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7.2. SR 10-11-1999 rCI ---'\) ( )j !Ell< Item #7.2. MEMORANDUM TO: Mayor & City Council FROM: Lori Johnson, Finance Director DATE: October 11, 1999 SUBJECT: Consideration of Expanded Y2K Insurance from LMCIT . In response to concerns regarding Y2k liability claims and related issues, the League of Minnesota Cities Insurance Trust (LMCIT) is offering expanded Y2k coverage. Very few insurance carriers are offering expanded Y2k coverage, but the LMCIT has been very proactive on this issue to help protect the cities it represents. The city has taken many steps to address all known Y2k issues and no major problems are anticipated. However, in the event that something would happen, the current insurance policy would offer only limited coverage. The application deadline is October 31, 1999. Attached is an article from the League's Y2k Action News Newsletter that provides a very good description of the League's expanded coverage. The expanded coverage increases the city's annual aggregate limit from $25,000 to $750,000 in addition to providing $30,000 for extra expenses resulting from an Y2k problem. The estimated premium is between $6,500 and $7,200, including $2,600 for Elk River Municipal Utilities. The Utilities Commission discussed this at a Commission meeting and indicated that the Utilities would pay its share of the premium if the City Council wants the expanded coverage. Action Requested The City Council is asked to consider whether the city should purchase expanded Y2k insurance coverage from LMCIT. . 13065 Orono Parkway · P.O. Box 490 · Elk River, MN 55330. TDD & Phone: (612) 441-7420 · Fax: (612) 441-7425 . Y2k Tip from Rockville Q Remember safety when instal- (~ ling an electricity back-up ., ~ generator systemforyour home. It is important toinstoll a standby/ emergency generator to protect life and equipment. Have a licensed electrician install a transfer switch (or double.throw disconnect) to isolate your new temporary power source from the main power lines feeding into the distribution lines. Back-feed could potentially injure line crew workers or damage the generator. when electrical service is restored. Consult your electrician regarding other safety rules. Does your city have a Y2k tip to share with other cities so they may . share it with their citizens? Please . . a-mail Erica Norris at enorris@lmnc. org or call (651) 215-4032 or (800) 925-1122. . . Consider it civic responsi- < bility, an alternative to your regular work-a-day schedule, or just plain fun. Volunteer for the Y2k Public Awareness Booth in the air-condi- tioned Wonders of Technology building at this year's Minnesota State Fair, Aug. 26-Sept. 6. Plan your volunteer shift around some of your favorite fair activities. (For more information about the State Fair, visit: www. mnonline.org/ statefair /index.html.) Fair shifts will be just four hours long: 9 a.m. to 1 p.m.; 1-5 p.m.; or 5-9 p.m., and will be filled on a first come, first served basis. As a volunteer you will receive admission tickets, a t-shirt, and a Y2k logo button. To volunteer, call1ori Ayon, Minnesota Office of Technology, at (651) 215-3877. The volunteer schedule is available for viewing at: www.ot.state.mn.us/state-fair / schedule.html lEAGUE OF MINNESOTA CmES LMCIT' 5 expanded Y2k coverage~ Pm TRITZ To help cities prepare for potential Y2k problems, LMCIT developed a program to cover cities' related liability and other risks.Y2k is a unique situation, and LMCIT's approach to cov~ring these risks is different from anything we've done before. As a result, we've got- ten a number of questions about the coverage. We've also heard from some cities that don't think the expanded Y2k coverage is necessary or important. We'll try to respond to some of these questions and comments in. this article. Why. do we. need the expanded'. Y2k coverage? The biggest reason. . is liability. Without the expanded Y2kcoverage, the city has . only very limited coverage for liability . claims relating to Y2k problems: ... · There is a $25,000 annual aggre- gate limit on coverage for Year 2000 claims. (See sidebar for a definition of what is a "Year 2000 claim.") A .15% city co- pay also applies to these claims. . · The $25,000 annual aggregate limit is an absolute dollar limit for the year, regardless of the .. number of claims or claimants. · The $25,000 annual aggregate limit and 15% co-pay apply to both damages and defense costs for Year 2000 claims. · This $25,000 annual aggregate limit applies to any liability claim that's related to a Year 2000 problem. It applies: · Whether the claim is related directly or indirectly to Y2k; · Whether the Y2k problem is in a computer or in some other type of equipment; and / · Whether the Y2k problem is in the city's or in someone else's equipment. . The expanded Y2k coverage increases that annual aggregate limit from $25,000 to $750,000. It also ~. gives $30,000 of coverage for extra expenses the city might incur if a Y2k problem does affect the city. What's the deadline for apply- ing? .We haven't set a specific dead- line, though obviously the coverage needs to be in place before Dec. 31, 1999. Keep in mind LMCIT has more than 800 members. Remem- ber too that many cities' coverages renew on Jan. 1, so October to Jan- uary is our busy time of the year. Reviewing the city's application for the expanded Y2k coverage will take some time. If everybody waits . until the last minute to apply, we . can't guarantee we'll be able to process all the applications in time. We strongly recommend you apply as soon as possible. This will give our underwriters time to review the application, and you'll have time . to respond if the underwriters have questions about some aspect of your