JANICE K. BREWER
GOVERNOR

SCOTT A. SMITH
DIRECTOR

ARIZONA DEPARTMENT OF ADMINISTRATION
RISK MANAGEMENT DIVISION

FISCAL YEAR 2012 ANNUAL REPORT

RESPONSIBILITIES/STATUTES
The Fiscal Year 2012 Annual Report, as required by A.R.S. §41-623, summarizes liability,
property, and workers’ compensation expenditures, and provides information on loss
prevention efforts and overall achievements of the Risk Management Division during the
fiscal year.
The Risk Management Division was established in 1976, and is tasked with the
management and mitigation of liability, property, and workers’ compensation claims.
Statutes found in A.R.S. §41-621 et seq., and administrative rules found in A.A.C.- R210-101 through R2-10-601, outline the parameters of the program, including coverage for
agencies, employees, boards and commissions. The Risk Management Division provides
consultations with state agency personnel to recommend programs and procedures aimed
at reducing or eliminating risk. On an annual basis, Risk Management performs a
comprehensive evaluation of its insurance program to determine the proper mix of
purchased commercial insurance and risk retention.
Funding for Risk Management programs is provided from the Risk Management
Revolving Fund. Revenues into the fund are generated as follows:
 An actuarial projection is developed for property, liability, outside counsel and
allocated loss adjustment expenditures. In addition, estimates are prepared for costs of
administration, insurance premiums and attorney general defense. The total is then
allocated and invoiced to agencies based on a formula that assesses risk exposure as
well as historical losses.
 An actuarial projection is also developed for workers’ compensation time loss,
medical, outside counsel and allocated loss adjustment expenditures. In addition,
estimates are prepared for costs of administration, insurance premiums, and attorney
general defense. The total is then allocated to agencies based on an allocation method
from the National Council on Compensation Insurance (NCCI). The NCCI method
calculates a rate per payroll using employee classifications modified by the agency’s
historical losses.

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ACHIEVEMENTS AND GROWTH
Fiscal Year 2012 marked a year of significant achievements and continued growth.
Risk Management implemented Phase 2 of the Document Management System (DMS) by
enhancing existing property and liability functions and by fully integrating workers’
compensation workflow. The Document Management System creates a paperless claims
adjusting process to improve efficiency, workflow, data integrity, security, and response
time. During Fiscal Year 2013, further enhancements will be made by developing an
interface with the Risk Management Information System, the medical bill review
contractor, and the Arizona Financial Information System (AFIS).
The Workers' Compensation Section moved from a paper adjudication process to a
sophisticated on-line cost containment adjudication portal that allows adjusters immediate
access to medical bills and associated medical reports to quickly review, edit, approve, or
deny medical bills. Adjudication has been reduced from up to 30 days to 10 days. Medical
reports and bills are no longer received, stamped, indexed, distributed, manually reviewed,
and filed by clerical staff. Medical reports and bills are now received, batched, and mailed
overnight to the contractor for scanning, coding, and imaging within two business days.
This improvement results in less lag time, fewer calls, and fewer staff hours tied to a dated
manual process.
The Property and Liability Section implemented a File Transport Protocol (FTP) site to
securely transfer claims data to and from agencies, vendors, and legal counsel. The use of
the FTP site eliminates manually copying and transporting paper files, many of which are
contained in several volumes.
The Property and Liability Section developed separate data collections within the
Document Management System, then uploaded and indexed hundreds of historical
documents for more secure and efficient storage and retrieval:
 968 Joint Legislative Budget Committee(JLBC) Rule 14* collections
 210 documents containing annuity information
 44 agency corrective action responses for third party liability settlements and
judgments in excess of $150,000
The Property and Liability Section piloted a streamlined vehicle windshield claims
adjusting procedure aimed at reducing processing time and creating efficiencies by
empowering agencies with decision making authority. In Fiscal Year 2012, 1923
windshield claims were processed. The Section plans to expand the new program in Fiscal
Year 2013.

