Council Communication Office of the City Manager	Date	June 22, 2009
	Agenda Item No. 32 Roll Call No. 09- Communication No. 09-405 Submitted by: Allen McKinley, Finance Director

AGENDA HEADING:

Annual Insurance Renewal for July 1, 2009 - Property and Casualty Insurance.

SYNOPSIS:

To provide an incentive to insurance carriers to competitively quote City insurance coverages, the City normally markets about one-third of its property/casualty insurance coverages annually through Jester Insurance Services, Inc., Robert Jester, President, 303 Watson Powell, Jr. Way, Des Moines, Iowa 50309, and maintains coverage with those carriers for about three years. This year, the City marketed its Property Insurance coverage and, because of the intense public scrutiny of the American International Group (AIG), also marketed its Airport Liability Insurance coverage. In addition, the City is renewing its Excess Workers Compensation Insurance, Excess Liability Insurance, Crime Insurance, Flood Insurance, HazMat/Mutual Aid Occupational Injury Insurance and Enterprise Fund Automobile Liability Insurance coverages (descriptions of each are included below). These coverages will remain with the current carriers.

The total premium for the July 1, 2009 renewal of property and casualty insurance coverages is $1,094,366. This represents an increase of $49,155, or 4.7%, over last year’s renewal of $1,045,211. Staff recommends approval of the attached Schedule of Insurance.

FISCAL IMPACT:

Amount: $1,094,366

Funding Source: 2009-2010 Operating Budget:

• Tort Fund – Tort Liability GE005 FIN940500, Page 111.
• Parking Operations Fund – T&T Parking Administration EN051 ENG100701, Page 86.
• Solid Waste Operations Fund – Solid Waste Collection EN151 PWK100101, Page 264.
• Solid Waste Operations Fund – Curbside Recycling EN151 PWK100119, Page 266.
• Sanitary Sewer Operations Fund – Des Moines – Sanitary Sewer Maintenance EN101 PWK071000, Page 258.
• Storm Water Utility Operations Fund – Des Moines- Storm Sewer Maintenance EN301 PWK071600, Page 268.
• Golf Operations Fund – Golf – Grandview EN201 PKS010704, Page 219.
• Golf Operations Fund – Golf – Waveland EN201 PKS010707, Page 220.
• Golf Operations Fund – Golf – A.H. Blank EN201 PKS010701, Page 218.
• Des Moines Public Housing Agency Fund – Housing Services – Administration SP350 HSG029000, Page 138.
• Airport Operations – Building Maintenance EN002 AIR040400, Page 26.
• Special Revenue Funds – Other Employee Benefits SP451 HRS961000, Page 148.

The proposed renewal premium of $1,094,366 is $22,977 less than the $1,117,343 budgeted to fund this renewal. Of the $1,094,366 in total renewal premium, $922,625 is allocated between General Fund and Enterprise Fund operations and $81,465 is for Airport Liability Insurance and $50,000 for additional WRA flood coverage. The remaining $40,276 represents policies specific to the General Fund. Of the $922,625 that is allocated, $452,575, or 49.1%, is allocated to Enterprise Funds and $470,050, or 50.9%, to the General Fund. The insurance coverage provided to the WRA by 28E Agreement is allocated on the same basis as if the WRA were an Enterprise Fund of the City. The WRA’s portion of the $452,575 is estimated to be $135,356, or 29.9%. A “Premium Allocation Comparison” chart is attached showing the FY09 and FY10 allocation by Enterprise Fund and the General Fund.

ADDITIONAL INFORMATION:

On February 9, 2009 by Roll Call No. 09-197, the City Council approved a professional services agreement with Jester Insurance Services, Inc. Under the provisions of this agreement, Jester Insurance Services, Inc. competitively markets about one-third of the City’s insurance coverages annually. Jester Insurance Services, Inc. has contacted various insurance markets for the July 1, 2009 renewal.

Based on Jester Insurance Services, Inc.’s recommendations, a Schedule of Insurance is provided below, indicating each line of coverage being renewed, the insurance carrier being recommended by staff, a comparison of last year’s premium to this year’s premium and the plus or minus difference between the two. The following is a description of this year’s renewal, highlighting coverages and changes that have most significantly impacted the coverage being provided and the premium being charged. Because of the complexity posed by the conditions associated with the Airport Liability and Property Insurance coverages marketed this year, the explanation provided below is fairly comprehensive.

