9.a) 2010 Insurance Coverage Renewal Meeting Date: 11/17/2009
Agenda Item: � �1
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City Council Agenda Report
City of Scandia
14727 209`h St. North
Scandia, MN 55073 (651) 433-2274
Action Requested: Discuss annual renewal of insurance coverage from League of
Minnesota Cities Insurance Trust(LMCIT) and decide whether or not
to waive the monetary limits on tort liability established by
Minnesota Statutes for 2010.
Deadline/Timeline: The renewal date for all insurance coverage provided by LMCIT is
December 1, 2009.
Background: • The City purchases all of its insurance coverage through the
League of Minnesota Cities Insurance Trust(LMCIT). Rates for
2010 are not yet available. The final cost will be determined
based on coverage selected by the City.
• The City Council must decide each year whether to waive the
statutory monetary limit on tort liability. If the city does not
waive the limit, an individual claimant would be able to recover
no more than $500,000 on any claim to which the limits apply,
with a total limit on a single occurrence of$1.5 million. If the city
does waive the limit, an individual claimant could potentially
recover an amount up to $1.5 million, plus any excess liability
insurance coverage(Scandia currently carries $1 million.)
• Most communities (about 70%)do not waive the limit.
Previously, Scandia waived the limit,but decided not to do so in
2009. The City saves approximately$1,200 to $1,300 per year
on liability insurance premiums by not waiving the limit.
LMCIT's publication on liability coverage and waivers is
attached for your information.
• The City currently has a deductible of$500 for all claims. Staff
investigated the possibility of increasing the deductible to $1,000
and found that it would save about $1,800 annually. Increasing
the deductible to $2,500 would save about $3,300. Based on the
number of claims the city submits, it would not appear to be a
good value to increase the deductible.
• In 2007, the City added the optional Open Meeting Law Defense
coverage to the LMCIT insurance package. Unless the Council
directs otherwise, we will continue this for the 2010 renewal. The
Page 1 of 2
11/04/09
LMCIT would pay 80%of defense costs in the event of a claim.
• For 2009, the city increased its faithful performance bond
coverage from $100,000 to $200,000. The coverage is now in the
range of what is recommended by the Municipal Finance Officers
Association. No change to this coverage, or any of the other
optional coverage provided by the LMCIT, is recommended for
2010.
Recommendation: I recommend that the Council NOT WAIVE the liability limits for
2010. I further recommend that the city not increase deductibles or
make other coverage changes at this time.
Attachments/ • "LMCIT Liability Coverage Options"
Materials provided:
Contact(s): Joann Buse, Agent
Security State Agency(433-5753)
Prepared by: Anne Hurlburt, Administrator
(insurance renewa12010)
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11/04/09
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RISK MANAGEMENT INFORMATION
LMCIT LIABILITY COVERAGE OPTIONS
Liability Limits, Coverage Limits, and Waivers
When reviewing thls memo, it is Important to note that the statutory liabflfty limits wfll increase
on July 1, 2009 from $400,000 to$500,000 per claimant, and from $1.2 million to $1.5
million per occurrence. LMCIT will automatically adjust members'Ifability coverage to reflect
this change.
LMCIT gives cities several options for structuring their liability coverage. The city can choose either
to waive or not to waive the monetary limits that the statutes provide; and the city can select from
among several liability coverage limits. This memo discusses these options and identifies some
issues to consider in deciding which of the options best meets the city's needs.
What are the statutory limits on municipal tort liability?
The statutes limit a city's tort liability to a maximum of$400,000 per claimant and$1,200,000 per
occurrence. These limits apply whether the claim is against the city, against the individual officer or
employee, or against both.
What are the coverage limits for LMCIT's basic primary liability coverage?
LMCIT's liability coverage provides a limit of$1,200,000 per occurrence, matching the per-
occunence part of the statutory municipal tort liability limit. Under the basic coverage form the
$400,000 per claimant part of the statutory liability limit is not waived, so if the statutory limit applies
to the particular claim, LMCIT and the city would be able to use that limit as a defense.
