HomeMy WebLinkAboutRisk Management Information Packet r
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RISK MANAGEMENT
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INFORMATION PACKET
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League of Minnesota Cities
Insurance Trust
145 University Avenue West
St. Paul, MN 55103
651
Pho ne: (651) 281-1200
Fax: (651) 281-1298
Website: http:/lwww.imnc.org
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II League of Minnesota Cities
Insurance Trust
iic 145 University Avenue West,St.Paul,MN 55103-2044
Ii (651)281-1200 • (800)925-1122
Leagguc 01.31;n eth9 Fax:(651)281-1298 • TDD:(651)281-1290
Ii www.lmnc.org
RISK MANAGEMENT INFORMATION
I THINGS TO THINK ABOUT WHEN RENEWING YOUR
CITY'S PROPERTY/CASUALTY COVERAGE
ILMCIT tries to make buying coverage for the city's property and liability exposures as simple
and straightforward as possible,but it can still be a complicated and confusing business.
I Unfortunately, overlooking or misunderstanding some of these points can result in an unpleasant
surprise at claim time.
IThis memo is intended to provide a list of issues that should be considered when renewing your
coverage. In most cases, the need for the city to take a specific action is described.
IProperty coverage issues
IWhat to schedule
At renewal, a schedule of building/contents and property in the open will be attached to the
I renewal application. Please review this schedule for accuracy. It may not include some recent
changes, or there may be a need to delete, add or modify items on the schedule.
IEssentially, the city needs to provide three lists of property to be covered:
• Each building for which you want coverage. Any building you list on the schedule, except
I for vacant buildings,is covered for replacement cost, along with the building's contents.
(Remember to include any buildings or space the city rents and occupies; even if you're not
responsible for the building itself, you still need coverage for the contents.)
I • Each piece of mobile equipment with a replacement cost of more than $25,000. "Mobile
equipment"means property other than vehicles that's not part of a building or the building's
I contents. It's basically the kind of stuff that would traditionally have been covered by an
"inland marine"form. (It also includes police dogs.) Items of mobile equipment with a
replacement cost of less than $25,000 can be covered automatically without having to be
I specifically scheduled if the city wishes. The city needs to indicate on the application
whether or not they want coverage for under-$25,000 items.
I • Property in the open. This is a"catch-all"category of property. It's essentially stuff that
isn't a building and that doesn't move around. Hydrants, signs, streetlights, flagpoles,
fences, CD sirens,tennis nets,picnic shelters, etc. are typical examples. You need to identify
I the property in the open that you want to cover. This can be done either by listing individual
items (e.g., "the `Welcome to Mosquito Heights' sign on Main Street"),by location(e.g.,
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"property in the open at Mosquito Heights City Park" or"property in the park except picnic
benches"), or by some other general description (e.g., "all street lights in the city").
Coverage limits per building
Under the LMCIT property coverage,there is a specific dollar limit on the coverage for each
individual building. It is therefore important that the city review those individual limits to make
sure they're adequate. Pay special attention to buildings that have been remodeled or expanded
recently;buildings which are historically significant or which have unique architectural features;
and buildings which contain unusual amounts of fine arts or EDP equipment.
The schedule of covered buildings lists the"estimated replacement cost" for each building. The
"specific property limit" is 150%of the estimated replacement cost listed on the schedule for that
building. That is the most LMCIT will pay to repair or replace the building and contents if the
building is damaged or destroyed.
In most cases,the estimated replacement cost figures were established by the professional 1
appraisals LMCIT conducts, updated as appropriate to reflect subsequent increases in
construction costs. For recently-constructed buildings, it may be based on the actual
construction cost.
For most typical city buildings,the estimated replacement cost figures should be reasonably
accurate. The 150%provision provides a substantial safety margin,but it's still important to
review the estimated replacement cost figures for each building to make sure they're reasonable.
If a building has been remodeled or expanded,make sure the estimated replacement cost figure
reflects the effect of those changes.
