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HomeMy WebLinkAbout1999-03-09; City Council; 15088; California Municipal Excess Liability Programa P 0, % . CI”v OF CARLSBAD - AGENP BILL OF PURCHASE OF LIABILITY COVERAGE THROUGH CALIFORNIA MUNICIPAL EXCESS LIABILITY (CAMEL) RECOMMENDED ACTION: Approval of Resolution No. q?e? approving the purchase of liability insurance through the California Municipal Excess Liability (CAMEL) program. I ITEM EXPLANATION In 1991, the City joined the California Municipal Insurance Authority (CMIA) now known as the Public Agency Risk Sharing Authority (PARSAC), for purposes of obtaining liability coverage. On November 5, 1996 staff reported on the need to re-evaluate the City’s membership in PARSAC, and Council authorized staff to return to Council with a recommendation regarding liability coverage options. On April 22, 1997 staff recommended and Council authorized the submittal of a notice of intent to withdraw from PARSAC and the performance of an analysis of liability coverage options. The notice was submitted to PARSAC on April 251997. Unless Council wishes to rescind the notice, the City’s membership will be deemed withdrawn June 30,1999. Staff has completed the analysis of liability coverage options shown as Exhibit 2. In this study staff evaluated Joint Powers Authorities (JPAs), or pools, purchasing coverage as an individual entity from a commercial carrier, and purchasing insurance through a joint purchase program. A summary of coverage and bids is shown as Attachment B to Exhibit 2. The analysis of the JPAs concluded that these organizations are not competitive with the commercial market. The premiums are significantly higher for less coverage than available from the commercial carriers. For example, PARSAC’s premium is more than three times that of the lowest commercial bid and more than twice that of the highest commercial bid. In addition, the commercial carriers do not present the loss exposures such as employment practices liability and “bad faith” suits found with pool membership, there is no possibility of the future assessments found in pools, and unlike pools, there is no minimum time commitment to the program. The evaluation of options for commercial insurance the City could purchase as an individual entity and insurance the City could buy through a joint purchase program revealed strong competition in both coverage and price. Staff recommends that the City’s liability coverage be placed through the Robert Driver Company California Municipal Excess Liability (CAMEL) joint purchase program at the current coverage limit of $1 O,OOO,OOO. A list of the current CAMEL program participants is shown as Attachment D to Exhibit 2. The premium for CAMEL, $129,000, is less than half the premium under PARSAC and the insurance program provides significantly more coverage than the pool. The premium for CAMEL is higher than for coverage under the other commercial programs, with bids ranging from $85,000 to $102,353, but CAMEL provides some coverage not found in these programs too. In addition, through the group, CAMEL provides more advantageous and stable terms and conditions than may be obtained by purchasing coverage individually. Listed below is a summary of the basis for the recommendation to purchase coverage through CAMEL rather than one of the other commercial insurance bidders. l CAMEL provides all the coverage offered by the other commercial bidders plus: Broader coverage of employment practices liability No exclusion for Y2K liability Coverage for subsidence No exclusion for inverse condemnation as a result of insured’s negligence l CAMEL’s premium is capped for 3 years (in all years except one since program inception premiums have been reduced), and a two year notice of any changes in future premiums l CAMEL has a dividend program that returns up to 20% of the premium If Council prefers to place the City’s coverage with another commercial coverage provider, staff recommends Insurance Company of the West (ICW), the next to the lowest bidder. Although ICW’s coverage is comparable to that of Royal, the lowest bidder, ICW has a longer history of providing coverage to municipalities. In addition, Royal has a litigation management policy which could reduce the City’s role in its management of cases. FISCAL IMPACT The premium of $129,000 represents a savings of more than $135,000 over what was paid under PARSAC last year and what would be due to PARSAC this year if we remained in that pool. The premium will be included in the fiscal year 1999-200 budget. The Carlsbad Municipal Water District and Housing and Redevelopment Agency are also insureds under this coverage and will contribute to the premium through the budget process. EXHIBITS 1. 2. Resolution No. 7 7 -8 3 Liability Coverage Options Analysis 1 2 3 4 5 6 7 0 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 RESOLUTION NO. w-83 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, CALIFORNIA, APPROVING THE PURCHASE OF LIABILITY INSURANCE THROUGH THE CALIFORNIA MUNICIPAL EXCESS LIABILITY PROGRAM (CAMEL) WHEREAS, in 1991 the City became a member of the California Municipal Insurance Authority (CMIA), now known as the Public Agency Risk Sharing Authority of California (PARSAC) for purposes of obtaining pooled liability coverage; and WHEREAS, on April 22, 1997 Council authorized the submittal of a notice of intent to withdraw from PARSAC and conduct an analysis of liability coverage options; and WHEREAS, staff completed an analysis of liability coverage options and identified superior liability coverage at a significantly lower premium through the California Municipal Excess Liability (CAMEL) program; NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, CA as follows: 1. That the above recitations are true and correct. 