5.3. SR 01-09-2006
Item 5.3.
MEMORANDUM
TO: Mayor and City Council
FROM: Lori johnson, City Administrator
DATE: january 9,2006
SUBJECT: Excess Liability Insurance Presentation from Mary Eberley
When the City Council reviewed the insurance renewal with the League of Minnesota Cities
Insurance Trust (LMCIT) last fall, there was a brief discussion on purchasing optional excess
liability insurance. In the past, the city has chosen not to purchase this coverage. Insurance
agent, Mary Eberley mentioned the recent court case that may change liability exposure for
cities during her presentation of the July 1, 2005 renewal. Given this information, the
Council requested that this item come back for further discussion.
Attached is another copy of the information from LMCIT that was distributed with the
renewal. Ms. Eberley will walk the Council through this information and discuss the cost
($52,505 for 2005) of purchasing excess liability insurance so the Council is better able to
decide if it is an option that should be added in July, 2006, when the city's coverage is
renewed. The last page of the LMCIT memo provides an easy explanation of the options
available. The city currendy has $1,000,000 coverage across the board.
Action Requested
No action is required at the meeting; however, the Council will need to decide prior to
renewal if excess liability coverage will be purchased for the contract beginning July 1,2006.
s: \Council\Lori\2006\Excess liability. doc
L-gu. 0/ Mi,....... Citiu
Citiu ,_Un9 r=:o&m""
League of Minnesota Cities
Insurance Trust
145 University Avenue West, St Paul, MN 55103.2044
(651) 281.1200 . (800) 925.1122
Fax: (651) 281-1298 . TOD: (651) 281.1290
www.lmnc.org
RISK MANAGEMENT INFORMATION
LMCIT LIABILITY COVERAGE OPTIONS
Liability Limits, Coverage Limits, and Waivers
LMcrr gives cities several options for structuring their liability coverage. The city can choose
either to waive or not to waive the monetary limits that the statutes provide: and the city can
select from among several liability coverage limits. This memo discusses these options and
identifies some issues to consider in deciding which of the options best meets the city's needs.
What are the statutory limits on municipal tort Ii:lbility?
The statutes limit a city's tort liability to a maximum of $300.000 per claimant and $1,000,000
per occurrence. These limits apply whether the claim is against the city. against the individual
onicef or employee, or against both.
What :lre the coverage limits for L'ICIT's basic primary liability coverage?
LMCIT" s liability coverage provides a limit of $1,000.000 per occurrence. matching the per-
occurrence part of the statutory municipal tort liability limit. Under the basic coverage foml the
$300,000 per claimant part of the statutory liability limit is not waived, so if the statutory limit
applies to the particular claim, LMCIT and the city would be able to use that limit as a defense.
Beside the overall coverage limit of $1,000,000 per occurrence. there are also annual aggregate
limits (that is. limits on the total amount of coverage for the year regardless of the number of
claims), for certain specific risks. Aggregate limits apply to the following:
! Products I com leted 0 )erations
I Failure to supply utilities
EMF
I Limited )ollution*
I Lead and asbestos*
Mold
Land use litigation**
Em lovers liabilit .. (work com))
S 1.000.000 annuallv
S I ,000,000 annuall
S 1.500.000 annuall '
$1.000,000 annually
$200.000 annuall
S I ,500,000 annuallv
$1.000.000 annually
$1,000,000 annuall'
* The limit applies to both damages and defense costs.
** Coverage is on a sliding scale percentage basis. and applies 10 both damages and litigation
costs.
If the statute limits our liability to 51,000,000 per occurrence, why would the city purchase
bighc.- coverage limits than that'!
There are several different reasons why cities should strongly consider carrying higher limits of
liability coverage.
1. The statutory tort limits either do not or may not apply to se\'eral types of claims. Some
examples include:
· Claims underfet/eral civil rights laws. These include Section 1983, the Americans with
Disabilities Act, etc.
· Claims for tort liability that the city has assumed hy contract. This occurs when a city
agrees in a contract to defend and indemnify a private party.
· Claims for actions in aI/other state. This might occur in border cities that have mutual
aid agreements ,vith adjoining states. or when a city official attends a national conference
or goes to Washington to lobby, elc.
. Claims based oJ/liquor sales. This mostly affects cities with municipal liquor stores, but
it could also arise in connection with beer sales at a fire relief association fund-raiser, for
example.
. Claims based on a "taking" theOl)'. Suits challenging land use regulations frequently
include an "inverse condemnation" claim, alleging that the regulation amounts to a
"taking" of the property.
2. LMCIT's primary liability coverage has annual limits on coverage for a few specific
risks. The table on page I lists the liability risks to which aggregate coverage limits apply.
If the city has a loss or claim in one of these areas, there might not be enough limits
remaining to cover the city's full exposure if there is a second loss of the same sort during the
year. Excess liability coverage gives the city additional protection against this risk as well.