The estimated replacement cost figures do not reflect the increased costs that may be necessary
to reproduce the materials, design, and/or historical construction techniques of a historically
significant building, or any unique or unusual architectural features such as special woodwork,
murals, decorative stonework or metalwork, etc. On some older buildings,the need to bring a 1
damaged building up to current building code standards could also increase the cost. If you have
a historical building that you'd want to be able to reproduce as it is if it were damaged or
destroyed, you need to make sure the scheduled value reflects the higher cost of doing that 1
historical reproduction. If you have questions or concerns, contact your LMCIT underwriter.
Where necessary, LMCIT will arrange for a professional appraisal to estimate the "historical
reproduction"value of a building.
Beside the specific limit for the building, the following sub-limits apply to coverage for specific
types of building contents. These sub-limits are within the specific property limit.
Coverage Sub-limit
Computer equipment, data, and media $1,000,000 per occurrence
Fine arts $500,000 per occurrence
Personal Effects $25,000 per occurrence/$2,500 per employee
Business personal effects $25,000 per occurrence/ $5,000 per employee
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IIf a building contains unusual amounts or values of computer equipment or fine arts,you should
make sure both that the sub-limit is sufficient to cover these items, and that the estimated
Ireplacement cost shown on the schedule for that building also reflects the value of these items.
The LMCIT memo "LMCIT Property Coverage Limits"discusses this in greater detail. It's
Iavailable at the LMC website or by calling LMCIT.
IVacant buildings
If a building is vacant for 60 days or more, coverage for that building is limited to the building's
fair market value,rather than 150%of replacement cost. The premium for a vacant building is
Ibased on the fair market value rather than on the replacement cost but a higher rate applies.
I A building that's under construction or renovation is not considered to be vacant. Also, a
building that's intended to be used only on a seasonal basis—a park shelter, for example—is not
considered to be "vacant"during the months when it's not in use.
IIf a building becomes vacant during the year, or if a vacant building becomes occupied during
the year, cities should notify their LMCIT underwriter. If the change in status results in a lower
I premium,we'll issue a premium credit. If it results in an increased premium,the increase will be
waived until renewal. Keep in mind though that after a building has been vacant for 60 days,
coverage is automatically limited to the fair market value, regardless of whether you've notified
ILMCIT that the building is vacant.
The LMCIT memo "Property Coverage Limits"discusses coverage for vacant property in more
Idetail.
Newly-acquired or newly-constructed buildings and mobile property
IThe city's LMCIT property coverage automatically covers most property that the city acquires or
constructs during the year, so in most cases that property doesn't have to be reported and
I scheduled until the city's next renewal in order for the city to have coverage for it. However,the
city must immediately report and schedule the following in order to have coverage:
I • Any building that the city acquires or completes construction of during the year, if the
building's value is more than$5 million.
I • Any item of mobile property that the city acquires during the year if the equipment's value is
more than $250,000.
IBuilders risk
The LMCIT property coverage provides automatic "builders risk"coverage for a building in the
Icourse of construction, alteration,repair, or expansion,if the estimated total project cost is less
than $2 million. An under-$2 million construction project that's begun during the year does not
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have to be reported and scheduled in order for the builders risk coverage to apply. However, that
building must be included in the city's schedule of property at the city's subsequent renewal. I
If the estimated total project cost for a building construction, alteration, renovation, or expansion I
project is more than $2 million, the city must either contact the LMCIT underwriter to arrange
for builders risk coverage,purchase builders risk coverage from another source, or arrange for
the construction contractor to provide the builders risk coverage.
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Note: Remember that there is NO automatic builders risk coverage for the building if the project
cost is over$2 million. That is, the city does not have an automatic $2 million limit of builders
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risk coverage for a$5 million construction project. The LMCIT memo "Insurance and Liability
Considerations When Hiring Contractors" discusses this and other aspects of construction
contracts in more detail.
