To: HONORABLE MAYOR AND From: Scott P.
Johnson
CITY
COUNCIL
Subject: APPROVAL OF CITYWIDE Date: June
11, 2003
INSURANCE RENEWALS
COUNCIL DISTRICT: Citywide
SNI AREA:
N/A
RECOMMENDATION
a.
Approval of
purchase of citywide insurance policies for the period July 1, 2003 to
September 30, 2004 in an amount not to
exceed $3,700,000. Funding for these
policies is included in the 2003-2004 Operating Budget.
b.
Adoption of a
resolution authorizing the City Manager to negotiate and execute modifications
to the insurance provisions of Agreements with Penske and/or with ShuttlePort
with respect to the Airport Shuttle buses.
BACKGROUND
The City of San Jose
transfers exposure for catastrophic events via insurance policies when the
frequency of events cannot be predicted, the severity of potential losses could
seriously hamper the City’s operations, and where the cost of coverage is not
prohibitive.
The
City purchases a number of different insurance policies with annual premiums
below $100,000 and/or with different expiration dates (i.e. Notary Bonds,
Airport Customs Bond, Flood, and others.)
The following insurance policies have an annual renewal date of July 1,
2003. The premiums reflected are as of
the July 1, 2003 renewal date. Premiums
are subject to change during the course of the year based on additions and/or
deletions to the policies. The
insurance carriers listed are to take effect July 1, 2003.
ANALYSIS
The City’s Insurance
Broker (Willis Insurance Services of California, Inc.) has been successful in
securing renewal coverage for the policies which expire July 1, 2003. A number of insurance carriers have been
solicited to provide insurance premium quotes.
See Appendix A.
Proposals have been
compared and evaluated with respects to scope of coverage, cost, and financial
strength to pay claims and resources available to provide services such as
property inspections, property appraisals and loss control.
Annually the City’s
insurance broker approaches all viable insurance carriers on behalf of the City
to obtain the broadest insurance coverage at the best price. Appendix A reflects the coverage changes,
renewal premiums and insurance carriers solicited.
Staff recommends
changing the City’s annual renewal date from July 1 to October 1 since July 1
is the single busiest renewal date in the insurance industry. Renewal of coverage with a July 1
commencement date makes the process of securing the most favorable insurance
rates and terms more difficult for the City.
July 1 is also a major treaty reinsurance renewal date – the insurance
purchased by insurance companies. As a
result, renewals that take effect on July 1 face the additional
challenge of underwriters having too many July 1 renewals and new business
opportunities to review than available underwriting resources. Also, uncertainty in the pricing models of
insurance carriers can lead to underwriters’ inability to provide the most
competitive coverage quotations. Staff
recommends purchasing a one-time 15-month policy this year (July 1, 2003 –
September 30, 2004) to accomplish this change.
The annual insurance renewals would then come before the City Council in
September each year commencing in 2004, prior to the October 1 renewal date.
The California
Insurance Guarantee Association (CIGA) imposed a 2% surcharge on insurance
premiums effective January 1, 2003.
CIGA provides a mechanism for the payment of insurance claims of
insolvent insurance companies. As a
result, the City is experiencing an additional cost of 2% on all of the City’s
insurance premiums with the exception of Automobile Liability and Police Air
Surveillance Accidental Death and Dismemberment
As part of the
annual renewal process, the City examines a variety of insurance
coverages. The coverages examined for
this renewal period are described below in two categories; insurance coverages
recommended and insurance coverages not cost effective.
Insurance Coverages Recommended
·
All Risk and Boiler & Machinery
Property Insurance - Provides coverage for City owned and leased
real and personal property (including buildings, contents, business
interruption, boiler and machinery, EDP equipment and media, fine arts, mobile
and contractors equipment, builders risk, loss of rents, expediting expenses,
off premises services interruption, building ordinance coverage, unnamed
locations, transit, accounts receivable, valuable papers, and other coverages
as detailed in the policy forms subject to sub-limits as defined in the
policy).
