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Home My WebLink About5B LMCIT Insurance Non-Waiver Report 4646 Dakota Street SE Prior Lake, MN 55372 CITY COUNCIL AGENDA REPORT MEETING DATE: JANUARY 11, 2016 AGENDA #: 5B PREPARED BY: DON URAM, FINANCE DIRECTOR PRESENTED BY: DON URAM AGENDA ITEM: CONSIDER APPROVAL OF A RESOLUTION ELECTING THE NON WAIVER OF STATUTORY MUNICIPAL TORT LIABILITY LIMITS AND DECLINING EXCESS LIABILITY INSURANCE COVERAGE DISCUSSION: Introduction The City of Prior Lake participates in the League of Minnesota Cities Insurance Trust (LMCIT) for the purpose of securing its liability, property, casualty, automobile and workers compensation insurance coverage. As a condition of insurance policy renewal the City must annually execute an “LMCIT Liability Coverage Waiver Form” and: 1. Determine whether to waive the statutory liability limits; and 2. Determine whether to acquire excess liability insurance coverage. History We have been insured by the LMCIT since 1987. On a business exposure basis the City has incurred relatively few claims with the overall dollars being fairly low. Over the period from 2010 to 2014, the City’s liability losses have amounted to a total of $377,645 or an average of about $75,528 per year. It should be noted that Prior Lake has grown over the years resulting in more claim exposure and potentially higher judgements. The City has never incurred an insurance liability eligible claim in excess of its standard policy limits of $500,000 that is consistent with statutory tort limits. Current Circumstances League of Minnesota Cities Insurance Trust (LMCIT) members that obtain liability coverage from LMCIT must decide whether to waive the statutory tort liability limits to the extent of the coverage purchased. The decision 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 $500,000 on any claim to which the statutory limits apply. The total all claimants would be able to recover for a single occurrence to which the statutory tort limits apply would be limited to $1,500,000. These statutory tort limits apply regardless of whether the City purchases the optional excess liability coverage. A tort is a civil wrong whereby an injured party may be entitled to compensation. If the City waives the statutory tort limits and does not purchase excess liability coverage, a single claimant could potentially recover up to $2,000,000 for a single occurrence. Under this option, the tort cap liability limits are waived to the extent of the member’s liability coverage limits, and the LMCIT per occurrence limit is $2 million. The total all claimants would be able to recover for a single occurrence to which the statutory tort limits apply would also be limited to $2,000,000 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 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. For coverage written or renewed on or after November 15, 2014, LMCIT’s liability coverage will provide a limit of $2,000,000 per occurrence. The LMCIT is providing higher coverage limits than the statutory limit in order to give member cities better protection. The statutory liability limit caps the City’s liability for many types of claims but some liability claims, aren’t covered by the statutory limit, so the City’s potential liability is unlimited. The higher limit also protects against a major incident in which many people might be injured. Another reason to provide higher limits is because it is increasingly more common to see contracts require more than the statutory limit of $1.5M; a more common figure is the $2M limit. The Council must decide if it wishes to allow a higher recovery amount if an individual was successful under a tort liability claim against the City. The “advantage” of the waiver option, from the perspective of a Prior Lake resident, is that the individual or family could be awarded a higher judgment in a particularly egregious suit. The obvious disadvantage is that the City’s liability exposure is greater if it waives the statutory limits and the City’s liability insurance premium would increase. The cost to waive the statutory limits would be about 3.0% of our base liability premium or approximately $3,700 annually. In the past the Council has declined waiving the statutory monetary limits because it increases the amount available to award to a successful plaintiff, it encourages larger settlements, and it drives up the City’s insurance premium. About 18% of the cities insured by LMCIT have chosen to waive the statutory tort limits. Also available to the City, as optional coverage, is what is known as excess liability insurance that provides an additional $1,000,000 of liability insurance over and above the $2 million dollar policy limit on non- tort claims. This additional coverage basically acts as an umbrella and would provide the City additional insurance protection for claims that would be exempt from statutory tort limits. The added cost for excess liability insurance is very expensive and would be approximately $30,000 annually if we choose not to waive tort liability limits and $37,500 if we choose to waive the limits. Because of the cost, the City has not elected this insurance coverage provision in previous years. ISSUES: Waiving the liability limit protection afforded the City by statute or the purchase of excess liability insurance will increase the likelihood that claims will be made above the normal limits. The premiums for the additional coverage will increase insurance costs. If a claimant is successful in recovering greater damages under the higher limits, future premium costs will escalate. The majority of cities, including Prior Lake, elect the non-waiver of statutory municipal tort liability limits. About 28% of the cities insured by LMCIT purchase the additional coverage. By executing the waiver, the city would be sending a message to the public that is not consistent with today’s economy or our fiduciary responsibility. FINANCIAL IMPACT: Summarized in the table below is the increase in insurance premium costs associated with either of the above elections: Estimated Annual Premium Cost Increase Non-Waiver Waiver Primary Coverage $0 $3,700 Excess Liability Coverage $ 30,000 $37,500 Total $ 30,000 $41,200 ALTERNATIVES: The following alternatives are available to the City Council: 1. Approve the resolution Electing the Non Waiver of Statutory Municipal Tort Liability Limits and Declining Excess Liability Insurance Coverage. 2. Modify the resolution to incorporate the optional insurance coverage as desired by the City Council. RECOMMENDED MOTION: Alternative #1 to be adopted as part of the consent agenda. 4646 Dakota Street SE Prior Lake, MN 55372 RESOLUTION 16-xxx A RESOLUTION ELECTING THE NON WAIVER OF STATUTORY MUNICIPAL TORT LIABILITY LIMITS AND DECLINING EXCESS LIABILITY INSURANCE COVERAGE Motion By: Second By: WHEREAS, Minnesota Statutes 466.04 imposes limits on municipal tort liability; and WHEREAS, The City of Prior Lake has the option to waive the protection of statutorily imposed limits on what a claimant can recover in a tort liability action: and WHEREAS, The League of Minnesota Cities Insurance Trust offers municipalities the option to purchase excess liability insurance; and WHEREAS, The Prior Lake City Council has evaluated whether to waive the limit on tort liability and whether to purchase excess liability coverage for non-tort claims; and WHEREAS, The City of Prior Lake has historically exhibited relatively low claims experience. NOW THEREFORE, BE IT HEREBY RESOLVED BY THE CITY COUNCIL OF PRIOR LAKE, MINNESOTA that the City of Prior Lake hereby exercises the following elections with respect to the available LMCIT insurance options: X The City of Prior Lake DOES NOT WAIVE the monetary limits on municipal tort liability established by Minnesota Statutes 466.04 effective for the 2016 policy year. X The City of Prior Lake declines excess liability coverage effective for the 2016 policy year. PASSED AND ADOPTED THIS 11th DAY OF JANUARY, 2016. VOTE Hedberg Keeney McGuire Morton Thompson Aye ☐ ☐ ☐ ☐ ☐ Nay ☐ ☐ ☐ ☐ ☐ Absent ☐ ☐ ☐ ☐ ☐ Abstain ☐ ☐ ☐ ☐ ☐ ______________________________ Frank Boyles, City Manager