1. Airport Liability Insurance:

The City’s current Airport Liability Insurance coverage is purchased through AIG Aviation ("AIG") with both a per occurrence and aggregate policy limit of $250,000,000 and a $10,000 per occurrence deductible. Because of the recent turmoil in the financial markets and the intense public scrutiny of AIG, the City marketed this coverage again for this renewal and received responses from four qualified providers. The base coverage level offered by each provider is consistent with the current coverage levels provided by AIG. As in the past, in addition to the base liability coverage, quotes for TRIA (federal terrorism coverage) and extended war coverage (insurance carrier coverage) were requested. A complete list of the coverages and the associated costs offered by each provider is included below.

If the City were to continue to purchase coverage equal to its current policy, the City (Airport) would save $39,714 ($121,179 - $81,465) by approving the “base liability” proposal from STARR/Chubb (Note: Starr Aviation Agency Inc. has entered into a joint agreement with Chubb Corp. to offer clients liability insurance coverage). However, if the City determined the additional terrorism and extended war risk coverage should also be purchased, the ACE proposal is the most competitive but would represent a cost increase of $11,815 over what is currently paid today ($132,994 - $121,179). The difference between the lowest base liability proposal (STARR/Chubb) and the lowest base liability plus additional coverages proposal (ACE) is $51, 529 ($132,994 – 81,465).

Prior to September 11, 2001, the terrorism and extended war coverage mentioned above was offered at no additional cost in policies purchased by the City. Following the terrorist attacks, insurance carriers world-wide exercised their options to cancel this additional coverage within the seven-day time frame allowed. When these endorsements were re-offered, along with the federal TRIA endorsement, they were offered with a substantial, additional premium. The City chose to purchase these endorsements when re-offered for the balance of the 2000-2001 policy year and for the 2001-2002 policy year. Even though the additional coverage was expensive, it was not clear if not doing so would cause the City to be in violation of its Airport Revenue Bond insurance covenants. However, the City discontinued this additional coverage as of July 1, 2003 because: (1) it was determined by the City’s bond counsel, after extensive investigation by Jester Insurance Services, Inc. and staff, that doing so would not violate those insurance covenants, (2) the premium being charged appeared excessive when comparing the level of coverage offered to the risk exposure involved and (3) because the insurance carriers could still cancel their endorsements within seven days of a qualifying event, even if the event did not involve the City of Des Moines. While the cost-benefit of the premium charged compared to the potential exposure to risk is more favorable today than in the past, the policy endorsement continues to include the seven-day cancellation provision, and there is no reason to believe that insurance carriers would not exercise this provision if a qualifying event occurs, as they did 2001.

Because there is no “crystal ball” by which to predict the nature of future events as they may impact the need for this coverage, staff has had to consider and choose between two options: (1) be conservative and recommend the purchase of the terrorism and extended war risk coverage in case a coverage-qualifying event were to occur at the Airport or (2) believe that the level of risk to the City for such an event is remote enough as to allow the City the latitude to save money by purchasing only the base liability coverage at a time when Airport revenues are strained by the impact of the current financial crisis here and abroad.

While staff recognizes that the final decision is that of the City Council, staff recommends the purchase of the base liability coverage proposed by STARR/Chubb at a cost of $81,465, saving the City $39,714. In concert with this recommendation, staff will continue to review the need for terrorism and extended war coverage on an annual basis, and if domestic or world events give reason to reconsider the level of risk to which the Airport is exposed with regard to this coverage, staff will recommend its inclusion at the next annual insurance renewal. However, this recommendation does leave the Airport exposed to an uninsured loss if an act of terrorism or war, as defined within these coverages, were to occur at the Airport during that time. By the same token, if the additional coverage is purchased and the act of terrorism or war were to occur somewhere else, it is almost a given that the insurance carriers would once again cancel the coverage, as allowed by policy endorsements, and the premium paid by the City for this additional coverage would be lost. Again, the cost difference between purchasing the lowest base liability proposal (STARR/Chubb) and the lowest base liability plus additional coverages proposal (ACE) is $51,529 ($132,994 – $81,465). On June 2, 2009, the Airport Board received and voted to recommend approval of staff’s recommendation for the July 1, 2009 renewal.

