Large Judgment in Market Case Could Have Budget Impacts

By Blair Clarkson
Staff Writer

Jan. 14 -- Should the City be found liable for damages to victims of last July's Farmers' Market tragedy, the potential financial impact could last for a decade, affecting everything from project funding to tax revenues to the city's bond rating, according to experts and City officials.

On Wednesday, the plaintiff law firm that won the highest product liability verdict in history at $4.9 billion is expected to file claims against the City on behalf of nine victims who were injured or killed when an elderly driver barreled through the Downtown market on July 16, leaving ten dead and 63 injured.

Although the City has insurance policies in place to pay for a verdict or settlement, the policies do have limits, and a large settlement in excess of the City’s $22 million limit could affect future municipal budgets.

"If the judgment had to be paid, and it exceeded the protection in place, the City would still be responsible," said City Risk Manager Tom Phillips. "There's a section in the governmental code that allows the City to pay off a judgment over ten years."

Currently, the City is self-insured for up to $1 million, Phillips said. This protection acts much like a deductible in the event the City is found liable for an incident.

Above that amount, the City is covered by an additional $1 million group insurance policy it shares with ten other California municipalities, including Modesto and Anaheim. The insurance pool, known as ACCEL (Authority for California Cities Excess Liability), divides risk sharing among the 11 cities based on individual payrolls and budgets.

If Santa Monica needed to tap into the ACCEL pool, each member would be assessed their potion of the coverage; for example, one city might cover 15 percent, another 10 percent, and so on.

The pool responds to all of its members in the same fashion, according to Phillips. "If another member had a loss that was worth more than $1 million, we'd be part of its pool."

In the event that a judgment surpassed the $2 million level covered by self-insurance and ACCEL, the City maintains two supplemental insurance policies with American International Group (AIG) totaling $20 million, Phillips said.

While $22 million affords a substantial amount of insurance protection, the law firm representing several of the victims in their claim against the City -- Greene, Broilett, Panish & Wheeler, LLP -- has previously won huge settlements on behalf of its plaintiffs, including a recent $33 million verdict against Budget Rent-a-Car and the City of Los Angeles and its police department.

The firm also won a $3.3 billion settlement in a tobacco industry case and a confidential settlement for eight figures in the crash of Alaska Airlines flight 261, which was the first time a major airplane manufacturer admitted defective design.

Phillips cautioned that speculating about such a judgment would be difficult at this early stage, given that the claims that will be filed Wednesday are a precursor to a lawsuit that has yet to be filed against the City.

"We don't believe we will be found responsible," Philips said.

However, Phillips added, "if a settlement exceeded (the $22 million covered by the policies), and it was a final judgment and all appeals had been exhausted, then the City would have to pay it."

Phillips said it was "way too early to speculate" about what effect such a verdict or settlement would have on the City and its residents.

The City would have to analyze the size of the exposure, look at the governmental code, examine its resources, and review all the financial implications, he said. "There are so many unknowns there."

Karl Manheim, a law professor at Loyola, offered some solace. Often, he said, insurance companies will pay in addition to their limits or will try to settle for the policy limits without trial because they have an obligation to clients not to expose them to additional liability, even if liability is questionable.

Furthermore, state laws can limit certain kinds of pain and suffering damages against municipalities.

"You have to go through a lot of steps before you get a judgment that's going to exceed the insurance company's policy limits," added Manheim, who worked in the City Attorney's office for five years in the early 1980s.

Yet if there are judgments against the City far in excess of its $22 million insurance policy limits, and they're not capped by state law, then the money would have to come from City sources, such as general funds, the sale of assets and future tax revenues.

"It's like any other defendant in a lawsuit," said Phillips. "You'll have to come up with the funding."

The City's bond ratings also could be adversely affected, since they depend on the income stream a city has, according the Manheim. Bondholders demand that income, generally earned from tax revenue or other fees, be devoted to paying off the bond.

If those revenues are committed to a settlement and not available to pay interest and principal on the bond, then the bond rating will suffer.