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Other limits
The LMCIT property coverage includes sub-limits or additional limits on certain types of
properties, damages, or exposures. These limits are summarized below. These standard sub-
limits or additional limits should be sufficient for most cities,but in most cases they can be
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increased by endorsement if necessary. The city should review whether any of the other sub-
limits or additional limits need to be increased in order to meet its particular needs.
Coverage Limit I
Covered property in transit $250,000 per occurrence
Unscheduled location $500,000 per occurrence
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Golf course property $100,000 per occurrence
Newly acquired covered property Lesser of$5,000,000 or 150%of the
purchase price,per location I
Newly acquired mobile property $250,000 per unit
Buildings under construction $2,000,000 per location
Asbestos clean up $250,000 per location
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Loss of revenue/extra expense/expediting expense $5,000,000 per occurrence
Loss of revenue,etc.—electric utilities $500,000 per occurrence
Demolition and debris removal/physical damage to 25%of the estimated replacement cost of the
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covered property covered property per occurrence.
Debris removal/no physical damage to covered property $50,000 per occurrence
Extraordinary expense $100,000 per annual aggregate I
Leasehold interest $500,000 per location
Pollutant clean-up and removal $100,000 per location
Errors Lesser of 90% of the loss or$500,000 I
Rental reimbursement $25,000 annual aggregate
Arson reward $5,000 per occurrence
Accounts receivable $500,000 per location I
Valuable papers and records $500,000 per location
Utility service interruption $100,000 per occurrence
Terrorism $1,000,000 annual aggregate I
Criminal acts other than vandalism $1,000,000 annual aggregate
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Crime coverage
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All cities automatically receive$100,000 of coverage for crime losses, as part of the property
coverage. This should be sufficient for most cities,but higher limits are available if needed.
Flood and water damage
The city needs to identify whether or not each building is in a"flood hazard area". A"flood
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hazard area"is an area that is either within the 500-year floodplain as mapped by NFIP, or is in
an unmapped area. On a case by case basis,buildings in unmapped areas can be treated as not
being in a flood hazard area if you can provide information to the underwriter showing that it's
not at significant risk of flooding.
Buildings not in a flood hazard area are covered for water damage, including floods. Buildings
in a flood hazard area are covered for water damage except for flood.
For any building in a flood hazard area,the city must decide whether to add the supplemental
flood coverage which LMCIT makes available as an option. The supplemental flood coverage
"wraps around"the NFIP flood insurance,picking up flood damages that the NFIP policy
doesn't cover. The supplemental flood coverage is available only if the city has purchased NFIP
flood insurance for the building at the maximum limit available.
In considering NFIP flood insurance and the LMCIT supplemental flood coverage,there are two
' important points to keep in mind regarding FEMA disaster assistance:
• If a city building that's in a"Special Flood Hazard Area(i.e.,the 100-year flood plain)is
' damaged by flood,FEMA disaster assistance will be reduced by the amount that NFIP flood
insurance would cover, whether or not the city actually has that NFIP insurance. In other
words, for a building in the 100-year flood plain, FEMA won't pay for any flood damage the
' city could have insured with NFIP. The city should strongly consider NFIP flood insurance
for buildings in the 100-year flood plain.
' • If FEMA has previously provided assistance for flood damage to a building not in the 100-
year flood plain, FEMA will not provide any assistance for damage to that building caused
by a subsequent flood unless the city has flood insurance on that building. The city therefore
' should strongly consider NFIP insurance for any building within the 500-year flood plain if
FEMA has previously paid for any flood damage to that building.
' NFIP coverage through LMCIT
National Flood Insurance Program(NFIP) flood insurance is now available to cities through
' LMCIT. The premiums for NFIP coverage through LMCIT will be the same from any insurance
company, but the premiums and losses for NFIP flood insurance through LMCIT would be
included in calculating the city's share of any future LMCIT property/casualty program
' dividends.