However there are a couple of important restrictions on how the excess coverage applies to
risks that are subject to aggregate limits:
. The excess coverage does lIot apply to four risks: lead alld asbestosJailure to supply
utilities: mold: al/d "limited pollution" claims if either the pOllufa1l/ release or the
damage is below ground or ill a bOl(V of water; and
. The excess coverage does 1I0t al/fomQtic:ally apply to liquor liability unless the city
specifically requests il.
3. The city may be required b)' contl.act to carry higher coverage limits. Occasionally, a
contract might include a requirement that the city carry more than $1,000,000 of coverage
limits. Carrying excess coverage is a way to meet these requirements. (There.s also another
2
option for cities in this situation. LMCIT can issue an endorsement to increase the city's
coverage limit only for claims relating to that particular contract. There's a small charge for
these "laser" endorsements.)
4. There may be more than one political subdivision covered under the city's coverage.
An HRA, EDA. or port authority is itself a separate political subdivision. If the city EDA,
for example, is named as a covered party on the city's coverage and a claim were made that
involved both the city and the EDA, theoretically the claimant might be able to recover up to
$1,000,000 from the city and another $1,000,000 from the EDA, since there are two political
subdivisions involved. Excess coverage is one way to provide enough coverage limits to
address this situation. Another solution is for the HRA, EDA, or port authority to cany
separate liability coverage in its own name.
This issue of multiple covered parties can also arise is if the city has agreed by contract to
name another entity as a covered party, or to defend and indemnify another entity.
5. Cities sometimes choose to carry higher coverage limits because of a concern that the
courts might overt urn the statutory liabilit)' limits. However, those limits have now been
tested and upheld several times in Minnesota. While it"s always possible that a future court
might decide to throw out the statutory limits, this is now less of a concern.
Whllt excess liability coverage limits are available?
Excess coverage is available in $1 million increments, up to a maximum of $5 million.
We're just a small cit)'. Isn't excess liability coverage really just something that big cities
might need'?
Absolutely not. If anything. excess liability coverage is even more important to a small city.
If a city ends up with more liability than it has coverage, the city will have to either draw on
existing funds or go to its taxpayers to pay that judgment. A large city faced with, say, a million
dollars of liability over and above what its LMCIT coverage pays might be able to spread that
Sl million cost over several thousand taxpayers. The small city by contrast might be dividing
that same $1 million cost among only a couple hundred taxpayers. $1 million divided among
5000 taxpayers is $200 apiece - annoying but probably at least manageable for most taxpayers.
S I million divided among 200 taxpayers is $5000 apiece - enough to be a real problem for many.
How does excess coverage apply to uninsured/underinsured motorist coverage?
If the city carries excess liability coverage, the city has the option to have the excess coverage
also apply to uninsured or underinsured motorist (UM/UIM) claims. To do so. the city must first
increase its primary UM/UIM limit from the basic $50,000 to $1,000,000. There are additional
premium charges both to increase the primary UM/UIM limit and to apply the excess coverage
to the UM/UIM exposure. The city needs to consider whether the benefit from having higher
UMIUIM limits is worth that cost.
3
The UM/VIM coverages are intended to assure that an injured driver will be compensated if slhe
is injured in an accident caused by an uninsured or underinsured driver. The UM/UIM coverage
steps into the place of the liability insurance that the driver should have had.
Keep in mind that in the case of city vehicles. an injury to the driver while operating a city
vehicle would in most cases be covered by workers' compensation. The amounts the individual
would be able to recover from UMfUlM would be in addition to the medical, indemnity. and
other benefits paid under work compo In many cases. it would amount to a double recovery for
the individual's injuries.
A city might decide to carry a higher limit for a couple reasons: if they believe the workers'
compensation benefits are insufficient to compensate their injured employees; or if they want to
make sure that non-employees riding in city vehicles are fully compensated in the event of an
accident with an uninsured or underinsured vehicle. (Note that in lllost cases the passenger's
own UM/VIM would also respond.)
Ll\ICIT now gives the cities who participate in tbe primary liability coverage the option to
waive the $300,000 per claimant statutory liability limit. What's the effect if we do this?
If the city chooses the "waiver" option, the city and LMCIT no longer can use the statutory limit
of $300.000 per claimant as a defense. Because the waiver increases the exposure, the premium
is roughly 3% higher for coverage under the waiver option.
If the city waives the statutory limit. an individual claimant could therefor recover up to
$1,000,000 in damages on a claim. Of course, the individual would still have to prove to the
court or jury that slhe really does have that amount of damages. Also, the statutory limit of
$1.000,000 per occurrence would still apply: that would limit the individual's recovery to a
lesser amount if there were multiple claimants.
Why would the city choose to pay more in order to gct the waivcr-option coycragc? Docs it
give the city better protection'!
No. Buying coverage under the "waiver" option doesn't protect the city any better. The benefit
is to the injured party.
The statutory liability limit only comes into play in a case where
I. the city is in fact liable~ and
2. the injured party's actual proven damages are greater than the statutory limit.