2. That the purchase of liability coverage through the California Municipal Excess - - Liability program effective July 1, 1999, is hereby approved and the Finance Director is authorized to issue a warrant in the amount of $129,000 for the payment of the first year premium, beginning July 1, 1999, to the Robert Driver Company. , 1 1 1 1 1 11 1' II 1Z 2c 21 22 23 24 25 26 27 28 1 2 3 4 5 6 7 8 PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of Carlsbad on the day of 9th March 1999, by the following vote, to wit: AYES: hmcil Members Lewis, Hall, Finnlla, Nygaard and Kulchin NOES: None ABSENT: None Al-TEST: ALETHA L. RAlJTiNKRANZ, City Clerk L library liability coverage fomated AB February 22,1999 TO: CITY ATTORNEY ADMINISTRATIVE SERVICES DIRECTOR Risk Manager 66 EXHIBIT 2 LIABILITY COVERAGE OPTIONS ANALYSIS On April 22, 1997, Council authorized staff to submit a notice of intent to withdraw from the Public Agency Risk Sharing Authority of California (PARSAC) and conduct an analysis of liability coverage options. The notice of intent to withdraw (Attachment A) was submitted to PARSAC on April 25, 1997. Under the terms of the PARSAC Joint Powers Agreement, withdrawal cannot be effective until expiration of the two-year period beginning the first day of the next policy year. As a result, withdrawal is not effective until June 30, 1999. In addition, if Council wishes to rescind the notice of intent to withdraw, this may be done up until 90 days before the withdrawal is effective and with approval of the PARSAC Executive Committee. As a result, this analysis of liability coverage options has been completed at this time to include timely data on which a decision on coverage beginning July 1, 1999 can be formulated, and to allow time for the option of requesting that the notice of intent to withdraw from PARSAC be rescinded. This options analysis is divided into the following sections: (I) Background; (II) Coverage Options; (III) Comparison of Options - Coverage & Premiums; (IV) Additional Factors For Consideration; and (V) Conclusions & Recommendation. I. BACKGROUND: In 199 1, the City joined the California Municipal Insurance Authority (CMIA), now known as the Public Agency Risk Sharing Authority (PARSAC), for purposes of obtaining liability coverage. Although the commercial insurance market had become more competitive, the City was advised by its benefits consultant to join CMIA because of concerns that there could be a return to the restrictive market experienced in the latter half of the 1980’s. Since joining PARSAC, staff has developed some concerns about the organization, and the commercial insurance market has changed and become even more competitive. On November 5, 1996 staff reported on the need to re-evaluate the City’s membership in PARSAC, and Council authorized staff to return to Council with a recommendation regarding liability coverage options. On April 22,1997 staff recommended and Council authorized the submittal of a notice of intent to withdraw from PARSAC and the performance of an analysis of liability coverage options. The notice was submitted to PARSAC on April 25, 1997. Unless Council wishes to rescind the notice, the City’s membership will be deemed withdrawn June 30, 1999. II. COVERAGE OPTIONS: The City can obtain liability coverage through a commercial liability insurance provider or a Joint Powers Authority (JPA), also known as a “pool”. Commercial Liabilitv Insurance: The availability of commercial liability insurance was restricted during the mid to late 1980s; however, since the early 199Os, the municipal insurance market has become ever more competitive. According to Business Insurance editor Rod Zolkos, insurance companies that have been serving the pubic sector are becoming more aggressive in seeking municipal business, and new players are entering the market. Public entities are enjoying lower prices, new coverage options and an expanded choice of insurers (Business Insurance, May 18, 1997). According to Lisa Chazit, a principal at Tillinghast-Towers Perrin and quoted in the same article, ‘...the competition (in the municipal market) has just gotten more intense and probably more widespread...govemmental entities are seen as more attractive risks than they were 10 years ago or 20 years ago...They’re perceived as more sophisticated about risk management. ’ The attraction of insurers to cities is also based on a better understanding of the associated loss exposures and experience. According to Peter C. Young Ph.D., E.W. Blanch Sr. Chair in insurance at the University of St. Thomas’ Graduate School of Business in Minneapolis, and Martin Fone, M.A., ACII, Assistant Vice President for Am- Re Managers in London, insurance carriers are back in the municipal market because the companies are more comfortable with the loss exposures now. Before pools, information on governmental entity risk characteristics and loss experience (most of which was never compiled from insurers’ commercial claims data) was virtually absent from the government insurance market. Pools have reduced much of the uncertainty about public entities and have made the public sector a more attractive market (Public Risk, October 1996). Commercial liability insurance is available to the City individually and through Robert F. Driver Company’s California Municipal Excess Liability program (CAMEL), a joint purchase program. Purchased Individuallv: Five commercial carriers submitted bids for the City’s coverage. Two were not competitive considering their premium for coverage that is comparable to the other three, and Cal-Surance, the City’s broker, did not recommend them for consideration. The three included in this study are listed on the following page, along with their Best rating and three current municipal clients: 2 6 Royal Indemnity Company (Royal), with a Best rating of A:XIV, currently covering the cities of Lancaster, Napa and Santa Clarita. Insurance Company of the West (ICW), with a Best rating of A:VIII, currently covering the cities of Newport Beach, Temecula and Buena Park. Insurance Company of the State of Pennsylvania (Pennsylvania), with a Best rating of A++XIV, currently providing coverage to the cities of San Diego, Redlands and Beverly Hills. A summary of the coverage provided by each, along with their respective premium is shown in Attachment B. CAMEL: The CAMEL program was started by the Robert F. Driver Company in 1992. Through the group, Driver seeks to negotiate more advantageous terms and conditions than may be obtained by any one member purchasing coverage individually. The carrier for this program is Reliance National Insurance Company with a Best rating of A-XIII. Currently, there are 26 program participants: The cities of El Cajon, Costa Mesa, Burbank, Corona, Corte Madera, Fontana, Fresno, Garden Grove, Hemet, Industry, Long Beach, Montebello, Pasadena, Riverside, Sacramento, San Buena Ventura, San Mateo, Simi Valley, Thousand Oaks, and Torrance; and the Community Development Commission of Los Angeles, County Sanitation