*Pursuant to A.R.S. §41-621, the Joint Legislative Budget Committee (JLBC) Rule 14 requires JLBC
approval of liability settlements of $250,000 or greater

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The Property and Liability Section completed a vendor audit related to state auto property
damage. The overall positive result included one recommendation to more frequently
utilize “Like, Kind and Quality (LKQ)” when appropriate. LKQ is an insurance term
referring to the replacement of damaged, destroyed, or lost property with used property of
similar type and condition.
The Property and Liability Section, Large Loss Support Unit, assisted agency
representatives in completing a total of eleven Agency Loss Mitigation plans. Seven were
required under the authority of the Joint Legislative Budget Committee (JLBC) Rule 14
settlements and four were required as per A.A.C. Rule 2-10-10.
Risk Management fulfilled its mandatory federal reporting requirement for Section 111 of
the Medicare, Medicaid, and SCHIP Extension Act (MMSEA) of 2007. Section 111
requires all insurance companies (including self-insured entities) to report quarterly to the
Center for Medicare Services (CMS) on injury information for claimants who are
Medicare beneficiaries.
The Loss Prevention Section conducted six separate risk insurance training sessions with
284 attendees representing over twenty state agencies completing the instruction. Each
session consisted of six separate components totaling approximately fourteen to sixteen
hours of training. The curriculum included dynamics of risk, procurement insurance
concepts and terminology, fidelity/insurance crime prevention, special contingency risk
management, and contract compliance.
Loss Prevention implemented a number of improvements and efficiencies to assist state
agencies address loss exposures:
 Reviewed and monitored 45,000 state employee driver records through the
Arizona State Employee Driver Record Application (ASEDRA) Program
 Provided defensive driving on-line Computer Based Training (CBT) for over
8900 state employees
 Assisted the Department of Health Services and the Department of Economic
Security with the implementation of an on-line computer based training for
handling suspicious mail and packages
 Implemented Emergency Action Plans (EAP) and designed a standard matrix for
fire alarm detection system upgrades for buildings on the Capitol Mall
 Developed Emergency Action Plan (EAP) templates for statewide programs and
procedures
 Provided OSHA 30 -hour training for the Department of Administration General
Services Division FOAM, and the Department of Game and Fish
 Reviewed 31 building plans in conformance with A.R.S. §41-623E
 Developed a Continuity of Operations Plan (COOP) for workers’ compensation
essential functions
 Provided an Associate in Claims (AIC) certification training for eight Risk
Management employees

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The Loss Prevention Environmental Unit provided assistance to state agencies dealing
with environmental loss exposures:
 Assisted the University of Arizona and the Arizona Department of Environmental
Quality in completing the post-closure permit for the hazardous waste facility at
Page Trowbridge Ranch Landfill in Oracle, Arizona
 Identified agency-owned underground storage tanks (as well as underground
storage tanks located on state property) likely to be damaged by the
incompatibility of alcohol-blended fuel and fiberglass-lined storage tanks. The
unit provided training for appropriate agency personnel, coordinated evaluation
and sample collection from tanks operated by the Department of Transportation
and the Schools for the Deaf and Blind, and collected fuel and water samples for
analysis by the federal Environmental Protection Agency (EPA)
 Excavated and disposed of a historic pesticide dumpsite on state land located
near Picacho, Arizona
 Identified all shooting ranges located on state land (or operated by state
agencies) and developed methodology for the assessment of surface soil
contamination as a source of airborne lead exposure
 Coordinated negotiations and provided a technical review of the federal
Environmental Protection Agency (EPA) buy-out and consent order with the
University of Arizona for the Ellis Road Superfund Toxic Site
 Completed an operational review and provided recommendations for
improvements for three Department of Corrections waste water treatment plants
 Developed methodology and assisted the Department of Environmental Quality
and the Department of Public Safety in completing its evaluation of potential
surface water contamination associated with a leaking underground storage tank
site in Sunflower, Arizona
 Completed remediation of fuel release at the University of Arizona telescope site
at Mt. Graham, Arizona
 Continued efforts to develop a management program for drywells managed by the
Department of Administration
 Assisted the Arizona State Health Laboratory with a review and recommendation
for disposal of unneeded chemicals
 Provided legal support and technical review of a hazardous waste closure permit
for the Universal Propulsion Facility on state land
 Obtained closure from the Department of Environmental Quality for the
Department of Economic Security leaking underground storage tank site in
Coolidge, Arizona
 Completed an assessment of the Department of Arizona fuel storage tanks on the
Capitol Mall and provided recommendations to correct deficiencies
 Competed a review of the Department of Administration air quality permit,
identified potential additional sources, and assisted with permit inspection by the
Maricopa County Air Quality Division

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Risk Management recorded significant savings through numerous claims adjusting
subrogation efforts:
 Environmental claim recoveries: $30,746
 Environmental claim invoice savings: $96,600
 Workers’ Compensation third party recoveries: $703,796
 Property and liability third party recoveries: $1,054,442

