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5.8. SR 09-07-2004MEMO NDUM Item 5.8. TO: FROM: DATE: SUBJECT: Mayor and City Council Lori Johnson, Finance Director September 7, 2004 Consider League of Minnesota Cities Insurance Trust Policy Options and 2004-05 Workers' Compensation Insurance Renewal On August 16 Mary Eberly and I presented information about the city's insurance renewal with the League of Minnesota Cities Insurance Trust (LMCIT) for the city's comprehensive property and casualty, bond, liability, and various other coverages. At that time there were several options presented that needed additional research prior to making a decision. Recommendations on these options are included in this memo and the attached memo from Mary Eberly. Also, the city has received information from LMCIT on the Workers' Compensation policy that renews on October 1, 2004. That information is included and Council action is requested to renew that policy as well. First, below are the options discussed at the August 16 meeting in summary along with a recommendation. Please refer to the attached memo from Mary Eberley for detailed information. Deductibk Options The current deductible is $1,000. The recommendation based on a three year trend would be to stay with $1,000 deductible. However, the recommendation based on five year trend would be to increase the deductible to $2,500. Faithful Pe~rmance Bond The recommendation is to increase from current $200,000 to $500,000. Equipment Breakdown The recommendation is to reject the option to increase to $5,000 deductible. S: ~Council~l.ori~ 2004~ InsuranceRenewal090704.doc Excess L2'abili(y Coverage No staff recommendation as this is really a Council policy decision. Refer to the attached memo for costs to add coverage. No-Fault Sewer Backup Coverage At a cost of $12,775, the recommendation is not to add no-fault sewer backup coverage; however, this is a Council policy decision. There are very few times when tiffs coverage would have been used. Second, the new policy for Workers' Compensation beginning October 1, 2004 has been received. It shows an experience modification of .81, which is up slightly from last year's modification factor of .78, but still very good. Our safety program plays an important part in reducing work place injuries. There have been no sizeable claims in the last year; most claims are still less than $5,000 with many around $1,000 or less. The city previously had a $10,000 deductible amounting to a premium credit of 20%. The credit for the upcoming premium with the $10,000 is $35,305. Based on claims experience, the recommendation is that the $10,000 deductible remains in place. The city also receives a 3% credit for participating in the League's managed care program. This credit amounts to $5,296 for the upcoming year. The premium payable for the upcoming year is $117,794 compared to $97,353 last year. The increase is due mainly to increases in our estimated payroll but there were also some rate increases. As you can see, the main rate increases occurred in street construction, city shop and yard, and volunteer flrefighters. Action Requested The City Council is asked to consider the five options above and to consider renewal of the Workers' Compensation policy with the League of Minnesota Cities Insurance Trust, including managed care and a $10,000 deductible. S:\CouncilNLori\ 2004\ InsuranceRenewal090704.doc FIRST NATIONAL INSURANCE AGENCY 812 MAIN STREET ELK RIVER, MN 55330 763-441-2500 August 23, 2004 Ms. Lori Johnson, Finance Dir. City of Elk River 13065 Orono Parkway Elk River, MN 55330 Dear Lori: Re: League of MN Cities Insurance Trust Renewal Options 2004-2005 Policy Term The Council Members requested some additional information with regard to the Options we presented last week at the council meeting. We have discussed these options, and agree on at least some of the recommendations, but I wanted to outline each with some comments or clarification for benefit of the council members and for your records. A copy of these "Options" is attached for your reference. 1) $2~500 Deductible. The quoted savings for this policy term is $14,690. I have reviewed the claim history, with special attention to the recent three-year history, and a general review of five-year history. As a rule of thumb, a three to five year claim history is consistent with what commercial underwriters require when considering new accounts, pricing, etc. Over the most recent three-year history, the City would not have saved premium cost by changing to $2,500 deductible. In fact, there would have been an additional cost of about $2,000. Two out of these three years were "good" years with low frequency and low claim costs. The third year, however, was not so good - there were 14 claims, which would have cost a total of about $16,700 over and above the assumed deductible of $1,000. Considering a five-year period, the results look more favorable to select the $2,500 Deductible Option. We cannot arrive at exact premium savings figures for each of the five years, as we have made coverage changes, a deductible change in 2002, but can make some reasonably "educated" assumptions. It appears that the City would have save premium expenses in four out of the last five years. 