HomeMy WebLinkAbout1999-03-09; City Council; 15088; California Municipal Excess Liability Programa P 0, %
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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.
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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Council wishes to rescind the notice, the City’s membership will be deemed withdrawn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
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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
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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.
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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:
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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,
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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.
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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.
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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
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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