After September 11, 2001 there was a dramatic reduction in property insurance capacity worldwide. As a result, based on the cost implications, the City was forced to reduce its property insurance limits from $1 Billion to $500 Million. This year the City’s insurance broker has been successful in obtaining $750 Million in property insurance limits for 5.8% less in premium rates than what the City paid for $500 Million in coverage last year based on total insurable values of $1,446,720,733[1]. The City’s annual rate per $100 of insured value has decreased from approximately 0.1148/$100 ($1,660,411 annual premium) to approximately 0.1081/$100 ($1,563,819 annual premium); a reduction of 0.0067 ($96,592) excluding the CIGA surcharge which became effective January 1, 2003 as noted above
Insurance Carriers: Allianz Insurance Company, Pacific Indemnity Company, and Royal Surplus Lines Insurance Company.
·
Excess
Earthquake Insurance (Parking Garages Only) – Provides earthquake insurance covering
real property and loss of rental income coverage on three (3) of the City’s
four (4) owned parking garages (45 N. Market Street, 75 N. Third Street, and
280 S. Second Street). Earthquake
coverage was not purchased for the 4th and San Fernando Street
Garage given that construction was completed in early 2003 under current
seismic standards.
Insurance
Carriers: Various (refer
to Appendix A)
·
Airport
Owners and Operators Liability – Provides coverage for bodily injury, property damage and personal
injury for claims occurring at the airport.
Insurance
Carriers: ACE Property & Casualty Insurance
Company and Lloyds of London.
·
Secondary
Employment Law Enforcement Professional Liability – Provides coverage for an actual or alleged
error or omission, negligent act, neglect or breach of duty by the City while
conducting law enforcement activities on behalf of a third party (secondary
employer), which result in bodily injury, property damage or personal
injury.
Insurance
carrier: Steadfast Insurance Company.
·
Auto
Liability – Provides
coverage for bodily injury, property damage and personal injury for claims
arising out of the operation of the Airport and Water Pollution Control Plant
auto fleets.
Insurance
carrier: United States
Fire Insurance Company.
·
Shuttle
Bus Physical Damage Airport - Provides comprehensive physical damage
(other than collision i.e. fire, theft, vandalism, malicious mischief) and
collision damage subject to a $5,000 deductible. As part of the process of securing physical damage for the
shuttle buses at the Airport, it has become evident that the placement of this
monoline auto coverage is becoming problematic. Westchester Specialty Insurance
Company has agreed to provide this coverage in exchange for increasing the
deductible to $25,000. The City would
remain self-insured for the deductible.
Increasing the City’s deductible would require amendments to the City’s
agreements with Penske, the lessor of the shuttle buses. There may be other
ways to address coverage of physical damage to the shuttle buses which would
also necessitate amendments to the agreements with Penske and possibly
ShuttlePort, the shuttle bus operator. As part of the Council actions, staff
requests that the City Manager be authorized to negotiate and execute amendment
to the Agreements with Penske and/or the ShuttlePort as necessary, to address
the insurance coverage issues for the related to the shuttle bus operations at
the Airport.
Insurance
carrier: Westchester Specialty Insurance Company
·
Police
Aircraft Hull and Liability – Provides coverage for bodily injury,
including passengers, property damage and hull for Cessna 182 and American
Eurocopter EC120B.
Insurance
carrier: Westchester Fire Insurance Company.
·
Police
Aircraft Accidental Death & Dismemberment – Death, Dismemberment or Loss of Sight.
Insurance carrier:
CIGNA
Insurance Coverages Not Cost Effective
While
the insurance coverages described below are not cost effective to the City
today, Finance staff in consultation with our insurance broker, will continue
to review the cost of excess workers’ compensation coverage, earthquake
coverage, and war and terrorism coverage and make recommendations to purchase
insurance coverage to the extent it becomes cost effective.
·
War
Risk, Terrorism, Hijacking Risk – Provides coverage for its insured which
becomes legally obligated to pay damages because of bodily injury or property
damage, but only if caused by war and other perils resulting from Aviation
operations.
·
Terrorism
Risk Insurance Act of 2002 (TRIA) – Provides coverage for insured losses
resulting from certified acts of terrorism as defined by TRIA. Coverage is provided via a temporary Federal
program.
The Terrorism Risk Insurance Act (TRIA) of 2002 was signed into law by
President Bush on November 26, 2002.
TRIA requires all insurance carriers provide an optional quotation for
terrorism coverage at the same time as the standard insurance renewal
quotation. If the City declines to
purchase the optional TRIA coverage, any claim that occurs as a result of
terrorism will not be covered. On
January 28, 2003 City Council directed staff not to purchase citywide terrorism
coverage based on consultation with the Chief of Police, Director of Aviation
and the Administration, and in consideration of cost and coverage limitations.