2) 4) 5) Recommendation: Relying on information with more accuracy over the past three years, would indicate that the City should stay one more year at the current $1,000 Deductible level, "test" the results again next year, and consider the option again. This would be the "safest" route, I believe. On the other hand, the single "bad" year out of five, may be a "fluke", and could be related to the number of projects, construction, growth in the City, and may not occur again. In general, the City's approach to safety and loss control has grown more specific and, we hope, more effective. The council could also decide to take the chance, assume that results will continue to improve, and choose to take the $2,500 Deductible Option and take advantage of the premium savings this year. & 3) Faithful Performance Bond Limit I believe it is time for the City to make an increase in this limit to $500,000 level. The City's activities continue to grow, and so does the number of people who have contact with financial matters, and the budget. The "formula" the League mentions in its discussion on appropriate bond limits comes from the Municipal Finance Officers Assn. The "exposure index" is equal to 10% of the City's gross annual revenues, plus the market value of any negotiable securities. Any "exposure index" in excess of roughly $7,000,000 results in a suggested bond limit of $500,000 by the League. The discussion paper is available in the LMCIT Library on the League's web site and is entitled "LMCIT Bond Coverage", if you wish to review the entire discussion. Recommendation: Increase the Bond limit to $500,000. $5,000 Deductible - Equipment Breakdown Savings is negligible - $786. Claims of this nature, in general, tend to be large, so the savings effect for an insurer, or in this case, the League's self-insured program, is not significant. Credits tend to be small until the deductibles become more significant - $25,000-$50,000 range for large property schedules, for example. Recommendation: Reject this Option. Purchase of $1,000,000 or $2,000,000 Excess Liability Coverage I believe this is a policy decision. Also, the cost is significant to add these layers of protection against damages for injury or accident. In general, the tort limits in statute do not apply to all claims for damages. Examples include: claims under federal civil rights laws, liability assumed under contract, actions brought in another state, claims based on liquor sales, or based on a "taking" theory. For a 6) more detailed discussion of this matter, the League has a discussion paper in its web site LMCIT Library entitled "LMCIT Liability Coverage Options". Cost for $1,000,000 Excess - $ 50,354 Cost for $2,000,000 Excess - $76,354 These premiums would change only moderately with a decision to change to $2,500 Deductible. Recommendation: Council policy decision. No specific recommendation. No-Fault Sewer Back-Up Coverage I did not have complete information with me at the recent Council Meeting, so will list the highlights of coverage - -$10,000 Limit of Coverage per Building per year -City's Deductible does apply -Damage must result from a condition of the City's system - problems in the Homeowner's line between the home & the city's line may not be covered. -Catastrophic events where FEMA assistance would be available would generally not be covered. Extended power outages resulting in damage may not be covered. -Coverage is considered "excess" of any other that may be available such as the home owner's Homeowners policy. -Discussion paper is available in the LMCIT Library for additional information. Recommendation: The approximate cost if 8.5% of the municipal liability premium, or $12,775 at the $1,000 Deductible level, and approximately $12,100 at the $2,500 Deductible level. In your recollection, the City had only two claims where the coverage may have applied. I saw nothing in the comprehensive claims history for the City that indicated otherwise. I do not believe this Option is cost effective at this time, and would have to recommend rejection of this Option. I will not be able to attend the Council Meeting scheduled for early September, but could attend at a later time, or in workshop, if the Council Members wish to discuss any of these options. If they make their decision at the September meeting, please let me know, or fax me a copy of the minutes, and I will get the changes completed. And if you have any further questions about any of these options, Lori, just drop me an e-mail, or call. Hope this summary will help. Thank you - Mary Eberley, CPCU Agent League of Minnesota Cities Insurance Trust Group Self-Insured Workers' Compensation Plan 145 University Avenue West St. Paul, MN 55103-2044 (651)215-4173 The I'Ci ~:y" ELK RIVER, ELK RIVER UTILITIES ,HRA 13065 ORONO PARKWAY ELK RIVER MN 55330 EDA Agreement No.: 0200051319 Agreement Period From' 10/01/2004 To: 10/01/2005 REMUNERATION 361200 134300 11122OO 222800 140000 POP 20062 1857000 302900 258800 14538OO 165300 200800 344900 7985OO 30300 87360 500000 CONTINUATION SCHEDULE FOR QUOTATION PAGE RATE ~Ik~W CODE DESCRIPTION 6.27 q.%R 5506 2.70 &,~ 752O 3.56 ~.~ 7539 3.59 ~.~ 758O 5.46 q,u( 7706 56.07 q~,l~ 7708 3 61 ~.~1 7720 I 90 ~,~ 8017 4 68~,~o 8227 54 .~'~ 8810 4 27 q,o5 9015 2 26a,~5 9016 2 86 &.~q 9102 ,98 l.l[ 9410 ~37 .uq 9411 .37 ,MN 9411 .54 .q'l 8810 STREET CONSTRUCTION WATERWORKS ELECTRIC& STEAM PLANT SEWAGE DISPOSAL PLANT FIREFIGHTERS(NOT VOLUNTEER) FIREFIGHTERS (VOLUNTEER) POLICE OFF SALE LIQUOR STORE CITY SHOP & YARD CLERICAL OFFICE EMPLOYEES NOC BUILDINGS-OPER BY OWNER SKATING RINK OPERATION PARKS MUNICIPAL EMPLOYEES ELECTED OR APPOINTED OFFICIALS BOARDS AND COMMISSIONS PUBLIC UTILITIES CLERICAL Manual Premium EST. PREM 22647 3626 39594 7999 7644 11249 67038 5755 12112 7851 7058 4538 9864 7825 112 323 27OO 217935. Agent' 416021790 00575: ELK RIVER INSURANCE AGCY INC 812 MAIN ST ELK RIVER MN 55330 s/25/2ooa LM 4680(8/99)