Wednesday, November 11, 2009

Corporation Counsel Vastly Underestimates Potential Legal Liabilities Facing the City

Recently the Indiana State Board of Accounts published their review of the audit report prepared by KPMG, LLP for the City of Indianapolis covering the period from January 1, 2007 through December 31, 2007. While I had glanced through the report earlier, an alert reader of this blog pointed out the following gem on page 74 of the report,which I had overlooked:
15. Contingent Liabilities and Commitments

A. Various lawsuits are pending against the City. In the opinion of the City's Corporation Counsel, the aggregate potential loss on all outstanding litigation was estimated to be $2,432. This amount has been accrued for in the Internal Service Fund. This opinion concurs with the Indiana law limiting the liability of municipalities to $500 per person and $5,000 per occurrence. Additionally, the City is a defendant in various lawsuits for which management has determined that there is a reasonable probability of an adverse outcome. No accrual has been made in the financial statements for these items, which approximate $179, as the loss is not probable and estimable.
I am not aware of any law limiting municipality liability to $500 per person and $5,000 per occurrence. I can only suppose that this is instead a reference to insurance limits. Aggregate liability for a municipality is $700,000 per person per occurrence under Indiana law If there are several plaintiffs, then it can go as high as $5 million.

Further, the second part of the clause talking about "pending lawsuits" seems to contradict the first part. Then within the second part, they say there is a "reasonable probability of an adverse outcome" but then say no money has been set aside for these lawsuits because "the loss is not probable." What?

An attorney active in city politics told me awhile back that the City does not set aside money for lawsuit settlements or judgments. Apparently he's wrong. From the audit, it would appear that the City put aside a whole $2,432 for settlement/judgments in the "various lawsuits" pending against the City. Obviously the ultimate bill is going to be much, much higher than that. It is unfortunate KPMG and the State Board of Accounts did not throw a red flag on this section of the report.


Had Enough Indy? said...

Does it always take this long to review the books? 2007 seems an awfully long time ago.

Paul K. Ogden said...

Good question. I don't know. I agree it does seem like an awfully long time passed.