Very literally. applying the statutory liability limit means that an injured party won't be fully
compensated for hislher actual, proven damages that were caused by city negligence. Some
cities as a matter of public policy may want to have more assets available to compensate their
4
citizens for injuries caused by the city's negligence. Waiving the statutory liability limits is a
way to do that.
Other cities may feel that the appropriate policy is to minimize the expenditure of the taxpayers'
funds by taking full advantage of every protection the legislature has decided to provide. There's
no right or wrong answer on this point. It's a discretionary question of city policy that each city
cOllncilneeds to decide for itself.
How would the waiver affect our cit)"s coverage or risk on tbose claims tbat the statutory
tort liability limits don't apply to'?
It doesn't. Waiving the statutory tort limits has no effect on claims that the statutory limits don't
apply to.
What's the effect of waiving the statutory limits if we have excess coverage'!
If the city has $1 million of excess coverage and chooses to waive the statutory tort limits, the
claimants (whether it's one claimant or several) could then potentially recover up to 52 million in
damages in a single occurrence. If the city carries higher excess coverage limits, the potential
maximum recovery per occurrence is correspondingly higher.
Carrying excess coverage under the waiver option is a way to address an issue that some cities
tind troubling: the case where many people are injured in a single occurrence caused by city
negligence. Suppose. for example, that a city vehicle negligently runs into a school bus full of
kids. causing multiple serious injUlies. $1,000.000 divided 50 ways may not go far toward
compensating for those injuries. Excess coverage under the waiver option makes more funds
available to compensate the victims in that kind of situation.
The cost of the excess liability coverage is about 25% greater if the city waives the statutory tort
limits. The cost difference is proportionally greater than the cost difference at the primary level
because for a city that carries excess coverage, waiving the statutory tort limits increases both the
per-claimant exposure and the per-occurrence exposure.
If we waive the statutory tort liability limits, does it increase the risk that the city will end
lip with liability that LMCIT docsn't cover'?
No. The waiver foml specifically says that the city is waiving the statutory tort liability limits
only to the extent of the city's coverage.
Of course, that's not to say that there is no risk that the city's liability could exceed its coverage
limits. We listed earlier a number of ways that could happen to any city. But the waiver doesn't
increase that risk.
5
Can we waive the statutory tort limits for the primary coverage but not for the excess
coverage?
No. If the city decides to waive the statutory tort limits. that waiver applies to the full extent of
the coverage limits the city has. The city cannot partially waive the statutory limits.
I'm confused. Is there a simple way to sUlUmarize the options?
It's not necessarily simple. but the table on the following page is a shorthand summary of what
the effect would be of the various coverage structure options in different circllmstances.
I'm still confused. \"'110 can I talk to?
Give us a call at the League office. Pete Tritz. Tom Grundhoefer. Bill Everett. Doug Gronli, or
any ofLMCIT's property/casualty underwriters will be glad to talk with you.
6
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From:
Sent:
To:
Subject:
Mary Eberley
Thursday, January 05, 2006 3:56 PM
LORI JOHNSON (E-mail)
LMCIT Liability Limits
~~3
-ifand())L1'
~ '3 j<tft;-
;
Mary Eberley
Hi Lori:
I'll be at the Council's workshop on Monday as we'd planned. I think the simplest way to approach the discussion about
the City's choice for liability limits is to follow the information in the enclosed risk management memo from the League
itself. The chart on the last page of the memo is the best & easiest explanation of the League's options. Right now, the
City of Elk River has elected coverage based on the second option - $1 million available across the board.
We have offered the Excess Liability Limit quote each year, but the City has opted not to purchase the additional limits.
You and I have discussed this each year, but I felt it would be good for the Council to have an opportunity to ask questions
and then either re-affirm, or change, the City's current position. The cost of additional limits is significant ($52,505 at the
last renewal for an additional $1,000,000 in protection), but risk also grows as the City does. The League has done a good
job of identifying some strategies a member city could follow, and it may be that Elk River would like to explore some of
these ideas.
Having this dialogue now will allow time to investigate any strategies or options the Council might want to consider before
July, the next renewal date, and before the Council makes its final decision for the next term.
We also agreed to discuss coverage for the Ambulance Service, and if it makes sense or saves cost to include the Service
with the City's LMCIT account. I am still looking at the Workers Compensation & will either send a separate email, or bring
it with me Monday evening. Right now, it looks as though it makes sense to leave the Ambulance Service where it is
currently insured, but I have a couple more questions to investigate.
If you think we should approach differently, let me know. I think this email and the attachment should be sufficient for our
discussion. If you feel we need to be more formal, I can do a separate memo. Thanks, Lori-
Mary Eberley, CPCU
First National Insurance Agency
763-712-7881
-m
LMcrr Liability
Limits
1
LMC
League of Minnesota Cities
Insurance Trust
145 University Avenue West, St Paul, MN 55103-2044
(651) 281.1200 . (800) 925-1122
Fax: (651) 281.1298 . TOO: (651) 281-1290
wWw.lmnc.org
L-gue 0/ Minnt180la Cin...