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The cost of NFIP flood insurance continues to be a significant issue. NFIP now offers optional
deductibles of up to $50,000,which can reduce the premium substantially. If a city were to
purchase NFIP flood insurance with a large deductible and a flood loss to that building were to
occur, the city could then use the "extraordinary expense" coverage provisions of the LMCIT
property coverage to finance the city's cost under the deductible. For some cities, this approach
of combining high-deductible NFIP coverage with the LMCIT extraordinary expense coverage
might be a practical way to obtain flood insurance at a reduced cost.
The LMCIT memo "New Coverage for Extraordinary City Expenses" explains this coverage in
more detail. It's available through the LMCIT website or by calling LMCIT.
Golf courses
A golf course must be listed on the schedule of "property in the open"in order for property such
as greens,tees, etc. to be covered. The coverage limit for this golf course property is $100,000,
including costs of debris removal. Coverage for loss of revenue, extra expense, and expediting
expense is not subject to the $100,000 limit on golf courses,but is subject to the $5,000,000 per
occurrence limit.
Property in the city's care, custody and control
Personal property of others in the city's care, custody and control is included in the definitions of
"building/contents" and "mobile property" for purposes of coverage. However, there are two
types of property in the city's care, custody and control that must be specifically scheduled in
order to have coverage: '
• Mobile property valued at greater than$25,000 replacement cost; and
• to others, except for autos which the city has borrowed,rented or
Automobiles belonging t o p y ,
leased for city use. (This is discussed in more detail in the section on auto coverage issues.)
Trees and shrubs
Trees and shrubs within 100 feet of a covered building are covered as part of the building. If it '
wishes,the city can cover other trees and shrubs by identifying the trees and shrubs to be covered
on the schedule of"property in the open". The trees or shrubs to be covered must be identified
specifically(e.g., "trees in Mosquito Heights Memorial Park"). The city also needs to provide a
reasonable estimate of the number of trees or shrubs to be covered.
Utility poles and wires ,
LMCIT's standard property coverage excludes coverage for damage to city utility poles and
lines. In the past,this has left cities with electric utilities with a significant uncovered loss in the
event of a widespread ice or windstorm that downed city lines.
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To help avoid this potential problem, LMCIT offers optional property coverage for city utility
poles and transmission and distribution lines. The coverage is subject to a$50,000 deductible
per occurrence and a$500,000 limit. The rates for the coverage are based on the number of
' miles of transmission and distribution lines in the city.
Municipal electric utilities—loss of revenue/extra expense coverage limit
' The LMCIT property coverage includes $5 000 000 of coverage for loss of revenue, extra
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expense, and expediting expense arising from covered damage to city property. However, a
' special sub-limit of$500,000 applies to loss of revenue/extra expense claims arising from
covered damage to the property of a municipal electric utility.
' Higher limits are available for municipal electric utilities, but there will be an additional
premium charge. Contact your LMCIT underwriter for information.
' Keep in mind that the loss of revenue/extra expense coverage would not apply to a loss or
revenue or extra expense resulting solely from a machinery breakdown(i.e., from a"boiler and
' machinery"type loss). The loss of revenue/ extra expense coverage is only triggered if there has
been damage of a type that is covered under the basic LMCIT property coverage document, such
as fire,windstorm, etc. (The machinery breakdown coverage is discussed later in this memo.)
' Municipal electric utilities—replacement cost options
' In order to give municipal electric utilities more affordable coverage which better fits their
needs, LMCIT has developed some new agreed amount replacement cost coverage options for
generation facilities. Briefly, under these options,the coverage limit and the premium are based
' on the cost of providing the generating capacity the utility needs,rather than on the cost of
replicating the actual facility the utility currently has. This might make sense in a situation
where the utility's existing facility has significantly more capacity than what the utility actually
' needs, or in a situation where a different and newer technology can provide the same generating
capacity for less than the cost of replicating the existing facility's older technology.
