HomeMy WebLinkAboutAgenda Statement 1986/09/23 Item 4 COUNCIL AGENDA STATEMENT
Item 4
Meeting Date 9/23/86
ITEM TITLE: Resolution /a7362 Approving the membership and
participation of the City of Chula Vista in the San Diego
Pooled Insurance Program Authority (SANDPIPA)
SUBMITTED BY: Acting Director of Personnel
REVIEWED BY: City Manage ' (4/5ths Vote: Yes No X )
On April 2, 1986, the City Council adopted Resolution 12424, approving an
amendment to the San Diego County Cities Risk Management Authority (SDCCRMA)
Agreement to allow for the City to enter into a general liability risk pooling
arrangement with six other member cities. This pooling arrangement includes
the use of a captive insurance company. The purpose of the program is to
provide a method of pooled self-insurance as an alternative to the traditional
purchase of insurance in a market where such coverage is either too expensive
or nonexistent.
The SDCCRMA, concerned about recent legal advise regarding possible exposures
arising from the use of a captive insurance company, specifically, federal
excise tax and bad faith exposure, has developed an alternative program that
provides the same coverage as the captive insurance program at the same or
lower cost and eliminates the two potential liabilities.
Adoption of the attached Resolution and Agreement will commence the formation
of the alternative program described in this report.
RECOMMENDATION: That the City Council adopt the resolution.
BOARDS/COMMISSIONS RECOMMENDATION: None.
DISCUSSION:
The City of Chula Vista has been participating in a risk pooling arrangement
through a captive insurance company since April 2, 1986. Originally, the
captive was viewed as an overarching "shell" to the various components of the
pooling program that would serve as the facility for issuing an insurance
policy and certificates of insurance. In addition, the captive would allow
participating members direct access to the reinsurance market instead of
having to purchase underlying layers of coverage from a private commercial
insurance company in order to get reinsurance.
While there were many issues concerning this type of pooling arrangement, the
advantages of having insurance coverage through a well-managed, professional
program outweighed the disadvantages of not having insurance.
Page 2, Item 4
Meeting Date 9/23/86
In June, 1986, the member cities of SDCCRMA learned of two areas of potential
liability: federal excise tax liability equal to 4% of the paid premium, and
bad faith claims exposure. While opinions differ regarding the applicability
of excise tax and bad faith claims to captive programs, interim legal counsel
to the SDCCRMA, Jennings Engstrand and Hendrikson, have taken a conservative
position by assuming that the tax liability and bad faith claims exposure does
apply.
The solution to avoid these two exposures, yet maintain a credible risk
pooling arrangement, is to eliminate the captive component of the program.
The only disadvantage to eliminating the captive insurance company is that the
pool would lose the ability to directly access reinsurance markets. The value
of such accessibility is questionable since there is no reinsurance available
today, nor do we expect any to be available over the next 18 months. In any
event, reinsurance can be obtained through the use of a fronting insurance
company. The advantages to eliminating the captive insurance company include
avoidance of two potentially costly areas of exposure in excise tax liability
and bad faith claims, plus a savings in administrative fees that would
normally be paid to use the captive facility. All other professional
components of the program would be maintained.
Administrative and legal staff from the cities participating in the risk
pooling program have been working with attorneys from Jennings, Engstrand &
Henrikson to develop a plan to transition the captive pool program to a
straight pool program without affecting the coverage, cost or stability of the
pool . Adoption of the attached documents accomplishes this goal .
The attached resolution establishes a new and separate Joint Powers Authority
(JPA) called SANDPIPA (San Diego Pooled Insurance Protection Authority) for
cities to participate in a pooled liability insurance program. The program
was originally conceived as one which would fall under the existing SDCCRMA;
however, the legal staff of the cities involved expressed their desire to have
a separate JPA established for just the pooled liability program. SANDPIPA
was created for this purpose. The original SDCCRMA will continue to exist and
offer the same risk management programs to its members as in the past. This
program is the same one reviewed by the City Council on April 2, 1986, except
for the elimination of the captive. Attachments A and B of this report, which
were originally sent to the Council on April 2, 1986, show the program
structure modifications. The Resolution restates the premium paid by the City
in April when coverage through the captive was established. No additional
premium is necessary. This Resolution is being adopted by the other
participating cities.
An Agreement, marked Exhibit A, is the general working agreement among
participating cities which sets forth the powers, duties and responsibilities
of the various cities. The Agreement requires member cities to remain in the
pooled program for one year. Withdrawal is accomplished by giving a six month
written notice of intention to withdraw. This provision gives the City
flexibility to continue to explore other liability insurance options such as
the formation of a State pool for municipalities proposed under AB-3554.
