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HomeMy WebLinkAboutItem OFi- AGENDA REPORT DATE: February 25, 2002 TO: Honorable Mayor and City Council THRU: John B. Bahorski, City Manager FROM: June Yotsuya, ACM SUBJECT: CITY RISK MANAGEMENT INSURANCE PROGRAM SUMMARY OF REQUEST Consider withdrawal from the Orange County Cities Risk Management Authority (OCCRMA) and joining the California Joint Powers Insurance Authority (CRIA). BACKGROUND The municipal liability insurance market has been on a roller coaster ride for the past twenty years. During certain periods, the market has been "soft" which means rates have been low, limits have been high and most insurance policies applicable to municipalities have been available. This situation has historically been followed by the opposite conditions — higher premiums, limits harder to reach and coverage difficult to obtain. In the mid 1980's, the market abruptly turned "hard" and municipal liability insurance was difficult, if not impossible to find, for municipalities. In the early 1990's, the commercial insurance market became "soft' again. This trend continued until the late 1990's, with premiums slowly increasing again during the last several years. In the late 1970's as a response to the drop in the market for municipal insurance and the unwillingness of the industry to insure individual cities, groups of cities banded together to create insurance "pools" that provided more buying power and financial attraction. Under this mechanism, cities would become member agencies of a joint powers authority. Depending on the chosen self - insured retention level, each city would be responsible for its own losses up to a specific dollar amount. Covered losses above this amount would be pooled with other pool participants. The City of Seal Beach currently utilizes this risk financing mechanism. In 1986, the City became a member of the Orange County Cities Risk Management Authority. One of the benefits of participating in a joint powers authority for liability insurance is that coverage for needed municipal exposures are more available to the pool (the primary reason pools were formed in the first place.) In addition, insurance premiums are really premium deposits, meaning that the City would receive a dividend if loss experience averages better than expected. Municipalities have an equity position in a pool system. Each member of a fiscally stable pool is a shareholder and can eventually benefit by reduced premiums or a dividend dependent on the risk t7 February 25, 2002 City Council Agenda Report — City Risk Management Insurance Program Page 2 management activity experienced in previous years. Pools have also branched out to provide other programs and services such as joint purchase programs for other insurance coverage (property, special events, claims administration, employee training, etc.). Presently, there are a number of public agency joint powers authorities in existence. Some serve special district needs such as the Association of California Water Agencies Joint Powers Authority. Other municipal joint powers authorities serve a specific regional base with a few participating members from outside their immediate area. Examples include the Coachella Valley Joint Powers Insurance Authority (the majority members from Coachella Valley); Independent Cities Risk Management Authority (the majority members from the Independent Cities Association); and the Public Agency Risk Sharing Authority (serving the northern California area). Besides the Orange County Cities Risk Management Authority ( OCCRMA) that serves twelve cities in Orange County, there is the California Joint Powers Insurance Authority (CJPIA) whose general offices is located in La Palma, California and serves a membership of eighty-seven public agencies, ten cities from Orange County. The City's risk management insurance program has not been thoroughly evaluated for some time. Last year, in response to escalating expenses associated with liability exposure litigation, the City did restructure its claims litigation process. As part of the city management's efforts to address the city's financial situation and to continue to look at ways to make the city more efficient and responsive, staff considered the services currently provided by OCCRMA and explored the concept of how the City would benefit if they were to consider changing its membership to another joint powers authority. DISCUSSION Besides the premium expenses for liability and other forms of insurance coverage, OCCRMA requires that each member agency maintain a reserve fund for the provisions of each individual member's potential Self Insured Retention losses and possible assessments. The fund level should approximate three times the highest annual premium paid to the self - insurance program within the last five years. The City of Seal Beach currently maintains in its reserves approximately $900,000 dedicated to the insurance program and cannot be available for the city's potential use on other unforeseen funding necessities. In addition, the City's expenses also include the cost of using a third party administrator and legal expenses for litigation. As described previously, there are other municipal insurance pools that are more regionally based in other areas. However, Staff has focused on the potentials of the California Joint Powers Insurance Authority (CJPIA) because it is a joint powers authority that is located in Orange County and serves Orange County cities. CJPIA is the largest municipal self - insurance pool in the state and has been in existence since 1978. CJPIA has potential cost benefit savings to the City in that the authority does not require the City to retain a reserve fund. In addition, the City would realize additional savings on overhead costs because it will not need to directly pay for the services of an attorney or third party administrator because CJPIA would include this as part of its services. Another minor benefit is that CJPIA offers training classes at its La Palma facility and will also do training on site thus reducing travel time and expenses for our February 25, 2002 City Council Agenda Report — City Risk Management Insurance Program Page 3 employees ( OCCRMA provides training classes in Orange which is not often accessible to Seal Beach because of manpower coverage, etc.) FISCAL IMPACT Included with this staff report are several attachments that provide a comparison in service and insurance value between OCCRMA and CJPIA. Attachment 1 and 2 provide a general overview of both authorities. Attachment 3 provides a value comparison of liability protection (a city's major coverage need) over a seven -year period. In order to compile these comparisons, staff requested that CJPIA prepare a quotation letter for the City (Attachment 4). Staff also conducted random reference checks of the CJPIA member agencies (20 cities) and received all positive comments. Under OCCRMA, the City has an average annual cost of liability coverage of $466,886. In addition, Seal Beach is also responsible for a $300,000 for self - insurance retention and is required to retain $900,000 in general fund reserves for these purposes. In comparison, if the City had been a member of CJPIA, its annual average cost of liability coverage is estimated to be 5244,920, with no requirement for SIR and a reserve amount. This primary deposit would cover losses and defense expenses. CJPIA pays for remaining expenses such as claims administration, overhead, etc. out of investment earnings of the authority. Because CJPIA would be responsible for claims processing and administration from the start, the City's in -house administrative expenses would be reduced. The City also incurs additional expenses with OCCRMA related to additional coverage such as special events, watercraft, excess worker's compensation, etc. The City would experience insignificant changes to premium costs if purchased through CJPIA because it generally uses the same carriers as OCCRMA. Based on the cost comparison in Attachment 3, if the City were to change to CJPIA, the City would realize an average annual savings of approximately $222,000+ over time and would not be required to maintain a $300,000 SIR and the $900,000 General Fund Reserve. There are fiscal impacts relative to transition from one authority to another. OCCRMA requires that a withdrawing member shall remain responsible for its share of premiums or funds to any insurance program of OCCRMA until all claims or other unpaid liabilities covering the period of the member's participation have been finally resolved. Coverage of policies terminate upon withdrawal except in policies where 1) specifically purchased for Seal Beach, 2) tail or extended policies are purchased by Seal Beach, 3) pending covered claims are being litigated, and 4) continuation of any coverage that is provided on an occurrence basis. The city does have some outstanding claims at this time and cannot predict at this time what claims would be closed by the end of this fiscal period. Therefore, the City may not realize the estimated cost savings during the first year in order to cover such potential expenses. In their joint powers agreement, OCCRMA requires that a member agency give written notice to the Board or its designee, on or before the next succeeding March 1 of its intent to withdraw as of 12:01 a.m. on the next July 1. Staff contacted the executive director regarding whether or not the letter of intent is binding if the City were to decide not to withdraw. Janet Kaiser indicated that if we are considering withdrawal, the