Summary of Airport Liability Insurance Proposals Received:

	FY2009 Cost	Proposed FY2010 Cost
		AIG	ACE	STARR/CHUBB	PHOENIX
Base Liability ($250 mil)	$ 121,179	$ 92,128	$ 117,118	$ 81,465	$ 118,220
Additional Items:
TRIA	$ -	$ 119,766	$ 6,767	$ 81,465	$ 221,750
Extended war ($150-250 mil)	$ -	$ 9,213	$ 9,109	$ 30,120	$ 51,000
Total	$ 121,179	$ 221,107	$ 132,994	$ 193,050	$ 390,970

2. Property Insurance:

The City’s current Property Insurance coverage is purchased through the Federal Insurance Company, which is a member of the Chubb Group of Insurance Companies (Chubb). The policy carries a per occurrence loss limit of $250,000,000 with a per occurrence deductible of $100,000. As the Operating Contractor to the WRA, the City also insures WRA property and allocates premium cost to the WRA, as is done for City Enterprise Fund operations.

During the 2007-2008 policy period, the City experienced two significant property loss events: (1) a fire at the Solid Waste Vehicle Storage Facility and (2) the 2008 Flood. While these losses did not affect the City’s premium for the July 1, 2008 insurance renewal, because the cost of the damages were not yet clear, since that time the fire loss claim has been closed at a cost of $1,466,762 ($860,442 – building repair; $606,320 – truck replacement and repair) and the total cost associated with the flood has been estimated to be $4,000,000 (WRA - $3,000,000; City - $1,000,000). These two loss events, in addition to the total major losses suffered by Chubb and other property insurance carriers due to the Midwest floods of 2008, have caused Chubb to make two significant alterations to its proposed coverage for the July 1, 2009 renewal. It should also be noted that the City purchased its first Property Insurance policy from Chubb just nine days prior to the losses of the “Flood of ‘93”.

The first coverage alteration is related to the current coverage, which insures any vehicle with a replacement cost of greater than $100,000, when that vehicle is in transit or is parked in or within 1,000 feet of an insured building. This is the coverage that covered the garbage packers that were either destroyed or damaged at the Solid Waste Vehicle Storage Facility. As a result of this fire event and the high concentration of insured vehicle replacement value associated with the number of trucks parked in and around that facility when not in use, Chubb has created a separate sub-limit that would be applied to future vehicle property damage. Rather than the vehicles being included in the overall per occurrence loss limit of $250,000,000, the vehicles will have a separate per occurrence loss limit of $5,000,000. To put this in perspective, the City estimates the total replacement cost of vehicles parked in the Solid Waste Vehicle Storage Facility at $8,400,000.

The second coverage alteration is related to the current flood coverage, which insures flood losses up to a maximum of $10,000,000 per occurrence, with a $500,000 per occurrence deductible for high flood risk locations (along the rivers) and $100,000 for low flood risk locations. With two major floods having occurred within fifteen years of each other and the number of locations that lie along the river and the number that were flooded both in 1993 and 2008, Chubb has reduced this coverage to a maximum of $1,000,000 per occurrence with $500,000 on all locations. As indicated below under “Flood Insurance”, after the Flood of ’93, when Chubb first initiated the separate $500,000 deductible for high risk flood locations, the City purchased additional coverage through the National Flood Insurance Program (NFIP) on several locations that experienced flood damage in 1993 to help offset the impact on the separate, higher deductible. However, it should be noted that the NFIP will only insure a facility if at least 51% of the facility’s replacement value is above ground and only pays losses at Actual Cash Value (replacement cost less depreciation), up to a maximum limit of $500,000 for the building and $500,000 for the building contents.