Beside the overall coverage limit of$1,200,000 per occurrence,there are also annual aggregate limits
(that is, limits on the total amount of coverage for the year regardless of the number of claims), for
certain specific risks. Aggregate limits apply to the following:
Products/com leted o erations $2,000,000 annuall
Failure to su 1 utilities $2,000,000 annuall
EMF $2,000,000 annuall
Limited ollution* $2,000,000 annuall
Mold $2,000,000 annuall
Land use liti ation** $1,000,000 annuall
Em lo ers liabili work com $1,200,000 annuall
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* Includes sudden and accidental releases of pollutants; herbicide and pesticide application; sewer
ruptures, overflows and backups; and lead and asbestos claims. The limit applies to both damages
and defense costs.
** Coverage is on a sliding scale percentage basis, and applies to both damages and litigation costs.
If the statute limits our liability to $1,200,000 per occurrence, why would the city
purchase higher coverage limits than that?
There are several different reasons why cities should strongly consider carrying higher limits of
liability coverage.
1. The statutory tort limits either do not or may not apply to several types of claims. Some
examples include:
• Claims under federal civil rights laws. These include Section 1983,the Americans with
Disabilities Act,etc.
• Claims for tort liability that the city has assumed by contract. This occurs when a city agrees
in a contract to defend and indemnify a private party.
• Claims for actions in another state. This might occur in border cities that have mutual aid
agreements with adjoining states, or when a city official attends a national conference or goes
to Washington to lobby, etc.
• Claims based on liguor sales. This mostly affects cities with municipal liquor stores,but it
could also arise in connection with beer sales at a fire relief association fund-raiser, for
example.
• Claims based on a "taking"theory. Suits challenging land use regulations frequently include
an"inverse condemnation"claim, alleging that the regulation amounts to a"taking"of the
property.
2. LMCIT's primary liability coverage has annual limits on coverage for a few specific risks. The
table on page one lists the liability risks to which aggregate coverage limits apply. If the city has
a loss or claim in one of these areas,there might not be enough limits remaining to cover the
city's full exposure if there is a second loss of the same sort during the year. Excess liability
coverage gives the city additional protection against this risk as well.
However there are a couple of important restrictions on how the excess coverage applies to risks
that are subject to aggregate limits:
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• The excess coverage does not apply to three risks: failure to supply utilities; mold; and
"limited pollution"claims if either the pollutant release or the damage is below ground or in
a body of water; and
• The excess coverage does not automatically apply to liquor liability unless the city
specifically requests it.
3. The city may be required by contract to carry higher coverage limits. Occasionally, a contract
might include a requirement that the city carry more than$1,200,000 of coverage limits.
Carrying excess coverage is a way to meet these requirements. (There's also another option for
cities in this situation. LMCIT can issue an endorsement to increase the city's coverage limit only
for claims relating to that particular contract. There's a small charge for these"laser"
endorsements.)
4. There may be more than one political subdivision covered under the city's coverage. An HRA,
EDA, or port authority is itself a separate political subdivision. If the city EDA, for example, is
named as a covered party on the city's coverage and a claim were made that involved both the
city and the EDA, theoretically the claimant might be able to recover up to $1,200,000 from the
city and another$1,200,000 from the EDA, since there are two political subdivisions involved.
Excess coverage is one way to provide enough coverage limits to address this situation. Another
solution is for the HRA, EDA, or port authority to carry separate liability coverage in its own
name.
This issue of multiple covered parties can also arise is if the city has agreed by contract to name
another entity as a covered pariy, or to defend and indemnify another entity.
5. Cities sometimes choose to carry higher coverage limits because of a concern that the courts
might overturn the statutory liability limits. However,those limits have now been tested and
upheld several times in Minnesota. While it's always possible that a future court might decide to
throw out the statutory limits, this is now less of a concern.
What excess liability coverage limits are available?
Excess coverage is available in$1 million increments, up to a maximum of$5 million.
Does the optional excess coverage apply to all types of claims?
No. The excess liability coverage does not apply to the following types of claims: limited pollution,
mold, failure to supply utilities, auto no-fault,uninsured/underinsured motorist, workers
compensation, disability, or unemployment claims, or claims under the medical payments coverage.
We're just a small city. Isn't excess liability coverage really just something that big
cities might need?
Absolutely not. If anything, excess liability coverage is even more important to a small city.