Ci/iu promoting ~'"
RISK MANAGEMENT INFORMATION
LMCIT LIABILITY COVERAGE OPTIONS
Liability Limits, Coverage Limits, and Waivers
LMCIT gives cities several options for structuring their liability coverage. The city can choose
either to waive or not to waive the monetary limits that the statutes provide; and the city can
select from among several liability coverage limits. This memo discusses these options and
identifies some issues to consider in deciding which of the options best meets the city's needs.
What are the statutory limits on municipal tort liability?
The statutes limit a city's tort liability to a maximum of $300,000 per claimant and $1,000,000
per occurrence. These limits apply whether the claim is against the city, against the individual
officer or employee, or against both.
What are the coverage limits for LMCIT's basic primary liability coverage?
LMCIT's liability coverage provides a limit of $1 ,000,000 per occurrence, matching the per-
occurrence part of the statutory municipal tort liability limit. Under the basic coverage form the
$300,000 per claimant part of the statutory liability limit is not waived, so ifthe statutory limit
applies to the particular claim, LMCIT and the city would be able to use that limit as a defense.
Beside the overall coverage limit of $1,000,000 per occurrence, there are also annual aggregate
limits (that is, limits on the total amount of coverage for the year regardless of the number of
claims), for certain specific risks. Aggregate limits apply to the following:
$1,000,000 annuall
$1,000,000 annuall
$1,500,000 annuall
$1,000,000 annuall
$200,000 annuall
$1,500,000 annuall
$1,000,000 annuall
$1,000,000 annuall
* The limit applies to both damages and defense costs.
** Coverage is on a sliding scale percentage basis, and applies to both damages and litigation
costs.
If the statute limits our liability to $1,000,000 per occurrence, why would the city purchase
higher coverage limits than that?
There are several different reasons why cities should strongly consider carrying higher limits of
liability coverage.
/~'\
if V The statutory tort limits either do not or may not apply to several types of claims. Some
'.../
examples include:
. Claims under federal civil rights laws. These include Section 1983, the Americans with
Disabilities Act, etc.
. Claims for tort liability that the city has assumed by contract. This occurs when a city
agrees in a contract to defend and indemnify a private party.
. Claims for actions in another state. This might occur in border cities that have mutual
aid agreements with adjoining states, or when a city official attends a national conference
or goes to Washington to lobby, etc.
. Claims based on liquor sales. This mostly affects cities with municipal liquor stores, but
it could also arise in connection with beer sales at a fire relief association fund-raiser, for
example.
. Claims based on a "taking" theory. Suits challenging land use regulations frequently
include an "inverse condemnation" claim, alleging that the regulation amounts to a
"taking" of the property.
2. LMCIT's primary liability coverage has annual limits on coverage for a few specific
risks. The table on page 1 lists the liability risks to which aggregate coverage limits apply.
If the city has a loss or claim in one of these areas, there might not be enough limits
remaining to cover the city's full exposure if there is a second loss of the same sort during the
year. Excess liability coverage gives the city additional protection against this risk as well.
However there are a couple of important restrictions on how the excess coverage applies to
risks that are subject to aggregate limits:
. The excess coverage does not apply to four risks: lead and asbestos;failure to supply
utilities; mold; and "limited pollution" claims if either the pollutant release or the
damage is below ground or in a body of water; and
. The excess coverage does not automatically apply to liquor liability unless the city
specifically requests it.
3. The city may be required by contract to carry higher coverage limits. Occasionally, a
contract might include a requirement that the city carry more than $1,000,000 of coverage
limits. Carrying excess coverage is a way to meet these requirements. (There's also another
2
option for cities in this situation. LMCIT can issue an endorsement to increase the city's
coverage limit only for claims relating to that particular contract. There's a small charge for
these "laser" endorsements.)
4. There may be more than one political subdivision covered under the city's coverage.
An HRA, EDA, or port authority is itself a separate political subdivision. If the city EDA,
for example, is named as a covered party on the city's coverage and a claim were made that
involved both the city and the EDA, theoretically the claimant might be able to recover up to
$1,000,000 from the city and another $1,000,000 from the EDA, since there are two political
subdivisions involved. Excess coverage is one way to provide enough coverage limits to
address this situation. Another solution is for the HRA, EDA, or port authority to carry
separate liability coverage in its own name.
This issue of multiple covered parties can also arise is if the city has agreed by contract to
name another entity as a covered party, or to defend and indemnify ano,ther entity.
5. Cities sometimes choose to carry higher coverage limits because of a concern that the
courts might overturn the statutory liability limits. However, those limits have now been
tested and upheld several times in Minnesota. While it's always possible that a future court
might decide to throw out the statutory limits, this is now less of a concern.
What excess liability coverage limits are available?
f Excess coverage is available in $1 million increments, up to a maximum of $5 million.