While the first alteration related to property damage to vehicles is significant, its impact is mitigated, to some degree, by the fact that the City only has a concentration of vehicles that exceeds the proposed $5,000,000 deductible located at the recently repaired Solid Waste Vehicle Storage Facility and this exposure has been mitigated because a new sprinkler system was installed as part of the repairs. The new exposure to risk posed by this change in coverage is if a peril such as a tornado were to touch down in the area of the Public Works Compound, Fleet Maintenance Center and Solid Waste Vehicle Storage Facility. If such a catastrophic event occurred, the total vehicle exposure would approximate $15,000,000. While such an event would be catastrophic, the likelihood of such event is considered to be remote. Otherwise, other locations with vehicle concentrations are spread throughout the City with no concentration exceeding $4,000,000 in replacement value. This will change over time as the replacement value increases annually due to the impact of price inflation and could pose a more significant risk since these other high vehicle concentration facilities do not have sprinkler systems.

The flood coverage alteration is much more problematic. The first problem is that, in both 1993 and 2008, the City’s flood losses were about $5,000,000. The new limit leaves the City exposed to significant financial loss if a similar or more catastrophic flood were to occur. The second problem is that, in 1993, the City owned and operated what was then the equivalent of the WRA and the total policy flood coverage limit was available to the City to cover its losses. However, in 2008, the WRA became a separate 28E entity which, by contract with the City as its Operator, purchases its property insurance through the City and, therefore, shares the premium, as well as, the policy coverage limits. This is a problem because the total property values of the WRA that are exposed to the peril of flood far exceed that of the City and the new flood limit of $1,000,000 would have to be shared by both.

As described above, in 2008, it is estimated that the WRA’s portion of the total flood loss will be about 80%. Its portion of the total 2008 Property Insurance premium, based on its percentage of total property value insured by the policy, was about 18%. Up until now, such a disparity between proportion of loss and portion of premium was not an issue because the total flood limit was $10,000,000, and other than a catastrophic flood loss at the main WRA facility, this limit was considered sufficient to cover such losses for both the City and the WRA. However, with a limit of only $1,000,000 to share, this becomes an issue. If a similar flood to 2008 were to occur, the limit would not be sufficient to cover all losses and the City would have to allocate to the WRA a portion of the $1,000,000 limit. That portion would reasonably be equal to the portion of the premium paid by the WRA. Using the premium allocation of 2008 as an example, the WRA would be allocated $180,000 of coverage and the City $820,000. Under the proposed flood coverage reduction offered by Chubb, the WRA would be significantly under insured, as well as the City, but to a lesser extent

In order to address the coverage alterations described and particularly that of flood coverage, the City went to market to see if other competitive coverage was available. Of the few insurance carriers that write policies on accounts as large as the City, Travelers Property and Casualty Insurance Co. expressed interest. The basic coverage offered by Travelers is comparable to that provided under the City’s current policy with Chubb but the flood coverage offered by Travelers is better than that offered by Chubb for this renewal. Travelers offered per occurrence flood coverage of $2,500,000 with a $500,000 deductible for high risk locations and $5,000,000 with a $250,000 deductible for all other locations. While Travelers’ flood coverage for high risk locations (Flood Zones B and X is two and a half times that offered by Chubb and, under the current premium allocation formula, would increase the WRA’s coverage from $180,000 to $450,000 and the City’s coverage from $820,000 to $2,050,000, it still leaves the WRA significantly under insured. Therefore, Travelers was asked if they would consider adding an additional $2,500,000 limit for the WRA. In return, Travelers offered to increase the City’s total limit for high risk locations from $2,500,000 to $5,000,000 per occurrence for an additional premium of $50,000, leaving the per occurrence deductible at $500,000. Upon discussing this offer, staff determined that since the WRA represents the highest total insured property value located in the high risk area, the WRA should be offered the full additional limit for $50,000 in additional premium. This would increase the WRA’s total coverage limit to $2,950,000. However, it must be noted that the Travelers’ proposal for high risk location excludes coverage for Principal Park. To address this exclusion, staff will apply for insurance through the National Flood Insurance Program to cover Principal Park. While the maximum limit will be $500,000 for building and $500,000 for contents at Actual Cash Value, the asset most at risk is the playing field and there is no insurance available that will cover the field. In addition to the above, Travelers offered a $60,000,000 per occurrence limit for property damage to vehicles compared to the $5,000,000 offered by Chubb.

