5.3. SR 10-17-2005
Item 5.3.
MEMORANDUM
TO: Mayor and City Council
FROM: Lori Johnson, Finance and Administrative Services Director
DATE: October 17, 2005
SUBJECT: Insurance Renewal
City Insurance Agent Mary Eberley will be present at Monday's meeting to give a brief
presentation on the city's insurance policy renewal, including property, liability, liquor
liability, open meeting law, and other related policies. As in past years, the coverage renewed
on July 1; however, we just received the final renewal information from the League of
Minnesota Cities Insurance Trust (LMCIl).
Attached is a memo from Ms. Eberley that provides information on the rates, changes in
coverage, and other issues that affect rates. As the memo states, we are not recommending
any changes in the policy; however, more discussion may be needed on a couple issues such
as joint powers coverage. Ms. Eberley will highlight the items for discussion at the meeting
Monday with the intent that follow-up can occur at a future meeting.
Action Requested
The Council is asked to approve the insurance renewal with the LMCIT effective July 1,
2005.
s: \ Council\Lori\2005 \InsuranceRenewal.doc
FIRST NATIONAL INSURANCE AGENCY
SERVICE CENTER
812 MAIN STREET
ELK RIVER, MN 55330
October 7, 2005
To: Honorable Mayor & Council Persons
City of Elk River
Thank you for the time on your Agenda at the October 17, 2005 meeting. I will attend to
present the insurance renewal information from the League of Minnesota Cities Insurance
Trust for 2005. Although the actual anniversary date for the City's coverage with the
LMCIT program is July 1 st, coverage has been bound pending completion of the renewal
proposal. Potential changes in the property values for electrical generation equipment
and the addition of operating coverage for Westbound Liquor are in process.
Lori Johnson, your City and ERMU staff, and I have worked closely with our League
underwriter to minimize cost increases again this year. We have also prepared some
options for your consideration, and will be prepared to discuss them with the Council
either at your October 17tli meeting, or in workshop, if you prefer.
We feel this year's renewal proposal is very reasonably priced, and the City's coverages
have all been carefully reviewed for accuracy and appropriateness. The Premium
Comparison page included with this letter provides a 5-year history ofthe City's LMCIT
pricing. The City's property values have more than doubled in the past 5 years, and
although premium costs have increased, they have not doubled. This year's bottom-line
cost increase over last year is 3.7%. I believe this is reasonable, and, in fact, expected to
see more. Lori and I feel confident in making our recommendations to you, and agree
the League has done an excellent job with the City of Elk River's renewal this year.
I would also like to take this opportunity to tell you it's been a pleasure to work with your
City's fine staff. They are professional, well organized and responsible people. This task
of properly insuring a diverse and growing operation like the City of Elk River is not a
simple one, but Lori and other City and Utilities employees are thorough and efficient. I
appreciate working with them.
We feel it is important to bring several additional points to your attention. The following
notes are brief comments on each of these points. We also offer several options for your
consideration again. Lori and I will be available for any other questions you may have
about these matters.
1) 2005 LMCIT Rates - Rate changes have once again been modest under the
League's self-insured program. Changes are related to claims costs. The
changes in most lines are very minimal, or have minimal impact on the City's
premium costs. The most significant changes are in Municipal Liability rates,
which have decreased 7%, while Workers Compensation rates have increased
by 7%. I have enclosed a League memo explaining the changes for 2005.
This memo also provides some discussion on the League's dividend plan for
member cities.
2) The City of Elk River received a dividend in the amount of $ 44,207 in
December 2004.
3) Last year, the City's loss experience rating factor was impacted by several
land use claims. These claims served to reduce the favorable credit the City
had previously received. One of these claims has fallen out of the "experience
period" but has unfortunately been replaced by another. In spite of this, the
City's overall claims experience has been very solid.
The City's careful attention to loss control and risk management strategies
appears to be resulting in a reduced frequency of claims. Severity, or the cost,
of claims is critical too, but repeated incidents, or "frequency" is of greater
concern. It will be important to continue your emphasis on overall safety and
management of risk. It will payoff in terms of expense reduction, as well as
employee and public safety.