Districts of Orange County, Fern Valley Water District, Glenn County Transit Services, South San Luis Obispo County Sanitation District, and Twin Cities Police Authority (this list also appears in Attachment D). A summary of the coverage provided by this program, and the premium is shown in Attachment B . Joint Powers Authoritv: Joint Powers Authorities (JPAs) for liability coverage were formed in the 1980s in response to a hardening insurance market. There are twenty-one (2 1) JPAs in California providing municipal liability coverage. Some target a specific geographic region, and they vary in requirements for self retention, length of membership commitment and operational policies. Most of these organizations are not candidates for consideration. Thirteen (13) are designed for cities in counties or specific geographic areas outside San Diego County; two (2) have population limits which do not fit Carlsbad’s current and projected buildout populations; two (2) require all members to maintain a self-insured retention (SIR) limit well outside the City’s current limit of $500,000; and one (1) doesn’t meet the City’s standards for fiscal stability. The remaining three (3) are included in this study and listed below. Public Agencv Risk Sharing Author&v (PARSAC) with 35 members: The cities of Alturas, Avalon, Blue Lake, Calimesa, Calistoga, Canyon Lake, Carlsbad, Clearlake, Coalinga, Femdale, Grass Valley, Hesperia, Highland, Nevada City, Pacific Grove, 3 Placentia, Placerville, Plymouth, Point Arena, Ranch0 Cucamonga, Rialto, Ridgecrest, San Juan Bautista, South Lake Tahoe, Tehama, Trinidad, Truckee, Twentynine Palms, Watsonville, Wheatland, Yountville, Yucaipa, Yucca Valley, and Amador City and California City (this list also appears in Attachment C). Independent Cities Risk Management Authoritv (ICRMA) with 30 members: The cities of Alhambra, Arcadia, Azusa, Baldwin Park, Bell, Chino, Colton, Downey, El Monte, El Segundo, Fullerton, Gardena, Glendora, Hawthorne, Hermosa Beach, Huntington Park, Indio, Inglewood, Lynwood, Manhattan Beach, Monrovia, Monterey Park, Redondo Beach, San Fernando, South Gate, Upland, Vernon, West Covina, Whittier and Culver City. San Diego Pooled Insurance Program Authoritv (SANDPIPA) with 12 members: The cities of Chula Vista, Coronado, De1 Mar, Encinitas, Escondido, Imperial Beach, Lemon Grove, National City, Oceanside, Santee, Solana Beach and Vista. A summary of the coverage provided by each, along with the premiums is shown in Attachment B . III. COMPARISON OF OPTIONS - COVERAGE & PREMIUMS: All of the bidders provide general liability, automobile liability and public officials errors and omissions coverage. In nearly every instance, the commercial carriers provide all the coverage offered by the pools and more, at a significantly lower premium. The major differences in coverage and some of the more significant exclusions in the programs under consideration are discussed below. A comparison of premiums relative to coverage is also discussed. Attachment B provides a complete summary of this information, the major components of coverage and the premiums under each option. PARSAC: PARSAC provides some sudden and accidental pollution coverage, similar to that provided by CAMEL, Royal, ICW and Pennsylvania. Also, the pool does not exclude coverage for Y2K liability or subsidence. However, of all the bidders, PARSAC’s employment practices liability coverage is the least broad, offering a maximum of $250,000, above the SIR, for defense only. PARSAC excludes coverage for employee benefits liability, dam failure and inverse condemnation. Except for ICRMA, all the other bidders cover or do not exclude coverage for one or more of these areas of liability. PARSAC does not yet have the fiscal year 1999-2000 premium for the City. However, the pool has confirmed that it will be at least the same as last year with an increase to reflect any increases in City payroll. Last year’s premium was $264,7 18. This makes PARSAC the most expensive of all the coverage providers under consideration, with a premium more than three times that of the lowest bidder (Royal), more than double that of the other commercial programs, and 22% higher than ICRMA’s quote for twice the limit of coverage. PARSAC is still far more expensive even if the City’s average retrospective premium adjustment of lo%, which is not guaranteed, is applied. 4 8 ICRMA: ICRMA provides employment practices liability coverage but it is not as broad as that offered by SANDPIPA and CAMEL. In addition, this pool excludes coverage for employee benefits liability, subsidence, dams, pollution, inverse condemnation, and watercraft, some of which we can obtain through the other programs, and all of which we can obtain through the CAMEL program. ICRMA does allow for defense costs above the coverage limit, which is not a common policy provision. Among the other bidders, only Royal and ICW have the same coverage feature. ICRMA’s premium is significantly higher than all the other bidders except PARSAC. Considering the relatively limited coverage offered by ICRMA, the premium is not competitive. SANDPIPA: SANDPIPA’s employment practices liability coverage, like CAMEL, is the broadest among the other bidders, and employee benefits liability, Y2K liability and some sudden and accidental pollution coverage similar to that provided by PARSAC, Royal, ICW, Pennsylvania and CAMEL are not excluded. However, subsidence, dams, and inverse condemnation are excluded. In addition, personal injury coverage does not specify mental anguish, mental injury, infliction of emotional distress, or violation of civil rights, making it less broad than that under the other bidders. Furthermore, SANDPIPA has claims-made coverage (on the first $2,000,000 of coverage). All the other bidders provide occurrence based coverage. Occurrence coverage applies to losses which occurred during the policy period, regardless of when the claim is asserted. Claims-made covers losses from claims asserted against the insured during the policy period. As a result, if the City were to ever leave SANDPIPA, coverage would have to be purchased from SANDPIPA or another provider to cover any gap in coverage for claims asserted after expiration of the SANDPIPA policy period with an occurrence date within the SANDPIPA policy period. The claims- made coverage provision is helpful to the pool and therefore its members in that it