We're just a small city. Isn't excess liability coverage really just something that big cities
might need?
Absolutely not. If anything, excess liability coverage is even more important to a small city.
If a city ends up with more liability than it has coverage, the city will have to either draw on
existing funds or go to its taxpayers to pay that judgment. A large city faced with, say, a million
dollars ofliability over and above what its LMCIT coverage pays might be able to spread that
$1 million cost over several thousand taxpayers. The small city by contrast might be dividing
that same $1 million cost among only a couple hundred taxpayers. $1 million divided among
5000 taxpayers is $200 apiece - annoying but probably at least manageable for most taxpayers.
$1 million divided among 200 taxpayers is $5000 apiece - enough to be a real problem for many.
How does excess coverage apply to uninsured/underinsured motorist coverage?
If the city carries excess liability coverage, the city has the option to have the excess coverage
also apply to uninsured or underinsured motorist (UMlUIM) claims. To do so, the city must first
increase its primary UMlUIM limit from the basic $50,000 to $1,000,000. There are additional
premium charges both to increase the primary UMlUIM limit and to apply the excess coverage
to the UMlUIM exposure. The city needs to consider whether the benefit from having higher
UMlUIM limits is worth that cost.
3
The UMIUIM coverages are intended to assure that an injured driver will be compensated if slhe
is injured in an accident caused by an uninsured or underinsured driver. The UMlUIM coverage
steps into the place of the liability insurance that the driver should have had.
Keep in mind that in the case of city vehicles, an injury to the driver while operating a city
vehicle would in most cases be covered by workers' compensation. The amounts the individual
would be able to recover from UMIUIM would be in addition to the medical, indemnity, and
other benefits paid under work compo In many cases, it would amount to a double recovery for
the individual's injuries.
A city might decide to carry a higher limit for a couple reasons: if they believe the workers'
compensation benefits are insufficient to compensate their injured employees; or if they want to
make sure that non-employees riding in city vehicles are fully compensated in the event of an
accident with an uninsured or underinsured vehicle. (Note that in most ca~es the passenger's
own UMlUIM would also respond.)
LMCIT now gives the cities who participate in the primary liability coverage the option to
waive the $300,000 per claimant statutory liability limit. What's the effect if we do this?
If the city chooses the "waiver" option, the city and LMCIT no longer can use the statutory limit
of $300,000 per claimant as a defense. Because the waiver increases the exposure, the premium
is roughly 3% higher for coverage under the waiver option.
If the city waives the statutory limit, an individual claimant could therefor recover up to
$1,000,000 in damages on a claim. Of course, the individual would still have to prove to the
court or jury that slhe really does have that amount of damages. Also, the statutory limit of
$1,000,000 per occurrence would still apply; that would limit the individual's recovery to a
lesser amount ifthere were multiple claimants.
Why would the city choose to pay more in order to get the waiver-option coverage? Does it
give the city better protection?
No. Buying coverage under the "waiver" option doesn't protect the city any better. The benefit
is to the injured party.
The statutory liability limit only comes into play in a case where
1. the city is in fact liable; and
2. the injured party's actual proven damages are greater than the statutory limit.
Very literally, applying the statutory liability limit means that an injured party won't be fully
compensated for hislher actual, proven damages that were caused by city negligence. Some
cities as a matter of public policy may want to have more assets available to compensate their
4
citizens for injuries caused by the city's negligence. Waiving the statutory liability limits is a
way to do that.
Other cities may feel that the appropriate policy is to minimize the expenditure of the taxpayers'
funds by taking full advantage of every protection the legislature has decided to provide. There's
no right or wrong answer on this point. It's a discretionary question of city policy that each city
council needs to decide for itself.
How would the waiver affect our city's coverage or risk on those claims that the statutory
tort liability limits don't apply to?
It doesn't. Waiving the statutory tort limits has no effect on claims that the statutory limits don't
apply to.
What's the effect of waiving the statutory limits if we have excess cove~age?
If the city has $1 million of excess coverage and chooses to waive the statutory tort limits, the
claimants (whether it's one claimant or several) could then potentially recover up to $2 million in
damages in a single occurrence. If the city carries higher excess coverage limits, the potential
maximum recovery per occurrence is correspondingly higher.
Carrying excess coverage under the waiver option is a way to address an issue that some cities
find troubling: the case where many people are injured in a single occurrence caused by city
negligence. Suppose, for example, that a city vehicle negligently runs into a school bus full of
kids, causing multiple serious injuries. $1,000,000 divided 50 ways may not go far toward
compensating for those injuries. Excess coverage under the waiver option makes more funds
available to compensate the victims in that kind of situation.
The cost of the excess liability coverage is about 25% greater if the city waives the statutory tort
limits. The cost difference is proportionally greater than the cost difference at the primary level
because for a city that carries excess coverage, waiving the statutory tort limits increases both the
per-claimant exposure and the per-occurrence exposure.
If we waive the statutory tort liability limits, does it increase the risk that the city will end
up with liability that LMCIT doesn't cover?