4) Westbound Liquor appears on the LMCIT renewal's property list as a
construction site. Since it has just opened this month, the coverage changes
and corresponding premium costs are not included in the Premium
Comparison enclosed. Fixtures and inventory are being added, and liquor
liability for the Westbound sales will also be added on a pro-rated basis. I
expect these charges to be between $2,800 and $3,000 additional for the
remainder of this policy period.
5) Workers Compensation coverage, although not shown on the comparison, has
just renewed at a total deposit premium of$ 142,708. The League's Workers
Compo Program provides an automatic renewal based on projected payrolls.
This year's Experience Modifier came in at .80, a slight reduction from .81
last year. This modifier is another good indicator of attention to safety. A
factor under "1.0", means generally better than average loss experience; and
also results in a rating credit - 20% for this year, so that's excellent!
6) An optional quote for Excess Liability coverage has again been secured. At
$1,000,000 limits, the additional cost would be $52,505. At a $2,000,000
limit, the annual additional cost would be $ 78,759.
The City has decided against the purchase of excess limits in the past, relying
on the statutory municipal tort liability limits. The City has elected the
League's waiver option, and generally has a total of$I,OOO,OOO available for
anyone "occurrence". There are some special exceptions, and in some cases,
separate limits for special types of losses, but in general, the figure to
remember is $1,000,000.
The League has very recently released a memo regarding liability under joint
powers agreements. A recent court case resulted in a new principle with
regard to "joint ventures". A copy of the League's memo is enclosed for your
review. In light of this recent Court of Appeals ruling, and the wisdom of a
periodic review of the City's policy with regard to municipal liability limits
and exposures, it may be time to conduct a workshop to either re-affirm, or
change, the City's decision on the purchase of liability limits. This is a policy
decision and LMCIT requires city council to make these choices..
Lori and I will be happy to complete any research you may wish to see, and
can discuss pros and cons with the Council.
7) For the Council's information, there will likely be some changes made to the
current property coverage limits for the Utilities' older generation equipment.
The League is in the process of evaluating the Utilities' current equipment and
will likely soon arrange a meeting with Utilities' management to discuss
options available for replacement of older equipment with newer technology.
The "replacement cost" coverage LMCIT provides for electric utility
equipment differs from the coverage provided for other municipal property. It
allows for the use of used parts and materials to repair or replace damaged
utility property. This is a cost containment measure to some degree, and in
some cases, new parts may no longer be available.
An "Agreed Amount" approach may be appropriate. This method of
valuation could allow for insuring the cost of constructing the needed
generating capacity, rather than at true "replacement cost". This method of
insuring assets requires a very careful, and very technical calculation of the
amount of coverage to purchase. This is where the League's expertise
provides assistance.
This discussion is not yet complete, but we will keep the Council informed, if
and when, changes are made to the coverage, as it will also have an impact on
the cost. If the Council would like to have additional information at this time,
we can prepare a packet of support information, or provide additional
information in a workshop setting. There is no specific concern at this time,
but we consider these potential changes and the discussion surrounding them
to be necessary and important to the LMCIT coverage for the City and
ERMU, and will be happy to provide whatever information the Council
wishes.
8) The City changed to a $2,500 deductible last year, and made several other
changes to its LMCIT coverage. We have again secured some additional
deductible options for your review, and will be prepared to discuss them at
your Council meeting. We have enclosed an "OPTIONS" document outlining
these additional deductible choices. Since the change to $2,500 deductible
was just made last year, and since the cost increase over last year is relatively
modest, we do not recommend a change at this time.
If the apparent reduction in frequency of claims continues, the Council may
wish to consider a larger deductible with no aggregate (maximum), or an even
larger per occurrence deductible with a large aggregate, such as option # 3,
or # 5 at some future anniversary.
