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Home My WebLink About06(D) - Resolution Electing the Non Waiver of Statutory Municipal Tort Liability Limits and Declining Excess Liability Insurance Coverage ReportCITY COUNCIL AGENDA REPORT MEETING DATE: PREPARED BY: PRESENTED BY: January 03, 2023 Jason Etter, Senior Accountant Cathy Erickson, Finance Director ITEM: 6D AGENDA ITEM: Resolution Electing the Non Waiver of Statutory Municipal Tort Liability Limits and Declining Excess Liability Insurance Coverage GOAL AREA OBJECTIVE: High-Value City Services 1.Establish financial stability for all funds. RECOMMENDED ACTION: Approve the resolution Electing the Non Waiver of Statutory Municipal Tort Liability Limits and Declining Excess Liability Insurance Coverage. BACKGROUND: Introduction The City of Prior Lake participates in the League of Minnesota Cities Insurance Trust (LMCIT) for obtaining 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 Prior Lake has been insured by the LMCIT since 1987. On a business exposure basis, the City has incurred relatively few claims with the overall dollars being low. Over the period from 2/01/2016 to 2/01/2022, the City's liability paid losses have amounted to a total of about $87,778 or an average of about $17,556 per year. Fortunately, the City has never incurred an insurance liability eligible claim more than the MN statutory tort limits. Current Circumstances LMCIT members that obtain liability coverage from the LMCIT must decide whether to waive the statutory tort liability limits to the extent of the coverage purchased. That decision has the following effects: If the City does not waive the statutory tort limits, the City's liability is limited by statute to no more than $500,000 per claimant and $1.5 million per occurrence for all claimants. 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 million for a single occurrence. Under this option, the tort cap liability limits are waived to the extent of the member's liability coverage limits, City of Prior Lake I 4646 Dakota Street SE I Prior Lake MN 55372 Item 6D Page 12 which for LMCIT members is $2 million per occurrence. The total all claimants (regardless of the number) would be able to recover for a single occurrence to which the statutory tort limits apply would also be limited to $2 million. The cost to waive the statutory limits would be about 3.5% of our base liability and auto liability premium or approximately $4,000 annually. 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. Excess liability insurance provides an additional $1 million of liability insurance over and above the $2 million policy limit on non-tort claims. This additional coverage 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 would be approximately $41,000 annually if we choose not to waive tort liability limits and $50,000 if we choose to waive the limits. Because of the cost, the City has not elected this insurance coverage provision in previous years. 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 million per occurrence. The LMCIT is providing higher coverage limits than the statutory limit 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 $1.5 million. 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. Most cities elect the non-waiver of statutory municipal tort liability limits. About 15% 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. In the past the Council has declined waiving the statutory monetary limits because it increases the award amount available to a successful plaintiff, it encourages larger settlements, and it drives up the City's insurance premium. FINANCIAL IMPACT: Summarized in the table below is the increase in insurance premium costs associated with either of the above elections: Primary CoveraQe Excess Liability Coverage Total Estimated Annual Premium Cost Increase Non-Waiver Waiver $0 $4,003 $41,287 $49,713 $41,287 $53,717 Item 6D Page 13 The premium for excess liability coverage has increased by 15%. Loss costs in 2022 for municipal liability claims were average overall, but patterns for specific types of liability claims continue to evolve, as is the case with police liability, sewer backup liability, employment practices, and land use litigation, for example. Change in the police liability environment, potential federal or state reforms, and the escalation in the value of serious claims is something we're monitoring and could impact pricing for police liability as well as excess liability limits. LMCIT suggests cities allow for possible rate increases in the range of 5 to 10% in part to account for inflationary considerations, towards the higher end for members with police liability or excess liability limits as the reinsurance market for excess limits is a bit in flux. ALTERNATIVES: 1.Motion and second as part of the consent agenda to approve resolution Electing the Non Waiver of Statutory Municipal Tort Liability Limits and Declining Excess Liability Insurance Coverage. 2.Motion and second to remove from the consent agenda for additional discussion. ATTACHMENTS: 1.Resolution -Consider Approval of a Resolution Electing the Non Waiver of Statutory Municipal Tort Liability Limits and Declining Excess Liability Insurance Coverage