No. The waiver form specifically says that the city is waiving the statutory tort liability limits
only to the extent of the city's coverage.
Of course, that's not to say that there is no risk that the city's liability could exceed its coverage
limits. We listed earlier a number of ways that could happen to any city. But the waiver doesn't
increase that risk.
5
Can we waive the statutory tort limits for the primary coverage but not for the excess
coverage?
No. lfthe city decides to waive the statutory tort limits, that waiver applies to the full extent of
the coverage limits the city has. The city cannot partially waive the statutory limits.
I'm confused. Is there a simple way to summarize the options?
It's not necessarily simple, but the table on the following page is a shorthand summary of what
the effect would be of the various coverage structure options in different circumstances.
I'm still confused. Who can I talk to?
Give us a call at the League office. Pete Tritz, Tom Grundhoefer, Bill Everett, Doug Gronli, or
any ofLMClT's property/casualty underwriters will be glad to talk with y~u.
6
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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.
t. 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 ~n 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 invehtory 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
//;3." also results in a rating credit - 20% for this year, so that's excellent!
~ 6) An optiop.al 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$l,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 J
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 ofa
periodic review of the City's policy with regard to municipal liability limits
J~ .~fD/
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and exposures, it may be time to conduct a workshop to either re-affirm, or
change, the City's decision on the purchase ofliability 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,
r # 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
~c
("','....
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League of MInnesota Cities
Insurance Trust
145 University .t..venue West. St Paul. MN 55103-20.!4
(651) 281-1200 . (800) 925-1122
Fax: (651) 281.-1298 . TDD: (651) 281-1290
www.lmnc.org
z..u,gu~ "J }fj"n"""bJ (.'i/l1tJl
CmfilS promoU,,!! "-",,,>O"IlC4
September 27, 2005
To: LMClT members, attorneys, and agents
From: Pete Tritz
Re: Court decision -liability under joint powers agreements
The federal EigllLh Circuit Court of Appeals recently issued ..1 very problematic dedsiol1
affecting liability and liability limits in joint powers arrangements. In Renner v. City of
Crookston, No. 04-3233 (8th eir., Aug. 30, 2005) the court ruled that in at least some joint
powers situations, a participating political subdivision can be held vicariously liable for the
actions of another subdivision; and that in these situations, a claimant can stack the statutory tort
limits of the participating political subdivisions. This memo outlines some problems this
decision creates, and possible strategies to address them.
Background
The case arose from a boiler explosion in a swimming pool that the city of Crookston and the
school district operated cooperatively. 'rile claimant, a boiler inspector and a North Dakota
resident, was very severely iqjured by the explosion. (This case \vas brought in federal court
rather than state court because it involved a citizen of another state.) The jury awarded damages
of over $12 million. The trial court ruled that under the joint powers agreement, the school
district was responsible for maintaining and operating the boBer, and that the city was therefore
not liable. The COUl11hen applied the statutory liability limit to the school district's liability and
reduced the award to $300.000.
On appeal, the Court of Appeals ruled that the pool operations were a "'joint venture" ofille city
and the school district; that the eity was therefore vicariously Hable tor the damagt?s, even though
the city was not "negligent or in any manner directly responsible" for the injuries; and that the
claimant therefore was entitled to recover $300,000 from the city in addition to the $300,000 to
be paid by the school district.
Problems this ruling creates
The Court has enunciated a new' and troublesome principle in this decision: If the combined
efforts of governmental entities constitute a "joint venture", then each political subdivision that's
part of that joint venture can be held liable up to its statutory tort limit for the actions of the joint
venture itself; or for the actions of any other political subdivision that's a member of the joint
venture that are in furtherance of the joint venture's purpose. This creates several problems:
All EQUAL OPPORTUNITY/AFFIRMATIVE ACllOU EMPLOYER
. It's a disincentive to inter-local cooperation, In any inter-local cooperative effort that could
be considered a "joint venture", the potential total liability exposure is apparently now equal
to the stanltory 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 fund 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 run over by a bus operated by
a six-member joint powers entity, you could reco\'er up to $ 1.8 million.
. Although the court didn't define "joint venture" precisely. one section of the opinion
describes it as a "mutual unde11aking for a common purpose." This language is troubling
because it's so broad. It seems pretty clear that any agreement that creates ajoint pov...ers
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 vennlre". Uut it's possible that
other types of intergovernmental cooperative arrangements \vill be affected as well. Even
providing assistance to a neighboring city under a muulal aid agreement arguably might
constitute a "muum\ 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 a joint 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 Ulrn, coverage for the joint powers 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 slacking" 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 for joint Jlowers agreements
.Mutual aid agreements. service C011lracts, and simi/arjoint pOll'ers agreements
The Reimer mling doesn't create any new coverage issues for most joint powers agreements,
including mutual aid 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
I iability exposure under these contracts. since there' s now a risk that a city could be held liable
for its partner's actions under the Reimer ruling's "joint venU\fl~" 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 ofagreemenl were deemed by the court to be a "joint venture".