makes it easier to estimate liability costs. However, obtaining “tail” coverage is a potential cost to be considered. In addition, the length of “tail” coverage and premium must be recommended by the SANDPIPA underwriter, acted on by the pool’s Underwriting Committee, and approved by the SANDPIPA Board of Directors. There is no way to estimate or project the cost or availability of this coverage from SANDPIPA or any other coverage provider. Finally, this pool’s coverage limit of $30,000,000 is the highest of the three JPAs (the coverage limits that can be purchased from the commercial carriers is not restricted). An evaluation of the cost effectiveness of the coverage provided by this JPA can be determined when a quote is obtained. A quote for coverage can be obtained when the City pays an application fee, which is based in part on population. The fee to Carlsbad would be approximately $7,800. According to Pool Administrator Laura Seiler, it is possible that the Board could reduce the fee, and if the City becomes a member, the fee would be applied to the premium and annual membership fee of $3,000. 5 9 Royal provides employment practices liability coverage, employee benefits Royal: coverage, some sudden and accidental pollution coverage which is similar to that provided by PARSAC, ICW, Pennsylvania and CAMEL, and Royal does not exclude all incidents of subsidence. Royal excludes coverage for inverse condemnation, dams and Y2K liability. Like ICW and Pennsylvania, the exclusion for dams can be removed if the agency receives what it determines to be an acceptable report on the condition of the dam, and the exclusion for Y2K liability can be removed if the insurer receives what it determines to be acceptable responses to a questionnaire staff would need to complete. Finally, Royal provides for coverage of defense costs outside the policy limit. This is a good feature and one that is provided by only two of the other bidders, ICRMA and ICW. Royal has provided the lowest quote of all the bidders and offers coverage that is surpassed by CAMEL only. In addition, Royal offers a fixed rate basis for two additional years (to be negotiated prior to inception) if the company pays less than 30% of the premium in losses. m: ICW provides employment practices liability coverage, employee benefits coverage, some sudden and accidental and accidental pollution coverage which is similar to that of PARSAC, Pennsylvania, Royal and CAMEL, and ICW does not exclude all incidents of subsidence. ICW excludes coverage for inverse condemnation, dams and Y2K liability. The caveats on the exclusions for dams and Y2K liability are the same as those proposed by Royal and Pennsylvania. Finally, like ICRMA and Royal, ICW provides for defense costs outside the limit of coverage. ICW submitted the second lowest quote of all the bidders (15% above Royal) and offers coverage that is surpassed by CAMEL only. In addition, the carrier offers a fixed rate basis (payroll) for two additional years if the company pays less than 45% of the premium in losses. Pennsvlvania: Pennsylvania provides employment practices liability coverage, employee benefits coverage, and some sudden and accidental pollution coverage which is similar to that of PARSAC, Royal, ICW and CAMEL. Pennsylvania excludes coverage for subsidence, inverse condemnation, dams, Y2K liability and, unlike any of the other bidders, HIV, AIDS or ARC exposure or transmission. According to Cal-Surance, the exclusion for subsidence can be removed with an acceptable engineering report. However, there is no information on what exactly would be required to have this exclusion removed, so for purposes of this analysis, it will be assumed that subsidence is excluded. The caveats on the exclusions for dams and Y2K liability are the same as those proposed by Royal and ICW. Finally, unlike ICW and Royal, defense costs are considered inside the limit of liability, thereby making the coverage limits of the other two higher than that from Pennsylvania. Pennsylvania’s quote is higher than the premiums submitted by Royal and ICW, and while its coverage is more broad than that of the pools, it is less broad than that under Royal and ICW. This carrier also guarantees the rate basis (population) of the premium for two additional years, and offers a retrospective rating plan that provides for a maximum 10% return of the premium. This plan increases the quote approximately 9%. CAMEL: CAMEL’s employment practices liability coverage, like SANDPIPA, is the broadest among the bidders, and employee benefits liability and Y2K liability are not excluded. In addition, CAMEL is the only bidder to specifically provide coverage for subsidence, and specifically not exclude coverage for any suits or claims for inverse condemnation as a result of the insured’s negligence. The combination of these two coverages makes the policy coverage much broader. This coverage combination may be triggered where the third party damage is limited to loss of property value without any actual property damage and the City has failed to recognize the subsidence exposure in advance. CAMEL also provides the sudden and accidental pollution coverage offered by SANDPIPA, PARSAC, Royal, ICW and Pennsylvania, and does not exclude employee benefits liability. Finally, CAMEL’s exclusion for dams can be removed with a favorable report from the State. Reports completed December 8, 1998 by the State Department of Water Resources Division of Safety of Dams on the condition of the City’s dams found them to be safe for continued use. Driver has confirmed that these reports satisfy the requirement for removal of the exclusion. The only coverage CAMEL does not specify in the policy and that is provided by the other three commercial carriers, is employee benefits liability coverage. However, it is not excluded and the carrier under the CAMEL program has confirmed that this liability would be covered under the Errors and Omissions coverage section of the policy. CAMEL’s quote is less than half of PARSAC’s premium, but higher than those from the other commercial carriers. CAMEL provides important coverage not found in the other programs and is the only bidder to guarantee the premium will not increase for three years (according to Driver, in all but one year since program inception, participants have actually received reductions in their premiums). In addition, the three year premium feature