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FISCAL YEAR 2012 COSTS AND COMPARISONS
Liability expenditures for Fiscal Year 2012 were $15.4 million – significantly less than $22
million in Fiscal Year 2011; however, Fiscal Year 2011 included one extraordinary bodily
injury claim in the amount of $5 million. The five-year average for liability expenditures,
excluding the extraordinary $5 million claim in Fiscal Year 2011, is $16.6 million.
Property expenditures in Fiscal Year 2012 were $15 million including $1.5 million from
extraordinary claims due to hail damage. The five-year average for property expenditures
is $13.9 million.
Workers’ Compensation expenditures in Fiscal Year 2012 showed an $800,000 increase
over Fiscal Year 2011. Increases resulted from medical inflation and a statutory increase in
lost time payment.
The following charts depict five-year cost comparisons:

PR OPER TY CLAIM COSTS

28
24
19.6
20
16
12

IN M ILL ION S OF D OLL ARS

LIABILITY CLAIM COSTS

22.0
17.2

15.4

13.9

8
4
0

20

16.9
15.0

16

13.5

13.0
11.3

12
8
4
0

FY'08

FY'09

FY'10

FY'11

FY' 08

FY'12

WORKERS' COM PENSATION
C LAIM COSTS
I N M IL LIO NS O F DOL LAR S

28
22.2

20 .2

20 .2

20.4

21 .2

20
16
12
8
4
0
FY'08

FY'09

FY' 10

FY' 11

FY'1 2

FY’11 extraordinary claims due to hail damage: $977,744
FY’12 extraordinary claims due to hail damage:
$1,571,372

FY’11 includes one extraordinary bodily injury claim of
$5 million

24

FY' 09

FY'10

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FY' 11

FY'12

LIABILITY PROGRAM
In the Fiscal Year 2012, there were 2,916 liability claims reported to the Risk Management
Division. Total liability claim payments for Fiscal Year 2012, including outside counsel and
allocated loss adjustment expenditures, were $15.4 million. General liability claims include third
party bodily injury and property damage, highway maintenance, and negligence in oversight of
state-managed programs. The category of personal liability includes such areas as employment
discrimination, defamation, and civil rights violations. Medical malpractice includes errors and
omissions by state medical professionals. Automobile liability includes third party claims for
injuries and property damage resulting from the use of automobiles by state employees engaged in
state business.
General Liability – Bodily Injury claims were the most expensive claims in the liability category,
representing 63% of the total cost. Personal Liability was second and represented 15% of the total
cost. Medical malpractice payments were $675,000. The following table breaks down the
frequency of claims reported in Fiscal Year 2012 and amounts paid regardless of occurrence date
by loss type:
Loss Type
General Liability – Bodily Injury
Personal Liability
General Liability – Property
Automobile Liability – Bodily Injury
Automobile Liability – Property
Medical Malpractice
Total

Frequency Liability Losses
490
$9,630,000
540
$2,292,000
1205
$1,060,000
67
$1,268,000
556
$475,000
58
$675,000
2916

$15,400,000

The following table shows frequency of claims reported and liability losses in Fiscal Year 2012 for
the agencies with the largest liability losses:
Agency
Frequency
Department of Transportation
517
Department of Corrections
885
State Mine Inspector
0
Department of Economic Security
394
University of Arizona
160
Department of Public Safety
178
Department of Veterans’ Services
14
Arizona State University
104
Sub-Total
All Other Agencies
Total

2252
664
2916

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Liability Losses
$4,472,000
$2,214,000
$1,344,000
$1,294,000
$1,130,000
$963,000
$765,000
$748,000
$12,930,000
$2,470,000
$15,400,000

PROPERTY PROGRAM
In Fiscal Year 2012, there were 5,088 property claims reported by state agencies. Losses totaled
$15 million.
The top two loss categories by frequency of occurrence and severity of payments were real and
personal property. Real property covers facilities owned by the state such as office buildings,
prison facilities and general infrastructure. Environmental property covers state buildings and state
lands that sustain environmental damage. Personal property includes state owned vehicles,
furniture, computers and other tangible property.
The following table breaks down the frequency of claims reported in Fiscal Year 2012 and
amounts paid regardless of occurrence date by loss type:
Loss Type
Frequency Property Losses
Real Property
975
$10,400,000
Personal Property
4083
$4,100,000
Environmental Property
11
$476,000
Other
19
$24,000
Total
5,088
$15,000,000
Frequency of claims reported and property losses in Fiscal Year 2012 for the agencies with the
largest property losses are as follows:
Agency
Frequency Property Losses
Arizona State University
398
$2,422,000
Arizona Department of Transportation
997
$2,234,000
Citizen’s Clean Election Campaign
0
$2,000,000
University of Arizona
631
$1,772,000
Department of Public Safety
942
$1,170,000
Department of Administration
342
$1,100,000
Department of Corrections
747
$814,000
Schools for the Deaf and Blind
61
$548,000
Northern Arizona University
278
$453,000
Department of Economic Security
404
$390,000
Sub-Total
All Other Agencies
Total