' The LMCIT memo " Electric Utility Coverage Options" discusses these options in greater detail.
It's available at the LMCIT website or by calling LMCIT.
' Machinery breakdown ("boiler and machinery") coverage
LMCIT offers Machinery Breakdown Coverage to protect cities from the unexpected cost and
' expense associated with equipment and machinery breakdowns. The Machinery Breakdown
Coverage,which we used to call"boiler and machinery" coverage, was originally developed by
the insurance industry to cover the risks of steam boiler explosions. As the coverage has
' developed,besides explosion risks from steam boilers or other pressure vessels,the coverage
now provides protection against the risks of breakdowns of a wide variety of machinery and
equipment, such as:
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• wastewater system equipment(e.g., pumps, agitators, air systems, electronic controls,
motors, etc.);
• air conditioning, refrigeration, and heating equipment;
• water system pumps,motors, etc.;
• electrical wiring,breakers,transformers, switches, etc.;
• telephone switchboard and related equipment; and
• compressors for filling fire department air packs. '
Two types of costs are covered:
• the actual cost of repairing replacing the equipment as quickly as possible; and
• lost income or extra expense incurred to continue operations while the equipment is down.
In considering whether to purchase machinery breakdown coverage, a city should look at how
much it would cost to replace various pieces of machinery,what extra expenses you might incur
to continue operation while a key piece of equipment is being repaired,how long it might take to
get repairs or replacement equipment, and so on. If your city's budget can handle these kinds of
expenses, it probably doesn't make sense to carry the coverage. On the other hand, if the
possible cost to repair or replace a particular piece of machinery is more than what your budget
can comfortably absorb, machinery breakdown coverage is worth considering.
Machinery breakdown coverage for other specialized equipment '
Cities may also have other types of equipment, such as equipment for municipal gas or district
heating systems, or medical equipment such as MRIs. These types of equipment can also be
covered,but must be evaluated separately. Special coverage terms, deductibles, and premiums
may apply. '
Machinery breakdown coverage for municipal electric utilities
Municipal electric utilities pose some special issues with regard to machinery breakdown '
coverage. The needs, problems, and risks of different municipal electric utilities vary
substantially, and the coverage terms, limits, deductibles, exclusions, and pricing must therefore
be individualized as well.
LMCIT can provide machinery breakdown coverage for Diesel generating equipment,but not for
other types of electrical generation equipment such as steam or gas turbines,wind turbines, or
hydro-electric facilities. For utilities that have these other types of generation equipment,
LMCIT will assist in placing the machinery breakdown coverage with HSB. If the utility has
both Diesel and other types of equipment, the entire risk will be placed with HSB.
When LMCIT is providing machinery breakdown coverage for Diesel generation facilities,
newly-acquired Diesel equipment will be automatically covered for up to 90 days, subject to a
$5,000,000 limit. However, the newly acquired equipment must be reported to LMCIT within
that 90 day period in order to have continued coverage. In general, any newly-acquired
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' equipment should be reported to the underwriter as soon as possible, regardless of whether the
machinery breakdown coverage is being provided by LMCIT or by HSB.
Two other points should be noted:
1. Each utility's equipment has to be evaluated individually. Certain equipment may not
qualify for breakdown coverage because of its age or condition.
2. At this time,neither LMCIT nor HSB is able to provide coverage to electric utilities for loss
of income or extra expense resulting from a machinery breakdown loss.
Independent administrative boards
Administrative boards, commissions, agencies and authorities and their properties are not
covered automatically under the city's LMCIT Property, Inland Marine, or Auto Physical
' Damage coverages. LMCIT can provide these coverages for these entities and their properties,
but only if the city specifically indicates which boards or commissions are to be covered and
under what type of coverage.
' Auto coverage issues
Auto physical damage coverage
The LMCIT auto physical damage coverage now applies automatically on a blanket basis to all
vehicles that the city owns, leases, rents, or borrows. Premiums for the year will be based on the
' list of vehicles the city provides at the beginning of the year. Vehicles the city acquires during
the year will be covered automatically, and do not need to be reported at the time or scheduled
for the coverage to apply. (Of course,they do need to be reported at the subsequent renewal.)