of the program provides for the identification of the fourth year premium at the end of the first year, the fifth year at the end of the second, and so on, so that any change in premium is identified two years in advance. Finally, CAMEL provides a dividend program that returns up to 20% of the premium, three years after inception, based on the loss experience of all program participants. In summary, CAMEL’s bid is reasonable considering that the program provides all the coverage offered by the others and more, the stability of a three year cap on the premium with a two year notice of a change in premium in future years, and the opportunity for reimbursement of some of the premium. IV. ADDITIONAL FACTORS FOR CONSIDERATION: In addition to the coverage and premiums of the pools and commercial programs, there are other factors that are exposures, non-quantifiable costs and important considerations in the coverage placement decision. Manapement of Claims. Litipation and Settlements: The City provides strong management of claims, litigation and settlements to ensure that funds are expended only when appropriate. The City maintains a strict settlement policy of payment premised on merit only. This policy has a number of benefits: (1) A firm settlement policy in claims management which prevents the City from functioning as an insurer of the public; (2) Claims are handled consistently, thereby eliminating any accusation of political influence; and (3) No nuisance settlements which encourage more claims and lawsuits. To achieve the best balance between the City’s settlement policy and the coverage provider’s need to participate in the management and settlement of a claim or lawsuit when coverage may be impacted, the timing and extent of participation expected by the provider must be considered in this evaluation. PARSAC: There are two areas of concern about management of litigation and settlements under PARSAC: (1) policies supported by PARSAC stafc and (2) the coverage structure, which requires coordination with and authority from, more than one decision-making body (this is also discussed under “Interpretation and Extent of Coverage on page 10). (1) Litigation and Settlement Management Policies: Two years ago, PARSAC proposed stringent litigation management and settlement policies which would effectively shift the control of claims and litigation management from the City to PARSAC. Two of these policies were: (1) If a member entity refuses to consent to any settlement or compromise recommended by PARSAC or its claims administrator and elects instead to continue to contest a claim or lawsuit, then PARSAC’s liability shall not exceed the amount for which PARSAC would have been able to settle the claim or lawsuit plus defense costs at the time the claim or lawsuit could have been settled or compromised; and (2) The litigation manager (PARSAC’s third party administrator for claims) would select defense attorneys for cases with the potential of exceeding a member’s SIR from a panel approved by the Board of Directors. These policies were particularly disturbing to staff in light of the City’s significant self- insured retention. They could put the City in the position of funding litigation and settlements over which we have little management control. Furthermore, staff monitors the claims administration services provided by an administrator selected by the City. As such, staff can act quickly to resolve any problems without disruption of services to claimants or impacts to liability. By enhancing the role of PARSAC’s third party administrator, another layer of administration to coordinate with is created, thereby increasing the risk of negative impacts on claims processing. Fortunately, appeals by staff to both the PARSAC Executive Committee and the Board of Directors prevented the adoption of these policies. However, the PARSAC General Manager continues to be a proponent of them. This is significant because the issue of litigation and settlement management which is critical to Carlsbad is not as relevant to most of the other PARSAC members. This is most likely due to the size of the pool members relative to the City of Carlsbad. More than 2/3 of the 35 PARSAC members are small cities with populations well under 20,000. Unlike Carlsbad, a full service City with an SIR of $500,000, most members are not full-service cities, and more than 2/3 maintain an SIR between $1,000 and $50,000 (Attachment C). For many of these cities, PARSAC’s third party administrator already provides claims administration and litigation management services. (2) Coverage Structure: PARSAC provides only $500,000 of coverage to the City of Carlsbad (the difference between the City’s SIR and $1 ,OOO,OOO). Coverage between $1 ,OOO,OOO and $3,000,000 is provided by another pool, California Affiliated Risk Management Authority (CARMA). The CARMA Board of Directors consists of the PARSAC General Manager, and a representative from each of the other two member pools: Vector Control IPA and Bay Cities JPA. Since joining PARSAC, the City has had only one case which has required coverage from PARSAC and CARMA. Although ICW (the excess insurance carrier providing coverage above CARMA at the time) was not impacted, the carrier also became involved in the matter and worked in cooperation with the City. Unfortunately, resolution of the case was difficult and the relationships among the parties were strained due to CARMA’s disagreements with the handling of the case. Staff is aware of two other PARSAC members who have experienced similar problems. ICRMA: ICRMA requires that defense counsel be selected from an “Approved Attorney Panel”. Members contacted reported satisfaction with the organization’s defense and settlement policies. SANDPIPA: SANDPIPA has a Claims Review Committee which evaluates reserve levels, “handling” of claims and potential losses, and makes recommendations for settlement or defense and/or tendering of losses. Members contacted reported satisfaction with the organization’s defense and settlement policies. According to Ms. Seiler the pool has never “taken over” a case. The organization was formed as a cooperative; the members handle their own claims and work “hand in hand” together on settlements where appropriate. In addition, Ms. Seiler and the pool members are both accustomed to and have a comfortable working relationship with Daley & Heft, the law firm which often provides defense counsel for the City of Carlsbad. Roval. ICW & State of Pennsvlvania: All three carriers have language requiring the insured to work cooperatively with the carrier in the event that a claim or lawsuit may impact coverage. However, unlike ICW and Pennsylvania, Royal has a settlement policy similar to that proposed by PARSAC. CAMEL: CAMEL requires the member to allow the insurer to participate in the management of the defense and settlement of those cases which may result in costs above the SIR. Members contacted reported satisfaction with their experience coordinating with the insurer on these cases. This is most likely due to the fact that the minimum self- insured retention level in this program is $100,000, with most members maintaining levels well above this amount. As a result, members routinely manage their own claims and litigation and Driver is accustomed to coordinating with their established programs. 