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HomeMy WebLinkAboutAgenda Statement 1986/04/01 Item 14 COUNCIL AGENDA STATEMENT Item 14 Meeting Date 4/1/86 ITEM TITLE: Resolution Approving Amendment to the San Diego Cities Joint Powers Agreement for Risk Management and Related Insurance Coverages and Appropriating $190,000 from the Unappropriated Balance of the Public Liability Trust Fund SUBMITTED BY: Director of Finances ' REVIEWED BY: City Manager it- (4/5ths Vote: Yes X No ) Two weeks ago the City Council authorized the City to enter into a risk pooling arrangement for general liability insurance coverage with other cities in San Diego County. The purpose of this resolution is to amend the San Diego County Cities Joint Powers Agreement to specifically allow such a pooling arrangement and to appropriate additional funds needed to pay the annual premium for the City of Chula Vista. RECOMMENDATION: That Council adopt Resolution approving the amendment to the San Diego Cities Joint Powers Agreement and approve the appropriation of additional funds. BOARDS/COMMISSIONS RECOMMENDATION: Not applicable. DISCUSSION: All cities in the State of California are currently experiencing extraordinary difficulties in the area of general liability insurance. The members of the San Diego County Cities Risk Management Authority (RMA) have explored the limited options available under this situation and have concluded that the risk pooling arrangement, as approved by the City Council two weeks ago, is the best method for addressing this crisis situation so that the member cities will not have to "go bare" for any period of time. The City Council requested additional information regarding the structure of the risk pooling arrangement, a list of cities involved, and costs associated with such. I. Amendment California law empowers local entities to insure liability coverage through joint powers agreements and the pooling of self-insurance claims or losses. The purpose of the amendment to the Joint Powers Agreement is to specifically provide for pooling of risks and losses as allowed under California law. Page 2, Item 14 Meeting Date 4/1/86 The amendment to the Agreement will read as follows: "The Authority shall have the power to select a broker and jointly purchase insurance; enter into a pooling arrangement of liability self-insurance claims or losses or a combination thereof. Such pooling arrangement may be accomplished through any appropriate vehicle; such as, but not limited to, self-funding, fronting arrangements and/or captive insurance company programs." II. Captive Insurance Program Structure The RMA would work through a "captive insurance company" which would provide a vehicle for issuing insurance policies to the RMA and issuing certificates of insurance. The captive insurance company to be used is called Magna Carta Insurance (LTD) . This is a closely held insurance company that exists for the sole purpose of providing insurance to a given entity, in this case the RMA. Please refer to Exhibit A which indicates the various parties involved in the risk pooling structure. There will also be established two advisory committees that will report their findings and recommendations to the RMA Board. A. Claims Administration Committee This Committee will consist of the following members: 1 . A representative from MTS insurance services. 2. A representative from Robert F. Driver Company. 3. Ross Oliver, Risk Management Consultant. 4. A representative from the claims administration firm. 5. A representative from RMA. The Claims Administration Committee will have the following responsibilities 1 . Review all claims. 2. Review and recommend reserve levels. 3. Review and recommend claims procedures. 4. Recommend, as necessary, legal defense firms. B. Underwriting Committee This Committee will consist of the following members: 1. A representative from MTS insurance services. 2. A representative from Robert F. Driver Company. 3. A representative from MCI Management. 4. A representative from the RMA. 5. Ross Oliver, Risk Management Consultant. Page 3, Item 1 Meeting Date 4/1/86 This Committee will have the following responsibilities: 1 . Review all losses. 2. Review and recommend coverage changes. 3. Review and make recommendations on new applications. 4. Review and recommend reinsurance levels. Since the above Committees will be reviewing all claims and losses, they will be in a position to make recommendations to the RMA regarding how member cities may strengthen their loss control/loss prevention activities in order to minimize liability exposure. III. Liability Insurance Coverage Coverage will be provided for the following: - Bodily Injury liability - Property Damage Liability - Errors and Omissions Liability - Personal Injury Liability Please see Exhibit B for additional information regarding coverage. IV. Premiums Please refer to Exhibit C which indicates for each city the present self-insured retention and the proposed self-insured retention under the risk pooling arrangement. The City of Chula Vista