SR-10-28-1975-11B
Santa Monica, California, October.l7, 1975
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TO: Mayor and City Council ,~~~~,~ ~° ~)' ''~'~
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FROM: City Staff QV ~ `~ ~ )~ "~
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SUBJECT: City's Excess Liability Insurance ~~3us~"~ `o ~"~
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Introduction
This report examines (1} the current method used by the City to place its
liability insurance; (2) the effect of recent increases in the premium for this
insurance; and (3) recommendations to examine the placement of City insur-
ante, reduce the premium for the excess liability policy, and facilitate the
administration of the City's insurance program.
Background
Present me+~od of obtaining City liability insurance--Since 1932 all of the
City's liability insurance has been placed through the Independent Insurance
Agents Association of Santa Monica, Inc> The Association, through an
insurance committee, advises the City (and the School District) as to levels
of coverage, seeks out insurance carriers willing and capable of insuring
the City, solicits bids, evaluates the bids and submits the lowest and best
bid to the City for its acceptance.
The Independent Insurance Agents Association of Santa Monica is made up of
the insurance agents. and brokers within the City who have direct access to a
wide spectrum of insurance sources. The three-member Insurance Com-
mittee of the Association is made up of Carl Tegner and Harvey Box, both
To: Mayor and Council -2- October I7, 1g75
of Century Insurance and Service Agency, and Jerry McNees of White and
Company (Mr. McNees is also President of the Independent Insurance Agents
Association of Santa Monica).
The commission on the premiums for the City's insurance :is distributed
fifty percent to the Association, twenty-five percent to the agency placing
the insurance, and twenty-five percent to the Insurance Committee
Premium increase for excess liability policy--The City carries a compre-
pensive excess liability policy with a maximum insured limit of $1, 000, 000,
and, up until this point, with a $10, 000 deductible limit. The purpose for
this policy is to provide the City with protection against successful claims
against the City's liability up to $1, 000, 000.' The City had been self-insured
for claims between $0 and the $10, 000 deductible.
With respect to this excess liability insurance, the carrier (Reserve Insur-
ante Company) informed the City 30 days before the anniversary date that
the policy would not be renewed for the following year. Although the policy
was written for three years in 1973 (which would have covered us until 1976),
the insurance carrier took the option of cancelling the policy 30 days before
the anniversary date of August 20 as provided in the policy. The City was
first informed by the carrier and subsequently by the Insurance Agents
Association representative. Needless to say, the City Staff was very con-
cerned about the fact teat the Association was not aware-that this situation
To: Mayor and City Council -3-
October 17, 1975
might occur and should have provided more warning to the City. However,
the Association's position is that the insurance agency cvho placed the policy
did not receive any advance notice of the cancellation. As far as the agency
was concerned, the insurance carrier was going to renew the policy at the
existing ($15, I75) premium or at a slightly higher premium. The Associa-
tion maintains that this is the first time in the history of the Association
that a carrier has raised the premium on the second anniversary of a three-
year policy. They state that policies have been cancelled or premiusn.s raised
in the face of large claims against the carrier but never when supported by
the almost claim-free experience such as the City has had (only one claim
was paid by the insurance company in five years for $2, 500. 00).
The Association went to work immediately to obtain an alternate carrier and
called the City on August 28 to inform us that they had secured coverage and
that the City would not be without liability insurance, As a result of the
Association's selection process, they have recommended re-insuring with
the same insurance carrier, but at a much higher rate, The Association
states that they had to do considerable "arm-twisting" in order to get the
carrier to re-insure the City even at the higher rates and that no other
carrier was willing to issue a policy at close to these rates, The new rates
for the $1, 000, 000 limit are: Deductible
$ 10, 000
25, 000
50, 000
- 100, D00
200, 000
Premium
$ 89, 500
70, 900
61, 000
52, 000
49, 000
To: Mayor and Council -4- October 17, 1975
Our present deductible is $10, 000 at an annual premium of $15, 175. This
premium has remained the same for five years, If we were to select the
same coverage with the same deductible, the $89, 500 premium would be
589% higher than the existing rate. Even the recommended $52, 000 rate is
342ofo higher than the present premium with a $100, 000 deductible. In addi-
tion, the carrier is only willing to insure the City on a year-to-year basis
rather than providing multi-year coverage.
The Staff and the City Attorney met with the Insurance Committee on Octo-
ber 7 to review the situation described above. In summary, several courses
of action are available with short and long-run consequences,
Alternatives
Short-Run
L Advise the Insurance Committee to search for other carriers for the
same coverage at a lower premium. The Insurance Committee
claims to have already diligently pursued this alternative and that
no other carrier is willing to provide the current level of excess
liability coverage at anywhere close to the price quoted by Reserve
Insurance Company for continuing the policy. The next lowest quo-
tation was $90, 000 fora $Z5, 000 deductible, compared to $70, 900
for the same deductible with Reserve Insurance Company.