9 13 In addition, like SANDPIPA, the Driver Company and insurance carrier are both accustomed to and have a comfortable working relationship with Daley & Heft. Interuretation and Extent of Coverape: All of the pools provide some amount of coverage, beyond which at least one more layer of coverage is purchased from a separate entity. The layer of coverage provided to PARSAC members by CARMA is distinct from that of PARSAC in that coverage decisions are made by the CARMA Board of Directors rather than the PARSAC Board of Directors. This situation can and has resulted in conflicts over interpretation and extent of coverage. Recently, a PARSAC member experienced difficulty in securing coverage from CARMA. The PARSAC Board of Directors voted to provide coverage to the member. Since that time, CARMA has assumed the defense of the case but has left open the question as to whether it will provide coverage. The member entity has voiced concerns that PARSAC has a duty to provide coverage. As a result, whether the PARSAC Board voted to provide coverage or not, PARSAC is at risk for a lawsuit from one of its members over the provision of coverage. While insurance companies are also vulnerable to “bad faith” suits, obtaining coverage in the commercial market does not require that we become involved in any suit by another covered party. In a pool, all the members are subject to involvement in and the cost of these suits. The relatively small financial resources of a pool as compared with the highly rated commercial carriers makes this exposure even more critical as the cost of one lawsuit from a member would most likely represent a greater impact to the balance sheet of a pool than that of a highly rated carrier. Compared with pools, commercial carriers have greater resources available and the diversification of investments to withstand such a suit. As a result, the potential impact to the insureds is less than to pool members. The commercial coverage programs, including CAMEL, do not have separate entities evaluating and interpreting layers of coverage. Under these programs, any discussions about coverage would be between the City and the insurer only, and no involvement with another coverage provider would be necessary. Coverage for Uniaue Needs: A JPA provides a package program that is adopted by the Board of Directors, and modified only after review and analysis by staff and consideration and approval by the Board. When a Board like PARSAC’s meets only semi-annually, it can be a lengthy process to realize changes in the coverage document. This is further complicated by the fact that PARSAC provides coverage between a member’s SIR and $l,OOO,OOO only, so any attempt to change the PARSAC document must incorporate the process for attempting to achieve the same change in the coverage level(s) above PARSAC. As a result of the relatively rigid nature of pool coverage documents and the inability to make changes quickly, any needs specific to an agency are often met by a member purchasing a separate policy to supplement the coverage provided by the JPA. This would be necessary under ICRMA. ICRMA excludes coverage for all watercraft. Consequently, the City would have to purchase and maintain a separate liability policy just for the lagoon patrol boat. Commercial insurance programs can be more flexible. In many cases a specific need can be met through a special endorsement to the policy. Notice for Withdrawal: JPAs require members to submit a notice of intent to withdraw for some period of time before withdrawal is effective. These notice requirements are intended to promote pool stability. Under the terms of the PARSAC Joint Powers Agreement, a member of the pool may not withdraw until the end of two policy years following the end of the policy year (June 30) in which notice of intent to withdraw is submitted. This means that membership continues for a minimum of two and maximum of three years after a decision is made to withdraw. This lengthy notice requirement directly impacts the ability of members to periodically check the market to ensure that premiums and service remain competitive. Since a periodic check of the market is not only a prudent business practice but one which is incumbent upon all public entities, and since there is no way to guarantee the availability and price of liability coverage options two to three years in advance, the only way to check the market to identify competitive alternatives is to submit a letter of intent to withdraw. Staff has raised this issue on more than one occasion but has been unable to gather enough support from the Board to change the policy. ICRMA requires the same length of notice for withdrawal as is required by PARSAC. SANDPIPA’s requirement to provide a six (6) month notice allows members the opportunity to check the market periodically. Manapement of Coverage Propram: The degree of oversight required and the level of loss exposure associated with the management of coverage from a JPA is much greater than that associated with the purchase of commercial insurance. Members of a JPA buy into the organization and are responsible for running the “business”. As a member of the PARSAC Executive Committee, staff travels to Sacramento four to five times a year to address all policy making decisions, administrative matters, and investment and other related financial matters. As reported in staffs 1997 recommendation to submit a letter of intent to withdraw, “In addition to the time