The LMCIT No-Fault Sewer Back-Up coverage was declined last year. We
did not seek a quote for this year's renewal, but coverage and pricing have not
changed. The approximate cost to purchase the coverage would be $11,615.
Although there has been one additional incident, it is still open and, if paid,
will be under the current deductible. Last year's determination that this
coverage option was not cost-effective has not changed. We continue to
recommend a declination for this coverage option.
If the Council has any other questions, I will be happy to address them at your meeting,
with Staff, or at any other time convenient for you. Based on the continued stability and
superior coverage offerings, I can recommend the Council pass a motion to accept the
LMCIT renewal offer at $265,381, for the July 1,2005 to July 1,2006 coverage period.
Thank you for placing your confidence in First National Insurance Agency and me. I
appreciate the opportunity to work with, and for, the City of Elk River!
Respectfully,
Mary Eberley, CPCU
Agent
CITY OF ELK RIVER
OPTIONS - 2005
DEDUCTIBLE OPTIONS
1) $5,000 Per Accident Equipment Breakdown - Save approx. $ 800
2) $5,000 Per Occurrence (except equipment breakdown) with no aggregate-
Save approximately $15,225
3) $10,00 Per Occurrence (except equipment breakdown) with no aggregate-
Save approx. $ 35,945
4) $ 10,000 Per Occurrence (except equipment breakdown) with $40,000 annual
aggregate and $1,000 Maintenance - Save approx. $ 11,565
5) $ 15,000 Per Occurrence (except equipment breakdown with $50,000 annual
aggregate and $1,000 maintenance - Save approx. $ 23,628
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to
LEAGUE OF MINNESOTA CITIES INSURANCE TRUST
LIABILITY COVERAGE - WAIVER FORM
Cities obtaining liability coverage from the League of Minnesota Cities Insurance Trust must decide
whether or not to waive the statutory tort liability limits to the extent of the coverage purchased. The
decision to waive or not to waive the statutory limits has the following effects:
. If the city does not waive the statutory tort limits, an individual claimant would be able to recover no
more than $300,OOO.on any claim to which the statutory tort limits apply. The total which all claimants
would be able to recover for a single occurrence to which the statutory tort limits apply would be
limited to $1,000,000. These statutory tort limits would apply regardless of whether or not the city
purchases the optional excess liability coverage.
. If the city waives the statutory tort limits and does not purchase excess liability coverage, a single
claimant could potentially recover up to $1,000,000. on a single occurrence. The total which all
claimants would be able to recover for a single occurrence to which the statutory tort limits apply would
also be limited to $1,000,000., regardless of the number of claimants.
. ffthe city waives the statutory tort limits and purchases excess liability coverage, a single claimant
could potentially recover an amount up to the limit of the coverage purchased. The total which all
claimants would be able to recover for a single occurrence to which the statutory tort limits apply would
also be limited to the amount of coverage purchased, regardless of the number of claimants.
Claims to which the statutory municipal tort limits do not apply are not affected by this decision.
This decision must be made by the city council. Cities purchasing coverage must complete and
return this form to LMCIT before the effective date of the coverage. For further information, contact
LMCIT. You may also wish to discuss these issues with your city attorney.
accepts liability coverage limits of $
Minnesota Cities Insurance Trust (LMCIT).
from the League of
Ch~ckone:
0'-. The city DOES NOT WAIVE the monetary limits on municipal tort liability established by
Minnesota Statutes 466.04.
o The city WAIVES the monetary limits on tort liability established by Minnesota Statutes 466.04,
to the extent of the limits of the liability coverage obtained from LMCIT.
Date of city council meeting .
Signatur€!/Date'
Position
Return this completed form to LMen; 145 University Ave. ltV., St. Paul, MN. 55103-2044
LMCIT (1 I100)(Re\'.11/03)
Page I of I
· It's a disincentive to inter-local cooperation. In any inter-local cooperative effort that could
be considered a ':ioint venture", the potential total liability exposure is apparently now equal
to the stahltory tort limit times the number of participating political subdivisions. In other
words, the total liability exposure that the cooperating political subdivisions must plan for
and fimd is now significantly greater.