city's preparations. What do we do to qualify? The city must meet two basic criteria: · The city must have made a rea- sonable effort to identify and correct potential Y2k problems in the city's equipment, and must have documented that effort; and · The city must have reasonable contingency plans for dealing with any Y2k-related problems.. The League's )(ear 2000 Action Guide outlines suggested procedures cities can use to accomplish these tasks. The "Y2k Preparedness Work- sheets" offer a simpler alternative procedure for smaller cities. Why are you making us go through all this work? Why can't LMCIT cover this risk automatically for all cities? We think every city should have the expanded Y2k coverage, and that's LMCIT's goal. The reason this coverage is optional and subject to underwriting review is to protect member cities. The Y2K ACTION NEWS Nine frequently asked questions from cities funds LMCIT uses to pay claims belong jointly to member cities. By reviewing each city's Y2k preparations, we make sure your city isn't being forced to help pay for losses because some other city ignoredY2k. ' It's not accurate to think of these underWriting criteria as "extra stuffwe gottado to get the cover':" age." The real reason to take these, steps to prepare forY2k isn~t to qualify for coverage; it's so you'll. be ready to protect your citizenS.:< , How much Will it cost? The extracost forthe expanded Y2k coverage will equal 5% of the city's liability premium plus 2% of the property premium. For example, in one city of about 600 population, itworks ouqo $260; in another city of about 10,000 population with a utilities operation it's about$4,500. (For a quick-and dirty estimate, . figure 3% of your total property!' casualty premium.)This charge will apply to the city's coverage for two years. ' , What if we get sued on a Y2k- related matter five years from now? 'Would it be covered? Yes; Once the expandedY2k coverage is'in place, it remains in place and appliesre:" gardless of when the Y2k-related . claim is made-unless you've either left LMCIT or exhausted the cover- age limits. , Isn't expanded Y2kcoverage really something you'd only need. if you're not ready forY2k? If you're not reasonably ready for Y2k, you wouldn't qualify for the expanded coverage. Buying coverage isn't something you do instead of manag- ing a risk; it'sjust one part of how you manage the risk. Even the best- prepared city needs to think about two possibilities: · There's always the po~sibility you'missed something--some ' microchip buried inside some piece of equipment that malfunc- tions because of a Y2k problem, or sO,me problem you didn't . anticipate and weren't ready for. · . Even if your own systems work flawlessly, the city could still be dragged into a suit for damages caused by aY2k problem in someone else's equipment. Even if the suit is groundless, deferise costs alone could easily exceed that $25,OOOlirnit.For exalllple,. , . 'imagiIle ci,le coiinty's~9f1systeIl1" )nialfunctions.becauseof a Y2k.' c . ..... problenl in their equipment.'; '. ,There's a fire in your city, the homeowner.c:allS91l butcan;t get thiough, so the home is destroyed. Thehonieowner sues the' city, saying yogshould have. warned citizenS that 911 might not work, and exPlained what to do if 911 failed.) . Saying, "We. thinkwe're ready, so we don't need liability coverage" is a little like saying, "We've got a pretty good fire department, so we don't need fire insurance onthe City Hall." . .Suppose the Y2k problem turns ouito be nothing. Wouldn't we have wasted our money buying the ex- 'panded toverage?By the same token, I suppose you. could say your auto liability premium was wasted if you didn't run into anyone. More seri- ously, it's no different from ,any, other risk LMCIT c~vers. If thepremiums cities pay aren't needed for losses, expenses or reserves, those funds will be returnedtocities as divi- dends~ The' premiu~the,city paid for expanded Y2kcovc;:ragewould figure iI1tbthe allocati?l1 formula for future dividends just as premi- ums forany other risk would; Who can I talk to about the expandedY2k coverage?Yotir local agent is one resource. Or feel free " to contact Mike Wozni.ak. ~t (651) 215-4090or mWozniak@lmnc.org, or PeteTritz at (651)2~1-12650r ptritz@h.1E1c.orgat.theLeague.', ". office.~.ii " , . - '- ' . Pete Tritz is administrator of the League of Minnesota Cities Insuranfe Trust. IMPORTANT Y2K DEFINITIONS The following definitions are used in the LMCIT liability .coverage document: Year 2000 claim means any claim for damages arising directly or indirectly out of: Any' actual or alleged failure, malfunction, or inadequacy of any. system or system component, whether belonging cto the city or to others, which is due to any year 2000 problem; ..... .'. '. ' ,.' ........ .... Any actual or alleged failure, malfunction, or iriadequacy of any product, service, data, or function that directly or indirectly uses or relies on any system or system component, which is due to any year 2000 problem; or , Any advice, consultation, design, evaluation, inspection; installati()~, maintenance, repair, replacement, or supervision done by a covered party to determine, rectify, or test for any potential or actual year2000 problem. ., . , ; Year 2000 problem means the inability of any system or system component to correctly ~cognize, process, distinguish, interpret, or accept the year 2000 a~d beyond. System or system component means any of thefollowing: Computer hardware, including microprocessors; , Computer application software; Computer operatiI1g systems and related software; Computer networks; ". . !vticroprol=essors or other computer chips not part of any computer system; . . C Any other computerized Or electronic equipment or components. .