Travelers' has quoted a premium of $550,954 compared to Chubb’s renewal premium for the reduced coverage described above of $555,706. Travelers’ quote is $ 4,752 lower than Chubb’s. Based on the additional flood coverage offered and the proposed premium, staff recommends approval of the Travelers Property and Casualty Insurance Co. While the Travelers’ policy offers more flood coverage than does the Chubb policy, it is still well below the $10,000,000 included in the City’s current property insurance policy and that needed to cover the City and the WRA in a major flood event. As a result, staff will continue to explore additional options to see if there is an affordable means to supplement the coverage provided by the Travelers policy for both the City and the WRA. It may be that a combination of excess flood insurance and self-insured reserves will be needed to adequately fund potential flood losses.

In addition to the property insurance coverage changes described above, the premiums offered were also affected by a five percent, across-the-board increase in the replacement value of all property to account for inflationary pressure on construction costs, as well as, the addition of improvements made to the following facilities: two additional skywalk spans, additions to Blank Park Zoo, the Aircraft Maintenance Facility leased to Mesaba Air, the new Salt Storage Facility and the office space rental at 600 E. Court Avenue, for those employees relocated from the basements of City Hall and the Armory Building. The total replacement value of City property increased from $784,032,080 last fiscal year to $845,676,062 this fiscal year, or $61,643,982.

3. Enterprise Fund Automobile Liability Insurance:

As indicated above, Solid Waste Collection and Recycling, Sanitary Sewers, Storm Water Utility, Airport vehicles when driven off Airport premises, WRA and Housing Services are covered by a $2,000,000 Automobile Liability Insurance policy with a per occurrence deductible of $5,000.

4. Excess Liability Insurance:

Currently, the City’s Excess Liability Insurance coverage provides for a per occurrence limit of $10,000,000 and an aggregate (policy maximum) limit of $10,000,000. The City’s per occurrence self-insured retention is $2,000,000 for all operations other than the following Enterprise Fund operations: Solid Waste Collection and Recycling, Sanitary Sewers, Storm Water Utility and for Airport vehicles when driven off Airport premises. The WRA and Housing Services are also covered by this policy and premiums are allocated to each accordingly. Each of these Enterprise Funds carries a $2,000,000 Automobile Liability Insurance policy with a per occurrence deductible of $5,000. The General Liability exposure of these funds is subject to the City’s $2,000,000 self-insured retention. However, because the Wastewater Reclamation Facility and Solid Waste facilities have restricted access to the public, the sanitary and storm sewers are primarily underground infrastructure and the Airport coverage is strictly for automobiles being driven off of Airport premises, the General Liability exposure is sufficiently low and self-insuring has been deemed an appropriate and cost effective risk financing technique.

5. HazMat/Mutual Aid Workers Compensation Insurance:

The distinction between the HazMat/Mutual Aid Occupational Injury Insurance and the Excess Workers Compensation Insurance policies is that the HazMat/Mutual Aid Insurance covers Fire Department personnel when they respond to mutual aid requests. This coverage extends from the time Fire Department personnel leave their station to the time they return. For HazMat services, the cost of this coverage is apportioned to those counties having 28E Agreements with the City for these services. Therefore, this coverage is cost-neutral to the City. The City’s Excess Workers Compensation Insurance covers Fire Department personnel when responding to City HazMat and Fire service needs within the City’s limits.

6. Excess Workers Compensation Insurance:

The City purchases Excess Workers Compensation Insurance to cover losses that exceed the City’s $450,000 per claim self-insured retention. This policy covers the indemnity (lost time wages and non-medical expenses) and medical expenses related to occupational injuries incurred by City employees, with the exception that only medical expenses are covered for sworn Police and Fire Department employees. Only medical expenses are included for Police and Fire because their indemnity expenses are covered under Chapter 411 of the Code of Iowa. Indemnity losses are funded through the Municipal Fire & Police Retirement System of Iowa, to which the City is required to make financial contributions equal to a State-mandated percentage of salaries paid to sworn Police and Fire personnel.

7. Flood Insurance:

To cover the additional per occurrence Property Insurance deductible of $500,000 for the facilities described above, the City purchases flood insurance through the National Flood Insurance Program (NFIP). The premium increased this year primarily because the replacement values at these facilities were updated to reflect the City’s current estimate of replacement value.