· It creates uneven results for claimants. E.g.. if you have the misfortune to be run over by an
Metro Transit bus, you could recover up to $300,000; if you're 11.111 over by a bus operated by
a six-member joint po\vers entity, you could recover up to $ 1.8 million.
· Although the court didn't define 'joint venture" precisely. one section of the opinion
describes it as a "mutual undeltaking for a common purpose." This language is troubling
because it's so broad. It seems pretty clear that any agreement that creates ajoint pO\vcrs
entity - i.e., a joint board with the power to receive and expend funds, enter contracts, hire
employees, or own property - will be considered a 'joint venhtre". But it's possible that
other types of intergovernmental cooperative arrangements will be affected as well. Even
providing assistance to a neighboring city under a mutual aid agreement arguably might
constitute a "mutual undertaking for a common purpose," and therefore a 'joint venture" in
which all the members are vicariously liable for each others' actions.
· It increases the risk that ajoint powers entity's coverage limits could turn out not to be
enough. When LMCIT issues coverage for a joint powers entity, that coverage protects all of
the constituent political subdivisions as well for liability arising from the joint entity's
activities. In htrn, coverage for the joint pO\vers entity's activities is excluded under the
individual city's own coverage. The goal is to be able to provide a single unified defense for
all of the parties, rather than having multiple attorneys defending each city separately. But
because of the "limit stacking" implication of the court's ruling, there's now a greater risk
that the joint entity's coverage limit might not be enough.)
Coverage issues fOl' ,joint powers ngreements
.1vIutual aid agreeme11ls. service contracts, and similarjoint pml'ers agreeme11ls
The Reimer mling doesn' t create any new coverage issues for most joint powers agreements,
including mutual aiel agreements, agreements under which a city purchases service from or
provides service to another political subdivision, and so on. The ruling does increase the city's
liability exposure under these contracts, since there's now a risk that a city could be held liable
tor its partner's actions under the Reimer ruling's '~oint venture" theory. But the city's LMCIT
liability coverage would cover the city's potential vicarious liability for another political
subdivision's actions if this type of agreement were deemed by the court to be a "joint venture".
I Of course, there's always some risk that the coverage limit will turn out to be inadequate, whether it's a joint
powers situation or an individual city, because some claims aren't capped by the slannory limit. Federal civil rights
claims are an example.
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Since the city's vicarious liability is subject to the statutory limit just as the city's direct liability
is, the city's existing covcrage limit should bc sufficient to cover thc city's exposure.2
One circumstance in which the court's ruling could create a coverage limits problcm with mutual
aid and contract for scrvice agreements is if the agreement contains defcnsc and indcmnilication
provisions. LMCrr generally recommends that mutual aid and contract for service agreements
include provisions for the party in charge to defend and indemnity the other party. The goal is to
eliminate contlicts among defendants and make it possible to present a single unified defense.
But under the court's ruling, that could result in the city having to pay not only for its own
liability up to the statutory limit. but also LO indenmify the other city for that city's vicarious
liability. That could add up to more than the city's coverage limit.
LMCIT's model mutual aid agreement incorporates "limited indcmnification" language that's
designed to avoid creating this problem. The model agreement is available on the web at
huo:i /www.lmnc.onuodfs/mulualaidmodel. pdf.
Agreeme1lls crealillg a joi1ll powers ellIily
As notcd earlier, any "joint powers entity" as defined in the LMCIT liability coverage is pretty
clearly going to be considered to be a 'joint venture". Under the Reimer ruling. in a liability
claim arising from the joint powers entity's activities the claimant or claimants potentially ean
now apparently recover up to the statlltOlY liability limit ii-om each of the participating political
subdivisions. The result is that the effective limits on liability arising Ii-om a joint powers
entity's activitics arc now eqllal to $300.000 times the number of mcmbers for each claimant;
and $1.000,000 times the nllmber of members for each occurrence.