City should submit their written letter by March 1st, however, the letter would not be February 25, 2002 City Council Agenda Report — City Risk Management Insurance Program Page 4 considered for any recommendation by the underwriting committee until it meets on March 17 regarding any intent to withdraw as of July 1. The admission process to CJPIA consists of a staff evaluation of the prospective member including analysis of the application materials and claims data and conducting on -site evaluations and visits with appropriate personnel. A $1500 non - refundable application fee is also required. CJPIA has indicated that with the exception of the on -site visits, completion of the application and payment of the application fee, much of the staff evaluation of the City of Seal Beach has been completed in preparation of the quotation letter. A recommendation, review and ratification by the authority membership would complete the admission process. Staff's evaluation is that changing to the CJPIA will result in financial savings to the City of Seal Beach regarding annual cost of insurance coverage and eliminate the need to maintain the City self - insurance retention, and the requirement for a general fund reserve for the City's risks, as well as overhead expenses for claims administration and defense. In addition, the City would also receive the minor benefit of greater accessibility to training for employees (i.e., workplace safety, employee relations, etc.). Staff recommends the City consider changing its membership in the Orange County Risk Management Authority to the California Joint Powers Authority and direct staff to 1) submit an intent to withdraw letter to OCCRMA and 2) submit an admission application and fee to CJPIA. Submitting an intent letter to OCCRMA by March 1, 2001 does not bind the City Council. The City Council can still decide to remain with OCCRMA, within a reasonable timeframe, if there is a desire to do so or require additional time to render a decision. However, this is a necessary step in the process of consideration to change risk management providers. I L I Attachment 1 General Comparison of Authorities Date of Formation OCCRMA 1978 Seal Beach member since 1986 CJPIA 1978 Membership OCCRMA 12 cities (Brea, Cypress, Irvine, Laguna Beach, Los Alamitos, Orange, San Clemente, Seal Beach, Stanton, Tustin, Westminster, Yorba Linda) CJPIA 81 cities, 5 JPA's, 1 special district (Orange County cities — Aliso Viejo, Dana Point, Fountain Valley, Laguna Niguel, Laguna Woods, Lake Forest, La Palma, Mission Viejo, San Juan Capistrano, Villa Park) (See 1 -A for complete list) Attachment 1 -A LIST OF MEMBERS BY COUNTY Imperial County- Brawley Calexico El Centro Imperial Inyo County Bishop r a Aneeles ounty Agoura Hills Agoura Hills /Calabasas CCA Artesia Bell Gardens Bellflower Bradbury Calabasas Cerritos Claremont Commerce Cudahy Diamond Bar Duarte Gateway Cities COG Hawaiian Gardens Hidden Hills Irwindale La Puente La Veme La Mirada La Canada Flintridge La Habra Heights Lakewood Lawndale Lomita - Malibu Maywood Norwalk Palos Verdes Estates Paramount Palos Verdes Transit Pico Rivera Rancho Palos Verdes Rolling Hills Rolling Hills Estates Rosemead San Dimas San Marino Santa Fe Springs Signal Hill South Pasadena South El Monte Southeast Area Animal Control Auth. Temple City Los Anzeles Aunty (epnt 1 Walnut West Hollywood Westlake Village bean Caunty- Mammoth Lakes Oranee ounty Dana Point Fountain Valley Laguna Niguel Laguna Woods Lake Forest La Palma Aliso Viejo Mission Viejo San Juan Capistrano Villa Park n' side o +nty Indian Wells La Quinta Lake Elsinore palm Desert Coachella Valley Assoc. of GOvts. as IWA o +nty La Mesa Poway San Marcos S n B�?rIf Apple Valley Big Bear Lake Chino Hills Grand Terrace Loma Linda Needles Santa DA ) County Buellton Carpinteria Solvang Goleta Ventura o+nty Camarillo Fillmore Moorpark Ojai Port Hueneme Ventura Port District Attachment 2 Risk Management Alternatives for the City of Seal Beach California JPIA OCCRMA Limits $50,000,000 $42,000,000 SIR $0 $300,000 Reserve for SIR Losses $0 $900,000 Reserve for Assessment $0 3 x Highest Premium of Past 5 Years Number of Members 87 12 Form Occurrence Occurrence and Claims Made Governance Elected Staff Coverage Bodily Injury Bodily Injury Property Damage Property Damage Personal Injury Personal Injury Advertising Injury Advertising Injury Public Officials E &O Public Officials E &O Automobiles Automobiles Accidental Pollution Earth Movement Employee Benefits Administration Discrimination Liability Non -Owned Aircraft Non -Owned Watercraft Special Contractural 42 USC 1983 Radioactive Contamination Cash Flow Protection 4 -Year Rolling Reno None Operating Expenses Paid from Earnings Paid by the Members Resources Risk Management Training Risk Management Evaluations Website Contracts Manual Newsletter Lending Library Policy Library Assigned Risk Managers Attachment ! \� () \ -2 | ) \\ \ `Lq § +)$ ! %: Lo IT 6 C4 ki7¥$ #k# m@ i %2 0 C4 (+\!i ( \\ § \} =! !