STAFF REPORT. DATE: June 11, 2013 CONSIDERATION TO APPROVE BINDING THE CITY S LIABILITY, PROPERTY, WORKER S COMPENSATION, AND AUTO INSURANCE COVERAGE.

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1 STAFF REPORT DATE: June 11, 2013 TO: FROM: SUBJECT: The Honorable Mayor and City Council John Penrod, City Attorney CONSIDERATION TO APPROVE BINDING THE CITY S LIABILITY, PROPERTY, WORKER S COMPENSATION, AND AUTO INSURANCE COVERAGE. RECOMMENDATION Motion to Approve binding the City s liability, property, worker s compensation, and auto insurance coverage through the Utah Local Government Trust with the no deductible option. GOALS, OBJECTIVES AND STRATEGIES AT ISSUE The City s Mission Statement reads: The mission of Springville City is to promote a safe and healthy environment for its citizens by providing services, facilities and opportunities in a fiscally responsible manner. Goal One, Prudent Management of Public Funds : Create and adhere to financial and budget policies. Issue: Is the City s current insurance program the best fiscally responsible program for the City? BACKGROUND: Since 1986, Springville City has been insured through its membership with the Utah Risk Management Mutual Association ( URMMA ), a pooling group of approximately 20 cities. During Springville City's approximate 25 years with URMMA, the City has not investigated any other insurance options outside of URMMA. Last year, the City decided to determine whether URMMA is still the best insurance option for the City. As such, the City issued an RFP for insurance broker services to help the City decide what would be the best option for the City. As a result of the RFP, Moreton and Company was awarded a contract to provide broker services. As part of that contract, Moreton has explored all insurance options available to the City, which includes traditional insurance, self-insured retention programs, and/or insurance pooling options, such as URMMA and the Utah Local Government Trust. Each of these types of insurance has benefits and potential negatives for the City. This staff report will review factors

2 Page 2 considered by staff in its recommendation, the benefits and negatives of each type of available insurance coverage, the results of the broker services, and the details behind staff s recommendation. FACTORS TO CONSIDER In reviewing insurance coverage and determining a recommendation for the City Council, staff and Moreton have analyzed four areas in reaching the recommendation. 1. Cost Cost of insurance of coverage has played a significant role in reaching a recommendation. 2. Risk Tolerance In terms of financial impact, does the City want to take some risk? That will include deductibles, retentions or self-insurance. Analysis of previous losses and experience assists in this process. 3. Philosophy What is the City s desire in terms of handling claims? Do you want to turn claims over to an adjuster and walk away? Do you want to have some involvement? Do you want to control the claim? What is the desired level of autonomy? 4. Culture Is the City culture hands-on, in-house or local? Do training, inspections and risk management help come from outside sources? Is calling 800 numbers acceptable to obtain help where names and faces change? Or do you want to know locally who you are dealing with? TYPES OF AVAILABLE INSURANCE 1. Private Market In the mid 1980 s, private market insurance companies abandoned municipal accounts. This led to cities forming pooled groups, such as URMMA, and looking for other options. Since the 1980 s, the private market has come back to municipal accounts but not as strong as before that time period. Over the past several years, those private insurers offering insurance coverage to municipal accounts has decreased. Those who have survived are considered themselves as specialists in the market and have entire divisions dedicated to handling municipal underwriting, claims, loss control and training services. City s typically choose private insurers when they: a. Do not want to join a pool b. Have in-house insurance or risk management expertise, such as a Risk Manager or Safety Personnel c. Want a high deductible or retention and the ability to manage it themselves d. Consider themselves too big as compared to a typical pool member e. Good pricing in good times f. Want to obtain higher limits of liability g. Want a rated insurance company

3 Page 3 2. Risk Retention Groups ( RRG ) The RRG groups were formed in the mid 1980 s due to the abandonment of private insurers from municipal accounts. RRG s are typically formed by cities that want to have more control over their claims. They manage the claims; pick defense council inside or outside; pay claims themselves up to a large ($250,000 minimum) self-insured retention per claim. The RRG s write accounts in several states and are domiciled in Virginia and Delaware. They usually have less than 50 members, and the policyholder reserves under $10 million. RRG s generally write only liability coverage. Typically, member of RRG s are: a. Larger municipalities that want to control their own claims b. Have in-house attorneys and risk managers c. Have desire to be self-insured up to at least $250,000 per claim d. Require little services from insurers e. Enjoy the relationship with other members throughout the country 3. URMMA URMMA was formed during the mid 1980 s when the private market abandoned municipal accounts. URMMA is owned by its members (approximately 20 members with several larger cities). Members make decision regarding administration, services offered, coverage terms and conditions, and basic structure. The members own URMMA and make all of the decisions for its operation. URMMA coverage is consistent for all members and is determined by the URMMA board. Currently, URMMA provide only liability coverage and group purchases property, crime and other ancillary coverage. Coverage URMMA provides coverage as follows: Deductibles are a set $7,500 per claim. Claims above the deductible are paid up to a cap limit. The cap is a function of the premium currently 125%. Every member has a different cap based upon the size of their premium. Springville s cap is about $125,000. URMMA only allows a member to have one claim paid for above the cap. The second claim is paid off over the 5 years. Because claims are paid off over a 5 year period, the amounts paid to URMMA annually for premiums and recaptured losses vary greatly depending on the claim history. That amount is estimated to vary much as $449,350 to $616,333. Losses occurring within the layer between the deductible and the cap are paid back to URMMA over 5 years. Losses above the cap are absorbed by the URMMA group up to the Utah Tort Cap limits, approximately $650,000 per occurrence. URMMA has insurance up to $6,000,000 per occurrence. URMMA s coverage is on a claims made basis as an additional stumbling block to leaving. Property insurance is $200,000,000 for the pool.