4800
288
5,088

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$12,903,000
$2,097,000
$15,000,000

WORKERS’ COMPENSATION PROGRAM
The State Workers’ Compensation Program provides benefits to state employees injured during
the course and scope of their employment. The program pays medical, surgical, lost wages and
hospital disability benefits as provided by law under the Arizona Workers’ Compensation Act.
The Managed Care Incentive Program provides quality medical care for state employees injured
on the job. More than 48 hospitals, 3000 physicians and 12 industrial clinics are available to
employees within the network.
The Early Claims Notification System continues to be successful. This system involves early
notification of workers’ compensation claims by injured state employees or their supervisors,
allowing them to call in the first report of an industrial injury to the workers’ compensation unit
24 hours a day, 7 days a week.
The Early Return to Work with Modified Duty Program continues to prove effective in many
state agencies. A disability management specialist works with injured workers, their supervisors
and managers to find positions within their agency that allow the injured worker to return to work
as soon as possible. Placing an injured worker in these modified duty positions enables the
employee to make a smooth and safe transition to their former duties or to a new position that is
suitable for them. In addition to managing the Modified Duty Program, the disability management
nurse has helped implement an in-house Utilization Review Program. All medical diagnostic
procedures must be reviewed for medical necessity and appropriateness before authorization. This
process is typically completed within 24 hours to help ensure recovery of injured employees.
The following table breaks down the frequency of claims reported in Fiscal Year 2012 and
amounts paid regardless of occurrence date by loss type:
Agency
Department of Corrections
Department of Economic Security
Department of Transportation
University of Arizona
Department of Public Safety
Arizona State University
Department of Health Services
Department of Juvenile Corrections
Arizona Superior Courts
Northern Arizona University
Sub-total
All other agencies
Total

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Frequency
1561
422
212
316
220
266
268
136
255
176

WC Losses
$6,360,000
$2,490,000
$1,731,000
$1,683,000
$1,640,000
$1,260,000
$1,100,000
$781,000
$770,000
$526,000

3832
535
4367

$18,341,000
$2,909,000
$21,250,000

LOSS PREVENTION PROGRAM
The Arizona Revised Statutes require each state agency to conduct risk identification and
assessment, and implement a loss prevention program to reduce frequency and severity of losses
in the following areas:





Real and personal property protection
Employee safety in the work environment
Federal and state standards for industrial hygiene and environmental protection
Negligent acts that cause harm to third-parties

The primary responsibility of the Loss Prevention Unit is to work with state agencies to reduce or
eliminate their exposure to risk. Risk Management Loss Prevention provides professional services
in a variety of areas including property, liability, environmental, and worker protection.
Loss Prevention provides professional safety consultants, industrial hygienists and environmental
specialists to assist agencies in developing and implementing loss prevention programs. Safety
consultants also provide assistance in solving everyday loss prevention problems in the following
areas:






Construction Safety
Industrial Safety
Hazard Communication
Fire Safety
Fair Safety






Security
Course of Construction
Motor Vehicle Safety
Emergency Planning






Site and Hazard Assessment
Health and Safety Education
CPR
Ergonomics

Assistance is provided in risk assessment and corrective action, program development and
implementation by means of Assessment, Consultation, and Evaluation (ACE) Reports. An ACE
report is a focused inspection and consultation to assess a particular risk exposure, along with
written recommendations for corrective actions. The top three ACE subjects and recommended
corrective actions are:
Fire and Security






Fire Extinguisher Inspection, Maintenance, Service and Training
Training on Fire Protection Practices
Wildfire Preventative Actions
Security Lighting Enhancements
Fire Door Repair

Safety Inspection
 Guardrail Installation
 Emergency Evacuation Plans (Drills)

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 Repair of Emergency Lighting/Exit Signs
 Secure Machinery
Building Indoor Air Quality
 Air Diffuser Cleaning
 General HVAC Maintenance
 Mold Consultation/Testing/Mitigation

OCCUPATIONAL HEALTH SERVICES
Occupational Health Services is responsible for the post-offer physical examinations of potential
state employees whose jobs put them at risk of occupational illness or injury. Occupational Health
Services schedules, evaluates, and pays for these examinations for various state agencies.
In Fiscal Year 2012, 1246 post-offer exams were conducted. The average number of days to
process exam findings was less than one day. This measures the turn-around period from the time
the staff nurse receives the prospective state employee’s medical information until the agency is
notified of the candidate’s status.
The total cost for Occupational Health Services exams in Fiscal Year 2012 was $141,428.

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