required for both meetings and travel, staff has been dedicating more and more time to the oversight of increasingly complex and sensitive PARSAC administration and employment issues. As a result of these issues, staff is finding it increasingly difficult and costly to manage PARSAC business matters from afar.” The cost of oversight and participation in policy-making is not only the dedication of member resources and the risks inherent to management from a distance, but also the loss exposure associated with employment practices liability and the lack of depth of pool staff. The loss exposure of having employees has already been realized by PARSAC. The JPA recently experienced a costly and protracted employment practices lawsuit that 11 required a significant commitment of member resources. The cost of an insufficient number of employees is also a concern in pool membership. Due to the size of most JPAs, pools are staffed by a relatively small number of people, resulting in a source of knowledge and expertise with less depth than found among the commercial carriers. The highly rated carriers can afford to retain highly skilled individuals in many specialties because they can spread the costs of these individuals across their entire domestic operations. Finally, when there is an employment problem or a change in staffing, the member entities suffer a disruption to services and a potential increase in liability during the problem resolution period or transition from one employee/contractor to another. In contrast to membership in a JPA, the purchase of coverage from the commercial market does not present these loss exposures. Stabilitv of Coverage & Premiums: JPAs do not function independently from the insurance industry. Pools are still subject to the insurance market for the excess layers of coverage they purchase. As a result, whether liability coverage is financed through a pool or a commercial insurance provider, the cost of funding loss exposures will reflect the climate of the insurance market. This has been evident in PARSAC’s premiums. While our premiums have gone down the last several years, so too have they in the commercial market. When the market was “hard”, our premium under PARSAC was nearly double what it is today. It is also evident in our coverage. The employment practices liability coverage and pollution coverage were added recently in response to the expansion of coverage into these areas by the commercial carriers. However, in a “hard” market, the terms, conditions and price of this pool’s or any JPA’s product can change due to the availability and price of the pool’s excess coverage. JPAs are attractive because they are committed to providing coverage; however, they cannot guarantee premiums. Pools require the member entity to take an ownership interest in the program. Through the joint powers agreement, the entity is bound into the program through the assessable provisions of this document. The pool can charge a member entity an additional premium for excess costs to the pool during a covered period of time. Because JPAs usually discover their ultimate loss experience and charge the assessment years after the policy period, they may charge this assessment even if the member has left the program. Compounding this negative aspect of pool membership is the difficulty in verifying the pool’s calculation and allocation of these assessments, and budgeting for these unpredictable bills. The flip side of assessments is the retrospective premium adjustment @PA) to members based on the pool’s overall fiscal performance and projected losses. These “dividends” are the result of good loss records, and one of the reasons a city joins a pool. However, it can be difficult to realize the benefits of this feature of a JPA. As reported in staffs 1997 recommendation to submit a letter of intent to withdraw from PARSAC, “The most recent actuarial survey by the pool’s consultant reflected the pool’s strong financial condition and supported total RPAs of $2.76 million to the members. However, in direct conflict with the consultant’s report and with no information to support their opinion, PARSAC staff recommended that 75% of this money be retained by the pool to improve PARSAC’s financial position. Carlsbad staff argued that members were entitled to their respective share of the money available for 12 RPAs and persuaded the Board to oppose PARSAC staffs recommendation and approve the distribution of the entire $2.76 million to the members. Carlsbad’s share was nearly $90,000.” The commercial market has responded to the cities’ need for stability by offering premium guarantees and stringent cancellation clauses. The best provisions among the commercial bidders are under the CAMEL program. This program allows cancellation for non-payment of premium, material breach of a policy condition, material misrepresentation or concealment of facts only. CAMEL also guarantees the premium will not increase for three years, and the fourth year premium will be identified at the end of the first year, the fifth at the end of the second, and so on, so that any change in premium is identified two years in advance. In addition, CAMEL provides a dividend program that returns up to 20% of the premium three years after inception, based on the loss experience of all program participants. This is similar to the RPA under the pools but without the assessable provisions those programs require. As a result, while pool members have difficulty predicting total costs because they are subject to the performance of the other members in the form of assessments, CAMEL, like the other commercial carriers, provides for some control over costs because the premium is based on the insured’s own performance and there is no potential for assessment. These program features under CAMEL enhance the stability of financing loss exposures, and allows the City time to monitor and evaluate any need for a change in placement of coverage. V. CONCLUSIONS AND RECOMMENDATION: As a result of Carlsbad’s excellent loss record, strong financial condition and other positive attributes, there is strong interest in providing the City’s liability coverage from both JPAs and the commercial insurance market. Coverage can be maintained with PARSAC, or placed in another JPA or with a commercial insurance program. The options are to: 1. 2. 3. 4. 5. 6. 