Like workers’ compensation and earthquake coverage, staff has been directed to
continue to consider cost benefit analysis for each renewal period. Based on the significant cost for this
coverage, staff is recommending that the City continue to be self-insured for
this exposure.
·
Excess
Workers’ Compensation
- Indemnifies the City for Workers’ Compensation Claims in excess of $500,000
annual aggregate retention.
Both primary and excess Workers’ Compensation rates have continued to
increase significantly as the number of viable insurance carriers offering
coverage continues to decrease. This
year saw yet another major workers compensation underwriter, Kemper, exit the
marketplace due to its financial insolvency.
In California the benefits increases associated with recent legislation
have also impacted pricing models.
Rates for the first quarter of 2003 increased on average between 20% -
40%. Insureds coming off of multi-year
programs were hit especially hard as their rating structures were corrected to
fall in line with the increased costs associated with this line of coverage.
Concentration of employees remains a key underwriting issue in the wake
of September 11th, 2001.
Capacity is also a major concern especially for higher risk categories,
including public entities. Statutory
coverage is still available, but at higher retentions and significantly higher
prices.
Given these premium increases, the attention
being given to City departments to enhance their risk control, and with the
Employee Services Department constantly improving its Workers’ Compensation
claims administration, our broker and staff recommend that we continue to
remain self-insured as we had been since the inception of the City’s
self-insured status in 1993 through 1999, and again from 2002 through the
current fiscal year end.
·
Earthquake – Provides coverage for damage caused by the
peril of earthquake or volcanic action.
The coverage is limited to direct damage caused by an earthquake.
Earthquake insurance is yet another type of coverage which has
continued to rise in cost. The cost for
$5 Million in coverage is in excess of $800,000 annually. These pricing levels make it financially
impractical to purchase coverage citywide.
We have been successful in securing a minimum limit of earthquake
coverage for the parking garages as requested by the Department of
Transportation. While premiums have
continued to increase, the City has experienced no substantial new Earthquake
damage since Loma Prieta in 1989.
Premium and
proposed budget comparisons can be reviewed on Appendix B.
PUBLIC OUTREACH
Not applicable.
COORDINATION
This memo has been
coordinated with the following departments:
Airport, Transportation, Convention Arts & Entertainment,
Environmental Services, Planning Building and Code Enforcement, the City
Manager’s Budget Office and the City Attorney’s Office.
BUDGET REFERENCE
|
Fund # |
Appn # |
Appn. Name |
RC # |
Total Appn. |
Amt. for Insurance Policies* |
2003-2004 Proposed Operating Budget Page* |
Last Budget Action (Date, Ord. No.) |
|
001 |
2001 |
Insurance Premiums |
000073 |
1,042,016 |
1,042,016 |
Page 687 |
N/A |
|
001 |
2864 |
Police Officers
Professional Liability Insurance |
009065 |
763,400 |
763,400 |
Page 675 |
N/A |
|
001 |
0502 |
Non-Personal
/Equipment (Police) |
000583 |
16,275,703 |
221,264 |
Page 496 |
N/A |
|
523 |
0802 |
Non-Personal
/Equipment |
000000 |
35,009,204 |
998,000 |
Page 801 |
N/A |
|
519 |
0802 |
Non-Personal
/Equipment |
417140 |
4,802,791 |
51,000 |
Page 799 |
N/A |
|
536 |
0672 |
Non-Personal
/Equipment |
001010 |
6,132,894 |
316,174 |
Page 816 |
N/A |
|
518 |
0692 |
Non-Personal
/Equipment |
301020 |
125,000 |
2,078 |
Page 859 |
N/A |
|
533 |
0512 |
Non-Personal
/Equipment |
106000 |
6,731,877 |
511,881 |
Page 826 |
N/A |
|
513 |
0762 |
Non-Personal
/Equipment |
900900 |
30,136,505 |
564,592 |
Page 187 |
N/A |
* These policies will be funded by the 2003-2004
Operating Budget. The 2003-2004
Operating Budget is expected to be approved by the City Council on June 17,
2003, and the implementing Appropriation Ordinance is scheduled to be adopted
on June 24, 2003.
CEQA
Not a project.
SCOTT
P. JOHNSON
Director, Finance
Department
Attachments (2)