§!!! () \ -2 | ) \\ \ Attachment 4 CALIFORNIA J - P • I , A January 24, 2002 Ms. June Yotsuya, Assistant to the City Manager City of Seal Beach 211 Eighth Street Seal Beach, CA 90740 -5601 Dear Ms. Yotsuya The CALIFORNIA JOINT POWERS INSURANCE AUTHORITY is pleased to present this quotation to the City of Seal Beach for the - provision of liability coverage. The City's initial primary deposit has been calculated based upon the data you recently-provided to us. To compare the cost of coverage as a member of the CALIFORNIA JPIA with coverage available through the commercial insurance market or with other pools, it is very important to recognize all of the costs of risk management that are included in the CALIFORNIA JPIA proposal. Our proposal includes all costs of claims from the first dollar and covers all the details of handling claims. The CALIFORNIA JPIA handles claims from their inception to closing. We pay the claims adjusters, hire the attorneys as necessary, and pay the claims as appropriate. All of these costs are included as part of the cost of coverage. The City should realize a significant savings on overhead costs because it will not need to directly pay for the services of an attorney or third party administrator, such as Carl Warren and Company, to manage its claims, and staff resources used to manage litigation can be utilized elsewhere because the CALIFORNIA JPIA includes this as part of its services. Additionally, the CALIFORNIA JPIA provides extensive risk management training to its members. Training is provided at no cost on a regional basis and to individual members to help them address risk management concerns and to reduce losses. Finally, the CALIFORNIA JPIA conducts biannual risk management evaluations of each member to help the member identify liability and safety exposures before they result in claims. All of these services are included as part of the CALIFORNIA JPIA program. CALIFORNIA JOINT POWERS INSURANCE AUTHORITY 8081 MOODY STREET. LA PALMA. CA 90623 TEL (562) 467 -8700 FAX (562) 860 -4992 Ms. June Yotsuya January 24, 2002 Page 2 Liability Coverage The CALIFORNIA JPIA was originally formed to provide liability protection to its members. While most other CALIFORNIA JPIA programs are optional, all members must participate in the liability program. The liability program is a self - insured, loss- pooling program in which participating members benefit from sharing risk with other member agencies. Coverage is provided to $50 million per occurrence. The program is retrospective in nature, utilizing a primary deposit at the beginning of the coverage period and a retrospective adjustment at the conclusion of the coverage period. The primary deposit is a calculated amount based on the prior experience of the member. The liability coverage quotation of $239,794 has been generated by applying the cost allocation formula used by the CALIFORNIA JPIA to the City of 's losses as though the City had been a member of the CALIFORNIA JPIA during the time period of July 1, 1993 to June 30, 2000. We determined the City's cost of coverage for each of the coverage periods for which you provided data. The City's primary deposit amount was then established by excluding the high and low years, and averaging the remaining costs of coverage. Attached you will find a sheet showing the primary deposit calculation. It is important to note that the primary deposit is only an estimate of the expected cost of coverage for the coverage period. If the City applies effective risk management and loss control techniques, it may receive a retrospective refund (primary deposit less the City's share of losses and expenses). Should the City's loss experience be worse, the City would owe additional funds to the liability pool. Retrospective adjustments are billed or refunded over a four -year period. This "rolling retro" was instituted by the Authority to stabilize the cash flow requirements of participation in the program. The cost allocation formula is such that each member's primary deposit is charged directly for the first $30,000 in costs for each occurrence (if an occurrence f esuits in more than one claim, only one $30,000 charge is made). Costs per occurrence from $30,000 to $750,000 are pooled based on each member's share of the under- $30,000 costs, excluding property only occurrences of less than $2,000. Costs from $750,000 to $5,000,000 per occurrence are pooled based on the member's share of the total payroll of all the members. Costs from $5,000,000 to $50,000,000 per occurrence are transferred to the CALIFORNIA JPIA's re- insurer: