple schools in financial ruin.”
When school districts have filed insurance claims with certain Oklahoma shared risk pools, the experience has not always been favorable. Some other shared risk pools apparently have operated quite successfully.
Tom Fisher, assistant superintendent of Woodward Public Schools, said in 2012 the school was hit with a hail storm that was so bad that officials had to stop a school board meeting several times because board members couldn’t hear over the noise of hail stones pounding the roof.
Fisher said the school’s experience with Oklahoma Schools Property and Casualty Cooperative started out well. Three sets of adjusters came out right away and filled out damage estimates.
Within a week, however, another set of adjusters appeared unannounced with a whole different attitude.
“They tried to tell us that there was no hail damage — that kids had been up on the roof with cowboy boots on kicking the roof,” Fisher said. “We called their representative ... and told him to get these people out of here.”
Reimbursements were slow and there were numerous delays, but the insurance cooperative did eventually pay for roof damage, he said. It never did pay for the thousands of dollars in damage to rooftop air-conditioners.
“It was a very long, frustrating journey with them, but we did finally get the roofs repaired,” he said. “Based on some of the other stories I’ve heard, we were rather fortunate.”
Yukon told group broke
Yukon Public Schools apparently was not as fortunate.
New Yukon Superintendent Jason Simeroth, who took over as the district’s top administrator in January, said the district paid OSPCC $638,570 in premiums for fiscal years 2011 and 2012, but were told the organization was broke when the district began looking into how to pay a $100,000 proposed settlement to a bullying lawsuit.
The plan now is to ask a Canadian County judge to approve a settlement that would require a $100,000 judgment to be put on the tax rolls and paid by district taxpayers over three years.
“That is why we switched companies … for obvious reasons,” Simeroth said. “I learned of their financial issues just before the settlement and was informed that we would have to pay the settlement ourselves.”
Simeroth said Yukon Public Schools likely will not file a lawsuit over the matter.
Jerry Needham, superintendent of Oktaha Public Schools and chairman of the OSPCC’s board of directors, said the group — which represented more than 40 schools — decided to go out of business earlier this year because of financial troubles. He blamed the troubles on a couple of catastrophic claims losses and some schools leaving the cooperative last June, resulting in the group losing about $1 million in insurance premiums.
Needham said the board will examine where the group stands financially at the end of the year. If necessary, assessments will be levied against former members to pay for uncovered losses, he said.
Forty-two of the 43 schools that were members of OSPCC when it folded decided to join the OSRMT, which is endorsed by the Oklahoma State School Boards Association, he said.
McAlester district sued
Some members of the OSRMT also have reported insurance claim problems.
The ground floor of McAlester’s Parker Intermediate School flooded last August when an underground water line broke the day before school started, said Superintendent Marsha Gore.
Instead of paying the claim, OSRMT sued the school district, asking a judge to declare that damage wasn’t covered by the policy.
The group’s programs are administered by The Sandner Group — Insurance Program Managers of Chicago, Ill.
“This is a claim we don’t feel should be paid,” said James Woodard, company president.
Woodard told The Oklahoman that his group believes the water line break was caused by normal wear and corrosion that would be excluded under the policy.
An entire school year has now gone by and the claim remains unresolved.
“It has not been a good deal for us,” Gore said, recalling the logistical challenge of moving about 400 students around.
El Reno Public Schools’ insurance claims experience with OSRMT has been mixed, said Superintendent McVay
Adjusters were sent to the campus immediately after the May 2013 storm and the school district quickly received $1.1 million to patch roofs and make the buildings inhabitable, he said.
Getting money from the group’s re-insurer for permanent repairs has been much more challenging, McVay said.
The school district’s experts estimate the damage at $8.8 million, but so far the insurers have only been willing to offer $3.3 million, he said. Negotiations are ongoing.
“A year is really frustrating,” McVay said. “We’re really concerned. Kids are now home for the summer and we need to get that settled and move onward.”
Study financial statements
Insurance Commissioner Doak said before signing with a pooled risk group, school officials should scrutinize the group’s financial statements to make sure they have sufficient financial reserves to cover potential claims.
Interpreting audits and financial statements of shared risk pools can be a daunting task, even for people who are financially savvy. However, such examinations can reveal important information if school officials will have their auditors, accountants or insurance experts examine them, said Frank Stone, chief actuary for the Oklahoma Insurance Department.
The Oklahoman examined the Sept. 30, 2013, independent audit report of the financially failed Oklahoma Schools Property and Casualty Cooperative and discovered it closed out the 15-month period with negative net assets of $832,721.
Having negative net assets is a huge red flag, Stone said.
Fifteen months earlier, the group only had $11,042 in net assets, which should have been a matter of concern to the group’s 43 member schools who were counting on the group to potentially cover claims that could reach millions of dollars.
The independent audit of OSRMT also reveals concerns. That shared risk group, endorsed by the Oklahoma State School Boards Association, currently provides coverage to 189 school districts, including Edmond, Norman, Stillwater and Shawnee, according to the organization’s website.
Accounting’s red flag
The group received a “qualified opinion” in the most recent audit of its financial statement. Qualified opinions are red flags in the accounting world, warning individuals who review them that information provided to auditors was limited in scope or the group being audited failed to maintain generally accepted accounting principles.
In this case, auditors issued the cautionary note because OSRMT requires new members to make reserve capital contributions each of the first three years they are members, but the group has been listing the entire amount as income on its books during each school’s first year of membership. The result is that the group looks more financially flush on its financial statements than it would if generally accepted accounting principles had been followed, a state insurance official confirmed.
Woodard, president of the company that manages OSRMT’s claims, said the auditor believes the organization’s capital contributions should be amortized over 10 years.
“How do you amortize something over 10 years that’s payable within three years?” Woodard asked. “There would be a difference of opinion between us and the auditor from the get-go.”
Woodard said he believes OSRMT’s low property and casualty rates offer an important option to Oklahoma school districts seeking affordable insurance.
The organization’s website claims “OSRMT members have saved 40 percent in contributions between the 2010-2011 and 2012-2013 program years.”