Page 3, Item 4
Meeting Date 9/23/86
A Memorandum of Insurance, marked Exhibit B, outlines the terms and conditions
of liability insurance coverage provided under the SANDPIPA Agreement. This
document is essentially the same insurance policy that has been in place since
April 2, 1986. Certificates of insurance, previously issued by the captive,
can be issued in the future by the brokerage firm for SANDPIPA and SDCCRMA.
Lastly, a legal Opinion Letter from the firm of Jennings, Engstrand and
Henrikson, which states that the three documents are correct and legal .
In conclusion, with the exception of the captive involvement, this is the
identical program adopted by the City Council on April 2, 1986. The program
is simply being administered by a new and separate vehicle, SANDPIPA.
FISCAL IMPACT: None.
WPC 0554K
617-A,4024,44,
by the City Council of
Chula Vista, California
Dated
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LAW OFFICES `m "' w
JENNINGS, ENGSTRAND & HENRIKSON
A PROFESSIONAL LAW CORPORATION
2255 CAMINO DEL RIO SOUTH •
SAN DIEGO,CALIFORNIA 92108 A�
PAUL D.ENGSTRAND CRAIG S. ENGSTRAND rSE ?' V,H.�ptip��yp��;S
LEO R. B.HENRIKSON LAWRENCE J. KAPLAN [619] 291-0840 .8,a mss 992
JOHN H.WHITNEY GERARD SMOLIN,JR.
WALLACE R.PECK WILLIAM A.JOHNSON,JR. FAX:[819]294-8249
-
CHARLES F. GORDER,SR. ELIZABETH C.ELDRIDGE
ROSS M.PYLE KENNETH C.TUREK HON.JAMES L.FOCHT
URBAN J.SCHREINER HENRY E.HEATER OF COUNSEL
RONALD L. ENDEMAN GERALD N.SIMS
DONALD R. LINCOLN GREGORY V. MOSER -
ANTON DIMITROFF MARK W.ANTHONY
LARRY L.MARSHALL DAVID J.SEMELSBERGER LA MESA OFFICE
CHRISTINE V. PATE DEBRA K. RTY 8262 UNIVERSITY AVENUE
ALVIN G.KALMANSON NEIL AUWARTER RTER
WILLIAM C.PATE JANET E.SOBEL LA MESA,CALIFORNIA 92041
C.MICHAEL COWETT WILSON A.SCHOOLEY 619 469-4191
JOHN E.RYAN DEARING D.ENGLISH
GEORGE J.BERGER MATTHEW GETTINGER
GEORGE
ICHA L E.BU WALT KEVIN E•L.LAMBERT 4 , 1986
MICHAEL E.BUSCH LORAINE L.LAMBERT
MICHAEL A.VAN HORNE
Mayor and Members of the City Council
City of Chula Vista
c/o Ms . Diana Levin
Risk Manager
276 Fourth Avenue
Chula Vista, California 92010
Re : Formation of San Diego Pooled Insurance
Program Authority ( SANDPIPA)
Dear Members of the City Council :
Since April 1986 , your city, together with a number
of others, has obtained liability insurance from a captive
insurance company located outside of the United States under
an arrangement sponsored by the San Diego County Cities
Risk Management Authority (SDCCRMA) . The SDCCRMA, concerned
with the cost and potential excise tax and bad faith exposure
of the off-shore captive insurance approach, has developed
an alternative.
The alternative is the formation of an independent
public agency, itself a joint powers authority, which will
have the power to offer a risk-sharing, self-insurance program
providing the same liability coverage as the existing captive
insurance program, at the same or lower cost, but without
certain potential liabilities . In addition, the new joint
powers authority may offer risk management services and
seek excess insurance and other group coverages for its
members .
Unlike the SDCCRMA, the proposed new authority, the
San Diego Pooled Insurance Program Authority for Municipal
Entities (SANDPIPA) is designed to be composed solely of
municipal entities which have agreed to participate in the
risk-sharing liability insurance pool administered by the
authority. Thus , there will only be one class of membership
in SANDPIPA.
We have been asked to develop the governing documents
for the new authority, and to render an opinion on the
validity of the governing documents, and the authority of
the member cities to participate in the joint powers agreement
and insurance program.
Formation of the Authority
Each city currently participating in the SDCCRMA
captive' s pool is being asked to adopt the proposed resolution
attached by which the City approves the joint powers agreement
(Exhibit A) , and the Memorandum of Insurance (Exhibit B) .
Adoption of the resolution:
(1 ) Approves the joint powers authority agreement.