currently has a $100,000 SIR which would increase to $250,000 under the proposed coverage. Please refer to Exhibit D which indicates the present and proposed annual premiums for each City. Last year when insurance was obtainable, the City of Chula Vista paid a premium of $176,454 for general liability coverage. Under the proposed risk pooling structure, the City' s premium will be $449,491 . The annual premiums have been calculated by Ernie Telford, a professional underwriter, and are based on past loss experience and perceived risk exposure for each city. Coverage in the form of claims made will allow for accurate assessment of each years exposure to determine future premiums to insure fund solvency. Assessments against member cities are also an available tool in the event loss results are much worse than anticipated or funded. Assessments are subject to an annual aggregate equal to four times the annual premium which in Chula Vista's case equals $1 .8 million dollars. V. Advantages to Risk Pooling Structure A. Provides a vehicle through the Captive Insurance Company for issuance of policies of coverage, certificates of insurance, premium allocations, and setting of proper funding levels. A professional underwriter is used for allocation of premiums and future assessments. Page 4, Item 14 Meeting Date 4/1/86 B. Provides a vehicle to purchase reinsurance or excess insurance on a group basis if and when it is available at a reasonable cost. C. If the JPA has relatively good experience in terms of paid claims being less than premiums collected, then surplus funds will accumulate which can be used to reduce future premiums. D. There is an annual aggregate restriction imposed equal to four times annual premium to limit assessment potentials. Any assessments will be levied, if necessary, based on the same percentage that an individual city' s initial premium is to the total premium paid by the RMA. In other words, Chula Vista' s initial premium is $449,491 which represents 18% of the total proposed $2,461 ,500 premium of the RMA. Therefore, if it becomes necessary to impose any additional assessments against the RMA, Chula Vista would pay 18% of the assessment up to an annual aggregate restriction equal to four times our annual premium, or approximately $1 .8 million. It is extremely unlikely that assessments of this magnitude will ever occur. E. If maintained, this structure would modify the dependency on the insurance market through the "hard" cycle while taking advantage of any "soft" market conditions. When the insurance market improves and become "soft" again, the RMA will be in a position to take advantage and purchase reinsurance and excess insurance. F. Reduces the negative impact of noninsurance on specific entities by spreading risks. VI. Disadvantage to Risk Pooling Structure As pointed out in the previous report to Council and highlighted by Councilman Malcolm, the pooling arrangement means that Chula Vista is "at risk financially" for the liability losses of the other cities in the pool . The other side is, of course, that the other cities in the pool are now assuming part of Chula Vista' s risk. However, by entering into a pooling arrangement limited to other cities in San Diego County, we are getting involved with cities we are familiar with. These cities, including Chula Vista, have been part of the same JPA for the past four years, have held regular monthly meetings, have similar risk management programs and risk exposures. The City of Chula Vista's liability experience and risk exposure has been similar to the other cities that will be part of the risk pooling arrangement. As mentioned previously by the City Manager, 31 claims went to the Council in 1984, 33 claims in 1985, and already 48 claims in the first three months of 1986 and several of these claims are for substantial dollar amounts. .0404 Page 5, Item 14 Meeting Date 4/1/86 FISCAL IMPACT: The City of Chula Vista' s premium as part of the risk pooling structure is $450,000. $260,000 was budgeted in 1985-86 to pay for general liability insurance coverage. It is requested that Council appropriate the additional $190,000 from the unappropriated balance of the Public Liability Trust Fund. The Public Liability Trust Fund currently has a balance of $782,000. Lack of insurance can have a tremendous negative fiscal impact on the City if it experiences a few "bad" cases and has large judgments entered against it. One way of lessening this potential impact is to enter into a risk pooling arrangement with the other cities in San Diego County in order to spread the liability over a broader base. The disadvantage is, of course, that the City assumes the risks of other cities in the pool and may end up paying for a portion of their liability losses. However, even this is mitigated by the annual premium adjustments. Cities with poor experience are going to see it reflected in their annual premiums and they will end up paying proportionately more than the cities with better experience. 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