I Of course, Iherc's always some risk that the coverage limit will turn Ollt to be inadequate. whether it's a joint
powers situation or an individual city, because some claims aren't capped by Ihe srannory limil. Federal civil rights
claims are an example.
2
Since the city's vicurious liability is subject to the statutory limit just as the city's direct liability
is, the city's existing coverage limit should be sufficient to cover the city's exposure.2
One circumstance in which the court's ruling t:Oultl <.:reate a coverage limits problem with mutual
aid and contract Cor service agreements is if the agreement contains defcnsc anti indcmnilication
provisions. LMClT generally recommends that mutual aid and contract for service agreements
include provisions for the party in charge to delend and indemnity the othcr party. The goal is to
eliminate conl1icts 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 to indemnify 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
http://\v\vw .1 mnc.onuodfslmutualaidmodel. pdf.
Agreements creating a juin/ powers en!ifY
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 can
now apparenlly recover up to the statutory liability limit ii'om each of the participating political
subdivisions. The result is that the eflective limits on liability arising Irom a joint powers
entity's activities an: now equal to $300.000 times the number of members for each claimant;
and $1.000,000 times the number of members for each occulTence.
Essentially. this stacking or vicarious liability represents another way in which the liability
exposure ror a joint powers entity could tum out to be greater than the basic $1,000.000 limit of
coverage which LMCIT provides. Of course, there are and always have becn other ways in
\vhich a city or ajoint powers entity could end up with liability exceeding its coverage limit-
federal civil rights claims, contractually assumed liability, etc.
Suggested strategies for cities
For mUlual aid Cllld cUll/rae/jor servicejoim powers agreements
. I f the agreement includes delense and indemnification provisions, make sure that those
provisions limit the \:ity's duty to indemnify to an amount no greater than its coverage limit.
Suggested language can be found in the LMCIT model mutual aid agreement at
h tlp:/ /W\V\V .Imnc. 0 m/pd rs/m utual ai umodel. pdf.
! Provided.ofl:oursc, that the claim is ofa type that's subject to the statutory limit in the lirsl place; e.g., it's not a
civil rights claim, etc.
3
For agreements that create a . 'joint powers entity"
I. Consider incorporating thejoim powers emity. 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.
We'd caution though that there's been little experience with incorporating joint powers
entities in this way. We don't know for sure what a court might acnmlly do with regard to
liability of an incorporated joinl powers entity - e.g., whether and how governmental
immunities and defenses would he available. etc. There may also be some disadvantages to
being a non-profit corporation. such as additional reporting and liling requirements, and so
on. Incorporating ajoint powers entity as a non-profit corporation is stepping into new and
untested legal ground, and cities considering it should weigh the potel}tial advantages and
disadvantages carefully \vith 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 Leaglie 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. ^ key point to discuss with legislators is the disincentive for inter-local
cooperation which Ihis court ruling creates.
A fin:ll comment
The federal Eighth Circuit Court of Appeals' mling in Reimer 1'. Crookstun creates potential
problems for cities. Given the potential seriollsness ofthose problems, cities should consider
adopting the strategies outlined above.
Howcycr, 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 Court 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'll rehear the case.
4
. This interpretation of state law by the federal court is not nccessarily a binding precedent for
the state courts, though it will certainly have some persuasive weight. If these issues should
arise in a case in state court, wc'd expect to litigate them vigorously through the state
appellate courts.
Questions, cummcnts, ur suggcstiuns'!
If you have questions, comments, or suggestions about this, please contact any of thc following:
Pete Tritz, LMCIT Administrator - 651-281-1265; Dtritz@lmnc.org
Bill Everett, LMCIT Associate Administrator - 651-281-12 I 6: bevereW@.lmnc.org.
Tom Grundhoefer, General Counsel - 651-281-1266; tgrundho(iii,lmnc.or~
Ellen Longfellow, Loss Control Attorncy - 651-281-1269, elonr!fel@lrnnc.org
PST - 9/27/05
5
League of Minnesota Cities
Insurance Trust
145 University Avenue West, Sl Paul, MN 55103-2044
(651) 281-1200 . (800) 925-1122
Fax: (651) 281-1298 . TOO: (651) 281-1290
www.lmnc.org
November 22. 2004
To: LMCIT members and agents
From: LMClT
Re: 2005 Property/Casualty and Workers' Compensation rates and dividend
Premiums
Here are the premium rate changes LMClT members will see at their next renewal. The
property/casualty rate changes apply to renewals on or after November 15, 2004. The
work comp rate changes apply to renewals in 2005.
. Municipal liability rates will decrease 7%.
. Property rates will increase 2%.
. Auto liability rates will increase 3%.
. Petro fund supplement rates will decrease 10%.
. Work comp rates will increase 7%.
Rates for all other coverages will be unchanged.
