Item No. 10.
| MEETING DATE: July 20, 2020 |
|
| TO: | HONORABLE MAYOR AND COUNCILMEMBERS |
| FROM: | JIM SADRO, CITY MANAGER By: Elvie Balderrama, Human Resources Director |
| SUBJECT: | APPROVE AN INCREASE IN THE CITY OF LA HABRA SELF-INSURED RETENTION (SIR) FOR GENERAL LIABILITY COVERAGE FROM $300,000 TO $500,000 |
RECOMMENDATION:
That the City Council approve and authorize the City Manager to increase the City’s Self-Insurance Retention (SIR), or deductible, for General Liability coverage from the current amount of $300,000 to $500,000 for the policy term of July 1, 2020, through July 1, 2021, with the option of lowering the SIR back to $300,000 during the next policy term year.
DISCUSSION:
The City of La Habra has been a member of a joint powers insurance authority (JPIA) with the California Insurance Pool Authority (CIPA) since 2011. In addition to La Habra, CIPA currently serves twelve member cities in Southern California, including the cities of Arcadia, Brea, Buena Park, Carlsbad, Cypress, Irvine, Laguna Beach, Montclair, Tustin, Orange, and Whittier (Members).
CIPA provides general liability insurance coverage of up to $43 million per occurrence once the SIR is paid. Insurance is provided through both direct coverage by CIPA of $3 million and from $40 million in excess coverage CIPA has secured through outside insurance companies. Each Member city is responsible for their own SIR ranging from $300,000 to $750,000 per incident. The City of La Habra's SIR has been $300,000 per incident since the City became a member of CIPA.
Over the past several years, the overall liability losses experienced by public agencies throughout the state has been increasing due to unprecedented high jury verdicts, higher cost settlements, and expensive defense costs. As a result, excess liability carriers have withdrawn from the California market, which is shrinking competition and overall insurance capacity in the state, and is resulting in higher premiums being charged by the remaining carriers. The recent civil unrest associated with concerns over excessive police uses of force have further exacerbated the insurance risks and, as a result, carriers have significantly increased premiums and reduced available limits.
The result of rising costs and limited carriers has caused CIPA to revise their underwriting methodology, placing more emphasis on Member experience (claims and losses). The City of La Habra has experienced several recent claims that exceeding the SIR, resulting in an increase in the City's insurance premium with CIPA to $745,908 for FY 20/21, which is $157,510 more than the City's FY19/20 premium of $588,398.
To help reduce the impact of this unexpected premium cost increase, staff has evaluated increasing the City’s SIR from $300,000 to $500,000. If this change is approved for the FY 20/21 policy term, the City's annual premium would drop by $175,908, from the current quote of $745,908 to $570,000. In comparison, the City’s FY19/20 premium for liability insurance at a $300,00 SIR was $588,398.
There are two additional Member cities that have had high claims experience and who were notified about a significant increase in their premiums. They were also offered the option of increasing their SIR to lower their premium, while retaining the ability to reducing their SIR in the following year.
It should be noted that, while opting for a higher SIR will significantly reduce the City's annual premium cost, if one claim is filed in FY20/21 that exceeds the City's SIR, the additional $200,000 that the City would have to pay would more than offset any savings from the reduced premium. However, to put this in perspective, over the past ten years the City has processed approximately 325 claims, and only three claims have exceeded the SIR. These three claims are largely responsible for driving the City's premium costs up at this point. In consideration of the City’s current financial situation due to impacts from the COVID-19 pandemic, staff recommends that the City Council approve Option 2 and increase the City's SIR for the FY20/21 term year, from $300,000 to $500,000, and then allow staff to re-evaluate the SIR and premium quotes in FY 21/22 to determine if additional changes are warranted at that time.
CIPA provides general liability insurance coverage of up to $43 million per occurrence once the SIR is paid. Insurance is provided through both direct coverage by CIPA of $3 million and from $40 million in excess coverage CIPA has secured through outside insurance companies. Each Member city is responsible for their own SIR ranging from $300,000 to $750,000 per incident. The City of La Habra's SIR has been $300,000 per incident since the City became a member of CIPA.
Over the past several years, the overall liability losses experienced by public agencies throughout the state has been increasing due to unprecedented high jury verdicts, higher cost settlements, and expensive defense costs. As a result, excess liability carriers have withdrawn from the California market, which is shrinking competition and overall insurance capacity in the state, and is resulting in higher premiums being charged by the remaining carriers. The recent civil unrest associated with concerns over excessive police uses of force have further exacerbated the insurance risks and, as a result, carriers have significantly increased premiums and reduced available limits.
The result of rising costs and limited carriers has caused CIPA to revise their underwriting methodology, placing more emphasis on Member experience (claims and losses). The City of La Habra has experienced several recent claims that exceeding the SIR, resulting in an increase in the City's insurance premium with CIPA to $745,908 for FY 20/21, which is $157,510 more than the City's FY19/20 premium of $588,398.
To help reduce the impact of this unexpected premium cost increase, staff has evaluated increasing the City’s SIR from $300,000 to $500,000. If this change is approved for the FY 20/21 policy term, the City's annual premium would drop by $175,908, from the current quote of $745,908 to $570,000. In comparison, the City’s FY19/20 premium for liability insurance at a $300,00 SIR was $588,398.
| SIR | PREMIUM | |
| Option 1 | $300,000 | $745,908 |
| Option 2 | $500,000 | $570,000 |
There are two additional Member cities that have had high claims experience and who were notified about a significant increase in their premiums. They were also offered the option of increasing their SIR to lower their premium, while retaining the ability to reducing their SIR in the following year.
It should be noted that, while opting for a higher SIR will significantly reduce the City's annual premium cost, if one claim is filed in FY20/21 that exceeds the City's SIR, the additional $200,000 that the City would have to pay would more than offset any savings from the reduced premium. However, to put this in perspective, over the past ten years the City has processed approximately 325 claims, and only three claims have exceeded the SIR. These three claims are largely responsible for driving the City's premium costs up at this point. In consideration of the City’s current financial situation due to impacts from the COVID-19 pandemic, staff recommends that the City Council approve Option 2 and increase the City's SIR for the FY20/21 term year, from $300,000 to $500,000, and then allow staff to re-evaluate the SIR and premium quotes in FY 21/22 to determine if additional changes are warranted at that time.
FISCAL IMPACT/SOURCE OF FUNDING:
Due to an anticipated increase in premiums, staff had allocated $670,000 in the FY20/21 budget for this expense; however, the actual premium quote was $745,908, or $75,908 more than the approved budget, and $157,510 higher than the City's FY19/20 premium. In order to avoid the need to appropriate an additional $75,908 to fund the unexpectedly high premium for FY20/21 at the $300,000 SIR level, staff recommends increasing the SIR in FY20/21 to $500,000 at an annual premium cost of $570,000. Not only will this be less than the City's FY19/20 premium, it would reduce the City's current budget for this expense by $100,000. If approved, staff will evaluate the FY21/22 premium quotes next year to determine if it is advisable to reduce the City's SIR back to $300,000 at that time.
GENERAL PLAN RELEVANCE:
ED 9.1 Balanced Fiscal Practices