7. Rescind the notice of intent to withdraw from PARSAC and request Executive Committee approval Direct staff to pay application fee to SANDPIPA and return to Council with quote and recommendation Join ICRMA Purchase coverage from Royal Indemnity Company (Royal) Purchase coverage from Insurance Company of the West (ICW) Purchase coverage from Insurance Company of the State of Pennsylvania Purchase coverage through CAMEL, Robert Driver Company’s joint purchase program 13 /7 c. Ontions 1.2&3: PARSAC. SANDPIPA or ICRMA: Continued membership in PARSAC, or joining ICRMA or pursuing a quote from SANDPIPA is not recommended because the coverage and premiums are not competitive, pool membership includes non- quantifiable costs and liability exposures such as employment practices liability and “bad faith” suits. The commercial market provides alternatives without the non-quantifiable costs and loss exposures associated with pool membership, and with superior coverage, all at a significantly reduced premium. Ontions 4.5&6: Roval. ICW. Pennsvlvania: These commercial programs provide broad coverage that is superior to that offered by the pools. While they are very similar, Pennsylvania’s coverage and premium is the least competitive. The coverage under Royal and ICW is essentially the same and second only to CAMEL. Of all the programs under consideration, Royal and ICW submitted the lowest and the next to the lowest bids respectively, with ICW’s bid 15% higher than Royal’s quote. However, Royal’s more stringent litigation management policy and ICW’s longer history of providing coverage to municipalities are important distinctions between the two, and make ICW the more attractive carrier. Option 7: CAMEL: Robert Driver Co.‘s California Municipal Excess Liability program is recommended for the following reasons: l Broad coverage superior to other bidders; l More advantageous and stable terms and conditions than may be obtained by purchasing coverage individually; l Reasonable premium with 3 year cap, 2 year notice of any change in premium, and dividend program; l No loss exposures associated with pool membership; l No possibility of the future assessments found in pools; l No minimum time requirement for commitment to the program, as is found in JPAs; l Favorable reports from program participants. The CAMEL program offers the positive features of both JPAs and individual placements while avoiding the negative aspects found in both options. Please let me know if you have any questions. 14 /8 ATTACHMENT A April 25, 1997 Mr. William Sorrick General Manager PARSAC 1525 Response Road Suite One Sacramento, CA 958 15 Dear Bill: As you know, the PARSAC Joint Powers Agreement requires written notice of a member entity’s intent to withdraw, and the withdrawal is not effective until the expiration of the two-year period beginning the first day of the next policy year. This part of the Agreement provides some stability to membership and premiums as it means that withdrawal is not effective for a minimum of two years. It also means that it is difficult for a member to stay current on the market cost and availability of alternative forms of coverage. Carlsbad has not determined that it is in the best interest of the City to end its membership in PARSAC. However, the City is dedicated to maintaining quality and cost effective liability insurance coverage and loss prevention programs. As a result, due to the lengthy period of time required for the notice and the City’s intent to provide for an adequate evaluation of liability coverage options, please accept this letter as the City of Carlsbad’s notice of intent to withdraw from PARSAC. The City of Carlsbad values its membership in PARSAC and intends to continue to contribute to the organization. If it is determined that PARSAC remains in the best interest of the City, a letter rescinding this notice will be provided for executive committee consideration, per the conditions of the Joint Powers Agreement. Thank you, and please don’t hesitate to call if you have any questions. Sincerely, ERIN K. LETSCH Risk Manager c: PARSAC Executive Committee /9 1200 Carlsbad Village Drive l Carlsbad. CA 92008-l 989 l (619) 434-2807 - FAX (619) 434-l 987 63 I 0000 $& 8853& g g $ g z 5 F-v? a- 6964#3fA~ ar E . . . . . . . . Sk zgigis !z -----cv(v(J 5 lo 2 2 g$ . b .- OOC ?3 -0 5 al P) Q) z 2” z u $E = Lz W z m $2 .::, ,, E b : ‘,_ 2, 2.: ,. __ ;; _!. ,>,a, ,. E E &j 50 7ii 0" 2 K ., ,._ gob +J;:' _,,I + 0 c.c O a aJ L *'E -ii .s " " aa-aL -2 iipg 82 z u &j g 7a&2zsi 2 3 e3 -2 =U E =Ka n 2 T- Tit 8 -8 -O -8 w 7 3: 1; (: 3 Q) aI 0. ; .s E E 75 6’ _’ B 22 + 20 0 l3 3 l3 W f :a, a0= Z: ,’ ZZZE Q) l--i i?:EL EXE z ii 0mcuD n &q 5.5 5i.g o?a a u” u .- w0.p-g Pp!@@cnS ;;s eg 0 70 g.2 Q- 3 .% = = I5 tf)s ao-= -pus ma Ca Z r 5 $2 8+ E.!/ .a (, % is c*t 8 &o 9 ‘S ‘C 0 Ti .- m$=r 5g Q>Z atJl g&i 3jm a-EL4 0 Edg ATTACHMENT C PARSAC MEMBERS CITY Alturas Amador Avalon Blue Lake Calimesa California City Calistoga Canyon Lake Carlsbad Cleat-lake Coalinga Ferndale Grass Valley Hesperia Highland Nevada City Pacific Grove Placentia Placerville Plymouth Point Arena Ranch0 Cucamonga Rialto Ridgecrest San Juan Bautista South Lake Tahoe Tehama Trinidad Truckee Twentynine Palms Watsonville Wheatland Yountville Yucaipa Yucca Valley POPULATION* 3,370 $5,000 210 $1,000 3,170 $25,000 1,280 $5,000 7,400 10,000 8,750 $100,000 4,720 $10,000 10,600 $1,000 67,900 $500,000 12,400 $50,000 9,575 $25,000 1,360 . $5,000 9,650 $500,000 59,200 $25,000 39,500 $50,000 2,930 $500,000 16,850 $100,000 44,100 $100,000 8,825 $50,000 840 $1,000 410 $1,000 115,000 $100,000 80,000 $250,000 29,900 $100,000 1,630 $1,000 23,050 $250,000 420 $1,000 370 $1,000 12,000 $25,000 14,850 $5,000 33,150 $500,000 1,930 $1,000 3,510 $10,000 37,050 $50,000 18,350 $5,000 SIR . . . *Source: “CuZzjixnia Public Sector ” - Fourth Edition library PARSAC Member’s SIR & Population 023 -\TTACHMENT D CALIFORNIA MUNICIPAL EXCESS LIABILITY (CAMEL) PROGRAM PARTICIPANTS 1998-l 999 THE CITIES OF: El Cajon Costa Mesa Burbank Corona Corte Madera Fontana Fresno Garden Grove Hemet Industry Long Beach Montebello Pasadena Riverside Sacramento San Buena Ventura San Mateo Simi Valley Thousand Oaks Torrance And Community Development Commission of Los Angeles County Sanitation Districts of Orange County Fern Valley Water District Glenn County Transit Services South San Luis Obispo County Sanitation District Twin Cities Police Authority LIBRARY CAMEL PARTICIPANTS 98-99