For most cities. the property/casualty rate changes will add up to a small net decrease in
premium rates. Of course. an individual city's premium will also be affected by changes
in exposures (payrolls. expenditures, property values, etc.) and by changes in its
experience rating.
Dividends
Property/casualty program members will again share a S9 million dividend this year.
This is the same amount we've returned in each of the past 1 wo years. As in the past,
we'll distribute the dividend in mid-December. The dividend formula will be the same as
we've used for several years. Under that fomlUla, each city's share is proportionate to
the difference between the city's total earned premiums and total incurred losses for all
years the city has been a member. with large individual losses capped for purposes of the
fommla.
The work comp program will not return a dividend this year.
What's behind the rate changes?
PropertylcaslIalty
Overall, the liability and property loss picture doesn't look much different than it did a
year ago, and we don't see any new trends or alarming patterns. Liability loss costs,
which make up about half of the property/casualty total, have been stable and in line with
or below projections. though litigation relating to land use regulation and development
continues to be a concern. Land use litigation costs average over $2 million a year-
about 20% of the total liability loss cost - and they can vary a great deal from year to
year.
While the loss picture really hasn't changed a great deal, the liability rate decrease is
possible because the LMCIT Board decided to significantly increase the ~mount of risk
LMCIT retains on liability claims, from $500,000 to $1,000,000 per occurrence. We're
also increasing LMCJT's retention on property losses, but by a smaller proportion.
Keeping more risk significantly reduces our reinsurance costs, but of course it also means
that we'11 be paying more of the losses directly and that our loss costs will vary more
from year to year. LMCIT's strong fund balance makes it possible to handle that
variability, but it may very well mean that citics will also see more variability in
dividends from year to year as well. In the long run, we expect that the increased
retention will produce a significant net savings for LMCIT members.
Work comp
This will sound like a broken record, but the main factor driving the 7% work comp rate
increase for 2005 is rising medical costs. Medical costs for work comp injuries are
continuing to increase at a rate of about 9% a year. What's causing that increase is a
complicated issue, but one component is the increased use of prescription drugs in
treating work camp injuries. Medical costs now make up just about half of the total cost
of work camp loss costs - about as much as indemnity benefits, Special Compensation
Fund assessments, and defense costs combined.
One positive trend is that the frequency of work camp injuries has decreased in each of
the past couple years. That's made it possible to keep the rate increase down to 7% -
LMCIT's smallest increase in three years - and to again build a small contingency
margin into the rates for the first time in several years. Hopefully cities can continue
reducing the numbers of employee injuries; that's really the best tool we have to control
future premium costs.
Investment income remains a very important element in the LMCIT work camp program,
though not quite as significant as it was a few years ago. Investment income now
produces a little over a fifth of the program's total revenue; a few years ago, it was over a
third. Nevertheless, investment income is still very important. Premiums alone would
not quite cover projected losses, let alone administrative and reinsurance costs.
2
How was the di"idend amount determined?
Most LMCIT members are very familiar with LMCIT"s approach to rate-setting. Briefly,
the premium rates incorporate a safety margin. That is, the premiums plus investment
income are designed to produce enough revenue to cover losses and expenses even if
losses turn out to be greater than projections. If losses turn out to be at projections. that
margin isn't needed to pay for losses and is available either to be returned to members as
a dividend or used to strengthen LMCIT"s fund balance. If losses turn out to be lower
than projections. that additional savings also becomes available to be retumed to
members.
One fact of life in any insurance operation is that it can take several years until claims are
finally settled and we know for sure what the actual loss costs were. For !his reason, we
have to work with estimates, \\'hich are continually revised and updated. The program's
results and the amount of dividend we can retulll in anyone year therefore don't just
depend on what happened during that year; the year's financial results are also affected
by changes in our estimates of what prior year losses will ultimately cost.
Here's a summary of what makes this year's dividend possible:
. At this point. the estimated cost oflosses incurred during the past year is in line
with what we'd projected when the rates were set. In other words, it doesn't
appear that that safety margin in the rates will be needed for losses.
. The current estimate of what losses from prior years will ultimately cost is less
than our earlier projections. The funds that we'd previously set aside for those
losses are therefore freed up.
. Both earned premiums and realized investment income for the past year have
been somewhat higher than projections.
The LMCIT Board also again used a small part of this year's net income to further
strengthen the program's fund balance. The Board concluded that this was appropriate in
light of the continued growth in the property/casualty program's premium volume,
especially in some higher-risk areas like liquor liability; and the increased Jimount of risk
LMCIT will now be retaining.
3
t .
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 limns, 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 cny waives the statutory tort limits and does not purchase excess liabimy 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.
. If the 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).
Ch~ckone:
O-The city DOES NOT WAIVE the monetary limits on municipal tort liability established by
Minnesota Statutes 466.04.
from the League of
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 .
Sjgnature./Date;.
PO,sition
Return this completed form to LMCIT, 145 University Ave. \111., St. Paul, MN.55103-2044
LMCIT (1I/OO)(Re\'.11/03)
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