8. Crime Insurance:

To cover potential losses due to employee theft, computer fraud, robbery, etc., the City purchases Crime Insurance with a limit of $1,000,000 per occurrence and a $25,000 per occurrence deductible.

Staff’s Recommendation:

Staff recommends Council approval of the following Schedule of Insurance:

Schedule of Insurance:

FY 08-09 FY 09-10 +(-) .

1. Special Excess Liability Insurance $ 187,653 $184,272 ($ 3,381)

*(Everest National Insurance Co.)

2. Auto Liability Insurance (EFs listed above) $ 75,855 $ 77,469 $ 1,614

*(St. Paul/Travelers Insurance Co.)

3. Airport Liability Insurance $ 121,179 $ 81,465 ($ 39,714)

*(AIG Aviation)

4. Property Insurance $ 469,144 $ 550,954 $ 31,810

*(Travelers Insurance Co.)

5. Crime Insurance $ 5,245 $ 5,245 $ -0-

*(Travelers Insurance Co.)

6. Flood Insurance $ 26,646 $ 24,630 ($ 2,016)

*(National Flood Insurance Program)

7. HazMat/Mutual Aid $ 14,911 $ 15,646 $ 735

*(American International Group – AIG)

8. Excess Workers Compensation Insurance $ 144,578 $ 154,685 $ 10,107_

*(Safety National Casualty Corp)

Total $1,045,211 $1,094,366 $ 49,155

* Recommended insurance carrier

PREVIOUS COUNCIL ACTION(S):

Date: June 23, 2008

Roll Call Number: 08-1116

Action: Annual Insurance renewal for property and casualty insurance, Jester Insurance Services, Inc., through July 1, 2009. (Council Communication No. 08-373) Moved by Vlassis to adopt. Motion Carried 7-0.

BOARD/COMMISSION ACTION(S):

Date: June 2, 2009

Roll Call Number: Resolution #A09-101

Action: Approved staff recommendation for changing Airport Liability Insurance carrier.

ANTICIPATED ACTIONS AND FUTURE COMMITMENTS:

Annual Property and Casualty Insurance Renewal for July 1, 2010.

For more information on this and other agenda items, please call the City Clerk’s Office at 515-283-4209 or visit the Clerk’s Office on the second floor of City Hall, 400 Robert D. Ray Drive. Council agendas are available to the public at the City Clerk’s Office on Thursday afternoon preceding Monday’s Council meeting. Citizens can also request to receive meeting notices and agendas by email by calling the Clerk’s Office or sending their request via email to cityclerk@dmgov.org.

ATTACHMENT

PREMIUM COMPARISON
	Actual	Quoted
	Premium	Premium
	08-09	09-10	Diff
Description	Total	Total	+ (-)
EF Specific & EF/GF
Allocated Premiums:
Parking Garages	$ 72,374	$ 63,142	$ (9,232)
Solid Waste Collection	$ 36,052	$ 31,762	$ (4,290)
Solid Waste Recycling	$ 15,088	$ 3,149	$ (11,939)
WRA	$ 140,115	$ 135,356	$ (4,759)
Sanitary Sewer	$ 21,294	$ 36,435	$ 15,141
Storm Sewer	$ 31,278	$ 33,766	$ 2,488
Grandview Golf	$ 1,201	$ 1,105	$ (96)
Waveland Golf	$ 1,971	$ 1,805	$ (166)
Housing Services	$ 10,310	$ 24,007	$ 13,697
Airport	$ 109,577	$ 122,048	$ 12,471
Total EF	$ 439,260	$ 452,575	$ 13,315
Total GF	$ 443,215	$ 470,050	$ 26,835
Sub-total	$ 882,475	$ 922,625	$ 40,150
Airport Liability Policy	$ 121,179	$ 81,465	$ (39,714)
WRA-Add'l Flood Ins	$ -	$ 50,000	$ 50,000
TOTAL	$ 1,003,654	$ 1,054,090	$ 50,436
Separate GF Policies:
Flood (6 bldgs)	$ 26,646	$ 24,630	$ (2,016)
Haz Mat (mutual aid)	$ 14,911	$ 15,646	$ 735
Total	$ 41,557	$ 40,276	$ (1,281)
GRAND TOTAL	$ 1,045,211	$ 1,094,366	$ 49,155