Esscntially. this stacking orvicarious liability represents another \-vay in which the liability
exposure for a joint powers entity could tUIll Ollt to be greater than the basic $1,000.000 limit of
coverage which UvlCIT provides. Of course, there are and always have been other ways in
\vhich a city or ajoint powers entity could end up with liability exceeding its coverage limit-
fedcral civil rights claims, contractually assllmcd liability. etc.
Suggested strategies for cities
For mutual aid llnd con/raelfor service joiJ1l powers agreemenls
· I f the agreement includes defense and indemnification provisions, makc sure that those
provisions limit the city's duty to indemnify to an amount no greater than its coverage limit.
Suggested language can be found in the LMCJT model mutual aid agreement at
http://W\V\V .IIllI1C .org/po fs/m lit ualai dmodel. pdf.
~ Provided, of course, Iha. Ihe claim is of a Iype that's subject \0 the statutory limit in the lil'Sl place; e.g., it's nol a
civil righls claim, etc.
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For agreements that create a ''joint powers entity"
I. Consider incorporating the joint powers entity. M.S. 465.717, subd. 2. which was passed in
2000, authorizes any joint powers entity to incorporate itself as a Chapter 317 A non-profit
corporation. On its face, this would seem to eliminate the member cities' vicarious liability
exposure. since M.S. 317 AA07 specifies that members of a non-profit corporation are not
liable for the corporation's acts or liabilities.
\Ve'd caution though that there's been little experience with incorporating joint powers
entities in this way. We don't know for sure ,,'hat a court might actually do with regard to
liability of an incorporatedjoinl powers entity - e.g., whether and how governmental
immunities and defenses would be available. etc. There may also be some disadvantages to
being a non-profit corporation. such as additional reporting and filing requirements, and so
on. Incorporating a joint powers entity as a non-profit corporation is stepping into ne\\' and
untested legal ground, and cities considering it should weigh the potential advantages and
disadvantages carefully with their legal counsel.
2. Consider carrying higher liability coverage limits. Obviously, the higher the joint powers
entity's coverage limits, the more likely it is to be adequate. But regardless of what the
coverage limit is. you can never be absolutely assured that it will be adequate. Even with a
coverage limit equal to the number of members times $1.000.000, there's still the risk of
claims that the statutory limits don't apply to. And with larger joint powers entities - those
with ten or twenty or thirty members - carrying a coverage limit that high may not be
practical or economical.
For all cities
· Support a legislatirefix. The League will be pursuing legislation to address this problem.
City officials need to be talking with legislators about the problems and inequities the court's
ruling creates. A key point to discuss with legislators is the disincentivc fix inter-local
cooperation which this court ruling creates.
A fin:lI comment
The federal Eighth Circuit Court of Appeals' nJling in Reimer r. Crookston creates potential
problems for cities. Given the potential seriousness of those problems. cities should consider
adopting the strategies outlined above.
Howeycr, it's important also to keep in mind that this ruling is not necessarily the final word on
the issue. Two points to be aware of:
· We have petitioned the Eighth Circuit COllrl to reconsider its ruling, in light of the ruling's
potentially far-reaching consequences. We don't yet know when the court will decide if
they'lI rehear the case.
4
· This interpretation of state law by the federal court is not necessarily a binding precedent for
the state courts, though it will certainly have some persuasive weight. If these issues should
arise in n case in state court, we'd expect to litigate thcm vigorously through the state
appellate COllrtS.
Questions, Cllllllllcnts, 01" suggestions'!
If you have questions, comments, or suggestions about this, please contact any of thc following:
Pete Tritz, LMCIT Administrator - 651-281-1265; otritz@lmnc.org
Bill Everett, LMCIT Associate Administrator - 651-281-1216: beverett(@,lnUlc.org.
Tom Grundhoefer, Gcneral Counsel - 651-281-1266; tgrundhoui::lmnc.org
Ellen Longfellow, Loss Control Attorney - 651-281-1269. elonefel@Imnc.org
PST - 9/27/05
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