4 Page 4 Total members surplus is approximately $13.5 million. Does not allow additional insureds. URMMA is designed for members who want to have control of their claims, to share costs of services, to be self-insured up to a comfortable level, to have a voice in the ownership of your own insurance company, and to use URMMA as a bank to smooth out loss costs. A difficulty is in predicting and budgeting for actual future costs. URMMA members: a. Want some level of self-insurance b. Want transparency in cost, board members approve costs c. Want stability in long-term costs d. Want autonomy e. Want access to quality services 4. Utah Local Government Trust ( ULGT ) ULGT writes approximately 500 Utah municipal accounts, most of which are midsize to smaller cities. ULGT writes liability, workers compensation, and property coverage. They take a layer of loss (about $500,000) above their insured deductible level and buy insurance above that amount. Their insured s may pick and choose from different deductible levels and limits of coverage. Property coverage is written by the Travelers Insurance Company. All Claims are handled by a subsidiary of the Travelers Insurance Company for liability, workers compensation and property. ULGT mirrors a typical standard insurance concept with a fixed deductible and no recaptured losses or payback of losses. The majority of their clients are smaller entities that need the claims services, expertise and training provided. Like traditional insurance, members may join or quit without notice or without penalty. ULGT s larger city members include Midvale, Taylorsville, Cottonwood Heights, and Holladay. ULGT also has large members, such as St. George and Lehi that purchase portions, but not all of their insurance from ULGT. Some additional information about ULGT: ULGT maintains approximately $42 Million in policy reserves. All claims are submitted to ULGT, giving little control over claims. ULGT offers a Safety Grant to help City s with their risk management. ULGT is willing to offer Nose coverage back to 1985 to cover any unreported claims back to the time the City joined URMMA. Property coverage is $200,000,000 for its members outside of Salt Lake County.

5 Page 5 SPRINGVILLE S INSURANCE OPTIONS After going out to the market for insurance quotes, Moreton narrowed the top insurance options down to four options, which include Travelers (traditional insurance company), URMMA, ULGT and the States risk retention group. Moreton has put together a cost schedule of these different options. Moreton s schedule is attached to this report. The schedule is not the most current schedule in that it does not include the ULGT no deductible option, an option that came in later in the process. ULGT s no deductible option is $15,000 more than the $1,000 deductible option, but it is estimated that under the $1,000 deductible option the City will pay approximately $21,000 in deductibles per year. As such, the no deductible option should save the City approximately $6,000 per year. The total amounts paid under this option would be approximately $435,000 per year. The numbers in the schedule are based upon loss and exposure data collected from 1985 to the present, particularly the last twelve years as it provides the most detail and better reflects the actual exposures. Based upon the date, Moreton s loss projection for the City in the following year is $85,765. The breakdown is as follows: Category Number of Losses Total Amount of Loss Range Under $7,500 per loss 18 $24,232 $10-35,000 $7,500 to $150,000 4 $39,570 $9-73,000 Over $150, $21,963 $0-140k Total 22.4 $85,765 RECOMMENDATION Staff s recommendation is to bind no deductible coverage option with the Utah Local Government Trust. The recommendation is based upon the following: An annual estimated savings in insurance costs of approximately $70,000 (approximately $435,000 with ULGT compared to $507,171 with URMMA). As long as the City s claim history remains consistent, the rate will increase by no more than 10% over the next three years. No cost Nose coverage back to Deductible of $1,000 with no five year payback requirement. Safety Grant and risk management services. Ability to name additional insured on insurance coverage. Dividends this year ULGT is issuing a $2,000,000 dividend to its members (this would be approximately $40,000 to Springville if Springville were a member). $2,500 no fault coverage for sewer backups. By going with ULGT, the City gives up the following:

6 Page 6 A close relationship with URMMA and its members going back to Ability to control claims. ULGT claims adjusters are located in Illinois. Transparency everything in URMMA is transparent. We know exactly where every dollar is going. Ability to be on a board that runs the group. Every member in URMMA is part of the Board. However, URMMA has an executive board that makes decisions that affect every member. ALTERNATIVES: The Council could decide to stay with URMMA or go with the private market. Without having sufficient funds in retention at this point, the RRG option does not appear to be a valid option for the City at this time. FISCAL IMPACT: Based upon Moreton s estimates and premium costs, the City should save approximately $70,000 by going with ULGT. Attachments: Moreton s Schedule of Insurance Costs

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