The Committee also advised that the carrier may again exercise its
option to cancel the policy and the City would be either (a) without
excess liability insurance during its search for another carrier; or
(b) required to pay an inordinately high premium for interim coverage
during its search for coverage--a search that might prove fruitless.
2. Advise the Insurance Committee to extend the excess liability insur-
ance coverage with the existing carrier for aone-year premium of
$52, 000, In making this latter recommendation, the Staff realizes
To: Mayor and Council -5- October I7, 1975
that the deductible amount increases from $lA, 000 to $100, 000 and,
therefore, subjects the Gity to higher risks. However, the City
Attorney maintains, based on actual experience of the last five years,
that this is not an unreasonable risk for the City to assume.- During
the past five years the City has paid only one claim over the $10, 000
deductible. In that claim the amount was $12, 500, so the insurance
carrier paid only $2, 500. This short-run alternative would require
additional funds in the amount of $37, 000 be appropriated from unap-
propriated reserves to pay the increased premium.
3. Request the insurance Committee and the Staff to review the one
million dollar limit on the current policy as to whether or not this
is adequate coverage and provide a quotation of premiums within
three weeks.
Long-Run
1. Expiration dates of policies--In order to budget for premium increases,
all liability policies should expire on May 15 of each year tivith pre-
mium increase notice to be sent to the City by April 15 of each year.
Premium increases, if any, could therefore be included in the pro-
posed budget and premiums paid on July 1 when the budget is in effect.
In the present case of the excess liability policy discussed above, the
City could not adequately predict the premium increase; hence, the
necessity for the appropriations request.
2. Increased deductible--In addition, as of June 1975, the reserves in
the self-insurance fiend were $208, 850. The Staff feels that reserves
have been built up to provide adequate claim payment coverage barring
a major catastrophy. Further, the City. Attorney maintains that a law-
. suit in excess of $100, 000 would take more than a year to adjudicate,
and because of this fact, the Council would have adequate time to
budget for the expenditure should the occasion arise. On the other
hand, retention of the $10, 000 deductible would result in the higher
premium of $89, 500 per year.
3. Insurance Placement Method--The Staff recommends a reexamination
of the City's method of obtaining insurance. Preliminary contact with
other cities using Local insurance associations such as we do indicate
a general movement away from placing all insurance with such associa-
tions. The general feeling by other cities is that the area of municipal
insurance underwriting has become so limited that it is not necessary
for local associations to do much "shopping" for carriers since there
To: 2dayor and City Council -6- October 17, 1975
f' iFi,_~y \1
are a relatively few firms offering municipal liability insurance. ~'"°J `l
There appears to be two other insurance placement alternatives worth
exploring: (a) Contracting with a professional insurance consulting
firm not authorized to sell insuraace, to locate carriers willing to
provide for the City's liability insurance needs; (b} to •exnploy an
insurance professional on the City staff to locate such carriers,
whose salary would be offset bg savings in premium dollars achieved
through a comprehensive risk management program. The alternative
to this recommendation is to continue the present method of placing
the Gity liability insurance without studying other methods,
4. Depooling poor risk cities--The City Attorney's office suggests that
efforts be made to eliminate poor risk cities from the liability insur-
ance pool, thus creating a separate pool for cities with "good" insur-
ance experience (low dollar value of claims paid). This is a long-
term program and will require participation by many cities. This
alternative is being pursued by the League of California Cities and it
is suggested that Santa Monica participate in this and similar efforts
to reduce premiums. The long-term result of this recommendation
is that carriers dealing with "good" risk cities would have a lower
loss ratio (ratio. of dollar value of claims paid to premium dollar col-
lected) which should result in lower premiums.
Recommendation
It is recommended that:
'~,,.
1. Theme Ca-fy~ncrease the deductible on the excess liability policy from
$lo, o0o to $loo, 0003
2. Thy 6ouirc'ilppropriate $37, 000 from unappropriated reserves to
Account #O1-8274-302 to pay for the increase in premium for the
excess liability policy recommended by the Fnsurance Committee
(Reserve Insurance Company
3. `~he policy expiration dates be changed to May 15 of each year to
facilitate budgeting for premium increases, if any;
To: Mayor and City Council -7- October 17, 1975
4. ~ he Staff review alternative methods of placing the City's liability.
insurance and report back to the Council within ninety (90) days~`:cLu.r9,Z~~(I
5. ~`he City Attorney's office be directed to cooperate with other cities,
the League of California Cities and the insurance industry in efforts
to reduce premiums for those cities with comprehensive risk manage-
ment programs.
Prepared by: Ralph Wilson
David P. Dolter
Richard Knickerbocker
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