Costs of operating the CALIFORNIA JPIA and the third party administrator are paid from the Authority's investment earnings (formerly these costs were charged to the members as a part of the cost allocation formula). The only costs that are pooled are those related to actual losses (i.e. paid losses, defense costs, and reserves). There is a surcharge based on police payroll for members with police departments. The surcharge is determined annually in conjunction with the Authority's actuarial study. For 2001 -2002 the surcharge is $2.00 per $100 of sworn police payroll. All claims, regardless of size, are to be immediately reported to the CALIFORNIA JPIA. Ms. June Yotsuya January 24, 2002 Page 3 Environmental Liability Program The CALIFORNIA JPIA began providing comprehensive environmental liability and remediation insurance protection on July 1, 2000. The environmental program is a mandatory program that covers defense, indemnity, and remediation for scheduled properties, facilities, and non -owned disposal sites. Streets and storm -drain outfalls are covered on a blanket basis. Coverage is provided up to $10 million per member during the three -year policy period; $50 million for the entire CALIFORNIA JPIA. There is a $50,000 per occurrence self - insured retention. With an estimated population of 24,000 residents, the annual premium for the City of Seal Beach would be approximately $4,080 (some high hazard exposures, such as maintenance yards, may have surcharges). Because all of the members participate in this program, the coverage is very cost effective. Optional Programs If the City of Seal Beach chooses to pursue membership in the CALIFORNLA JPIA for liability coverage, the City would be eligible to participate in all of the CALIFORNIA JPIA's programs, including the workers' compensation self- insurance pool, and programs for property insurance (including earthquake and flood), fidelity bonds, and special events insurance. Workers' Compensation The CALIFORNIA JPIA workers' compensation program handles all claims from the first dollar without deductibles. The cost allocation formula is similar to that used for the liability program. Costs up to $50,000 are charged directly to the member's primary deposit. Costs from $50,000 to $100,000 are pooled based on the member's share of costs under $50,000, and costs from $100,000 to $500,000 are pooled based on payroll. Costs in excess of $500,000 are transferred to an excess insurance policy. Administrative expenses are paid from the Authority's investment earnings. Property Insurance Coverage The CALIFORNIA JPIA property insurance program was designed specifically to meet the needs of our members. Coverage is available for real property (buildings), business personal property (contents), mobile equipment (unlicensed vehicles and equipment used to maintain public property) and vehicles. In addition, earthquake and flood, boiler and machinery, and rental interruption coverage is available at very low rates due to the combined purchasing power of the members. Ms. June Yotsuya January 24, 2002 Page 4 Fidelity Bonds The CALIFORNIA JPIA blanket fidelity bond program provides coverage for Faithful Performance, Depositor's Forgery, and Crime. There is also optional computer fraud protection. Rates for this program are very competitive. Admissions Process The admissions process for the CALIFORNIA JPIA consists of a staff evaluation of the prospective member including analysis of the application materials and claims data and conducting on -site evaluations and visits with appropriate personnel. A $1,500 application fee is also required. With the exception of the on -site visits, completion of the application and payment of the application fee, much of the staff evaluation of the City of Seal Beach has been completed as part of this quotation process. Following a positive staff evaluation, a recommendation will be forwarded to the City Managers' Committee. The City Managers' Committee then makes a recommendation to the Executive Committee composed of nine elected officials. Following Executive Committee approval, a recommendation is made to all of the members. They then submit a written ballot stating their position on admission of the applicant agency. With the approval of the members, the applicant agency is admitted to the organization and must pay the primary deposit determined in the evaluation process. The entire process takes approximately three months. Thank you again for considering the CALIFORNIA JOINT POWERS INSURANCE AUTHORITY for your risk management needs. I am looking forward to hearing from you. Please feel free to call me or Executive Director, William Holt, if you have any questions or need any further information. 5R?5w Jonathan R. Shull, ARM Assistant Executive Director Attachments