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If a city ends up with more liability than it has coverage,the city will have to either draw on existing
funds or go to its taxpayers to pay that judgment. A large city faced with, say, a million dollars of
liability over and above what its LMCIT coverage pays might be able to spread that $1 million cost
over several thousand taxpayers. The small city by contrast might be dividing that same $1 million
cost among only a couple hundred taxpayers. $1 million divided among 5000 taxpayers is $200
apiece—annoying but probably at least manageable for most taxpayers. $1 million divided among
200 t�payers is $5000 apiece—enough to be a real problem for many.
LMCIT now gives the cities who participate in the primary liability coverage the
option to waive the $400,000 per claimant statutory liability limit. What's the effect
if we do this?
If the city chooses the"waiver"option, the city and LMCIT no longer can use the statutory limit of
$400,000 per claimant as a defense. Because the waiver increases the exposure, the premium is
roughly 3%higher for coverage under the waiver option.
If the city waives the statutory limit, an individual claimant could therefore recover up to$1,200,000
in damages on a claim. Of course, the individual would still have to prove to the court or jury that
s/he really does have that amount of damages. Also,the statutory limit of$1,200,000 per occurrence
would still apply;that would limit the individual's recovery to a lesser amount if there were multiple
claimants.
Why would the city choose to pay more in order to get the waiver-option coverage?
Does it give the city better protection?
No. Buying coverage under the"waiver"option doesn't protect the city any better. The benefit is to
the injured party.
The statutory liability limit only comes into play in a case where
1. the city is in fact liable; and
2. the injured party's actual proven damages are greater than the statutory limit.
Very literally, applying the statutory liability limit means that an injured party won't be fully
compensated for his/her actual, proven damages that were caused by city negligence. Some cities as
a matter of public policy may want to have more assets available to compensate their citizens for
injuries caused by the city's negligence. Waiving the statutory liability limits is a way to do that.
Other cities may feel that the appropriate policy is to minimize the expenditure of the taxpayers'
funds by taking full advantage of every protection the legislature has decided to provide. There's no
right or wrong answer on this point. It's a discretionary question of city policy that each city council
needs to decide for itself.
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How would the waiver affect our city's coverage or risk on those claims that the
statutory tort liability limits don't apply to?
It doesn't. Waiving the statutory tort limits has no effect on claims that the statutory limits don't
apply to.
What's the effect of waiving the statutory limits if we have excess coverage?
If the city has $1 million of excess coverage and chooses to waive the statutory tort limits, the
claimants (whether it's one claimant or several)could then potentially recover up to $2.2 million in
damages in a single occurrence. If the city carries higher excess coverage limits,the potential
maximum recovery per occurrence is correspondingly higher.
Carrying excess coverage under the waiver option is a way to address an issue that some cities find
troubling: the case where many people are injured in a single occurrence caused by city negligence.
Suppose, for example, that a city vehicle negligently runs into a school bus full of kids, causing
multiple serious injuries. $1,200,000 divided 50 ways may not go far toward compensating for those
injuries. Excess coverage under the waiver option makes more funds available to compensate the
victims in that kind of situation.
The cost of the excess liability coverage is about 25%greater if the city waives the statutory tort
limits. The cost difference is proportionally greater than the cost difference at the primary level
because for a city that carries excess coverage, waiving the statutory tort limits increases both the per-
claimant exposure and the per-occurrence exposure.
If we waive the statutory tort liability limits, does it increase the risk that the city will
end up with liability that LMCIT doesn't cover?
No. The waiver form specifically says that the city is waiving the statutory tort liability limits only to
the extent of the city's coverage.
Of course,that's not to say that there is no risk that the city's liability could exceed its coverage
limits. We listed earlier a number of ways that could happen to any city. But the waiver doesn't
increase that risk.
Can we waive the statutory tort limits for the primary coverage but not for the excess
coverage?
No. If the city decides to waive the statutory tort limits, that waiver applies to the full extent of the
coverage limits the city has. The city cannot partially waive the statutory limits.
I'm confused. Is there a simple way to summarize the options?
It's not necessarily simple, but the table on the following page is a shorthand summary of what the
effect would be of the various coverage structure options in different circumstances.
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I'm still confused. Who can I talk to?
Feel free to call the Underwriting Department at 651-281-1200 or 800-925-1122.
Pete Tritz 12/08
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