Modesto likely will have to eat some of the cost of a $3.25 million gender discrimination settlement it paid out in March 2007, even though the city thought insurance would cover the expense.
The settlement resolved a lawsuit filed by three women who claimed they were passed over for promotions and punished when they raised questions about their employment.
When insurers refused to reimburse the city, Modesto sued.
The city recently recovered $500,000 in a settlement with insurer ACCEL, a risk management group to which the city belongs along with 11 other California municipalities.
City Council members approved the initial settlement for $3.25 million with the understanding that ACCEL would cover all of Modesto's expenses above $1 million.
ACCEL refused to pay, in part because it said the city failed to consult with it before negotiating the settlement.
Modesto is seeking the rest of the money it believes it is owed in another lawsuit against the city's other insurer, AIG, City Attorney Susana Alcala Wood said.
Unless AIG pays out $1.75 million, the city will lose taxpayer money. Alcala Wood said she couldn't comment on how much the city will recoup from AIG. She said a settlement should be reached in that case within the month.
The agreements come as Modesto braces for another tight budget year, with city leaders expecting to trim $8 million from a pared-down general fund.
The city hired an outside law firm to handle the dispute with the insurers. Modesto has spent about $290,000 in legal fees on the case since April 2007, Alcala Wood said. The settlement with ACCEL came a few weeks before the case was scheduled to go to trial.
City Manager Greg Nyhoff called the $500,000 settlement with ACCEL "disappointing." He noted that the gender discrimination lawsuit and subsequent insurance dispute happened before he started as Modesto's city manager in June 2008.
"I wish we could have gotten more," he said. "We're scrounging for every dollar."
Bee staff writer Leslie Albrecht can be reached at lalbrecht @modbee.com or 578-2378. Follow her at Twitter.com/BeeReporter.