This document automatically forms the Authority once two
cities have adopted it. The agreement governing the
operations and structure of the Authority, and the rights
and obligations of its members. As in the SDCCRMA, each
participating city is entitled to one seat on the board
of directors of SANDPIPA. SANDPIPA is a separate government
agency;
( 2 ) Approves the Memorandum of Insurance. This is
the "policy" of insurance for the city. It outlines the
scope and type of coverages offered through the pool, and
the specific obligations of the Authority and the city with
respect to claims, premiums and assessments . The Memorandum
of Insurance provides the same coverage as your existing
captive insurance company policy, and will replace it
entirely;
( 3 ) Approves payment of premiums , the "retained limit"
(deductible ) and period of coverage under the Memorandum
of Insurance. Until SANDPIPA is actually formed, and the
terms and conditions of the Memorandum of Insurance are
approved by the new governing board of SANDPIPA, no premium
notices will be sent to the city. If any terms or conditions
of the Memorandum of Insurance were to be altered by the
board of SANDPIPA, the changes would have to be approved
by each participating city.
Approval of the resolution this month by all cities
currently participating in the captive insurance pool will
allow the Authority to commence operations prior to October
1, 1986 , when the current captive insurance pool binder
is scheduled to expire.
Background Legal Authority
Cities are specifically authorized to enter into
risk-sharing arrangements through a joint powers authority
for insurance purposes by Article 16 , Section 6 , Paragraph
2 of the California Constitution. The legislature further
specifically authorized self-insurance and joint powers
agreements for insurance purposes in Government Code sections
990 , 990 . 4 , 990 . 6 and 990 . 8 .
The power of a city to purchase insurance has been
upheld repeatedly by the courts (e.g. , Miller v. Johnson
(1935 ) 4 Ca1 . 2d 265 ; Burns v. American Casualty Co. (1954 )
127 Cal.App. 2d 198 ; People v. Standard Accident Ins . Co.
(1941 ) 42 Cal.App. 2d 409 ) , and approved by the Attorney
General (15 Cal.Ops.Atty.Gen. 205 (1950 ) ; 23 Cal .Ops .Atty.Gen.
146 (1954 ) .
Specific authorization for cities to create a separate
agency exercising powers common to each agency, under certain
conditions, is found in Government Code sections 6500 et
seq. See City of Oakland v. Williams (1940 ) 15 Cal. 2d 542 .
Opinion of Jennings, Engstrand & Henrikson
We have acted as counsel to the SDCCRMA in connection
with the preparation of the documents to be used in the
formation of a separate joint powers authority, the San
Diego Pooled Insurance Program Authority for Municipal
Entities (SANDPIPA) . SANDPIPA will be legally empowered
to establish a risk-sharing self-insurance pool, offer risk
management services, and assist in the procurement of excess
or surplus insurance, and other types of insurance, for
cities which join SANDPIPA. We have examined the law and
the proposed form of resolution, joint powers agreement,
and Memorandum of Insurance, attached hereto, as necessary
to render this opinion.
As to questions of fact material to our opinion, we
have relied upon the representations of the designated staff
risk managers of the cities being asked to participate in
the authority, without undertaking to verify the same by
independent investigation. In particular, we have not been
retained to review the accuracy, completeness or sufficiency
of the formation of the cities which may participate in
SANDPIPA, nor have we been engaged to review or to make
any recommendations concerning the scope or type of coverage
to be offered under the Memorandum of Insurance, except
as to its consistency with the resolution, joint powers
agreement, and laws applicable thereto.
Based on our examination, we are of opinion, as of
the date hereof , and under the existing law, as follows :
(1 ) Upon adoption of the proposed resolution, approval
of the SANDPIPA agreement, and acceptance of the Memorandum
of Insurance by at least two cities , according to the forms
attached hereto, a duly created and validly existing joint
powers public agency of the State of California will exist
with the power to establish and administer a risk-sharing
pool for liability coverage for participating cities , and
to perform under the agreement on its part;
( 2 ) A risk-sharing self-insurance pool which is
established in accordance with the joint powers agreement
and Memorandum of Insurance by SANDPIPA is not considered
insurance or subject to regulation under the Insurance Code
of the State of California.
Other Recommendations
As soon as practicable, following adoption of the
resolution, agreement and Memorandum of Insurance, as provided
above, and within the periods prescribed by law, SANDPIPA
must give notice of its creation to the Secreta y of State
and make the necessary filings to appear on the tate roster
of public agencies in order to incur debt and safeguard
its assets.
In addition, it is recommended that, a. soon as
practicable, the Authority: adopt a conflict of interest
code, an investment policy, bonding requiremen s for its
officers and employees, and approve the Me orandum of
Insurance, bylaws and a plan document as provided in the
agreement creating SANDPIPA.
Sincerely,
Gre"'•ryV.. Moser for
JENNINGS, ENGSTRAND & HENRIKSON
A Professional Law Corporation
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