' With respect to auto physical damage coverage,there are three situations which must be reported
to LMCIT and specifically scheduled or endorsed:
' • Any individual vehicle which the city wishes to cover for replacement cost.
' • Any owned, borrowed, rented, or leased vehicle for which the city does not want coverage
for physical damage. In other words, the"default"is that the city will automatically have
ACV coverage on every vehicle the city owns, rents, leases, or borrows,unless the city tells
' LMCIT otherwise. Note: When a city employee or volunteer uses his/her own vehicle on
city business, that vehicle is not considered to be a"borrowed"vehicle and is not covered for
' physical damage.
• Any non-city-owned vehicle which is not borrowed, rented, or leased for city use,on which
the city wants coverage for physical damage.
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An example of the latter might be an auto that the city has seized as evidence or impounded for a
traffic or parking violation. In order to have physical damage coverage on these vehicles,the
vehicles would need to be specifically scheduled. Keep in mind though that the city's liability
coverage would in any case apply to damage to a seized or impounded vehicle if the city is
legally liable for that damage; i.e., if the damage was due to some negligence on the city's part.
In most cases, there's seems little reason from a public policy standpoint why the city would
want to add physical damage coverage on impounded vehicles, since the liability coverage will
already pick up whatever damage to those vehicles the city is liable for.
No-fault(PIP) coverage '
LMCIT automatically provides no-fault(PIP) coverage on any vehicle for which the city is
required by law to carry no-fault coverage. In general, state law requires no-fault coverage on
every registered vehicle. However, certain public safety vehicles "the general appearance of
which is unmistakable—i.e., fire vehicles, ambulances, and marked police vehicles—are not
required to be registered, and therefore are not required to be covered by no-fault. Unmarked
squad cars and police undercover vehicles are required to be registered, and are therefore
automatically covered by no-fault.
If the city wishes to have no-fault coverage on its fire, ambulance, or marked police vehicles,
you must specifically request and schedule that coverage. The cost is 11% of the auto liability
premium for that vehicle. '
In general, a city employee operating a city vehicle on city business will be covered by work
comp if s/he were injured in an accident. However, one possible reason a city may wish to have '
no-fault protection in place on these vehicles is to protect passengers who are not city employees.
Another possible reason for adding no-fault coverage where it's not required by statute is if the
city allows off-duty use of the vehicle by the employee; a take-home squad car might be an
example. Of course, in many cases a passenger or off-duty city employee may also already be
covered by no-fault coverage through a private auto insurance policy on his/her own vehicle.
Another situation in which the no-fault coverage can cover a non-employee is if a city vehicle
were to hit a pedestrian who doesn't have no-fault coverage of his own.
Uninsured/underinsured motorist coverage
As with no-fault, LMCIT automatically provides UM/UIM coverage on any vehicle where it's
required by statute. But, again like no-fault, the statutes don't require UM/UIM coverage on
those public safety vehicles which are not required to be registered. We believe it makes sense
for most cities to carry the minimum limit rather than providing higher limits, and to cover only
those vehicles where it's required by statute. -
The UM/UIM coverages are designed to help assure that an injured driver will be compensated if
s/he 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 other driver should have had. But
in most cases an injury to a city employee driving a city vehicle would be covered by workers'
compensation, and the amounts that individual would recover from UM/UIM would be in
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Iaddition to the medical, indemnity, and other benefits paid under work comp. In many cases,
that would amount to a double recovery for the individual's injuries.
The city has the option to add UM/UIM coverage on vehicles where it's not required, or to
increase the UM/UIM coverage limit from the basic $50,000 to $1,000,000. The cost is $4 per
I vehicle to add basic UM/UIM coverage on unregistered public safety vehicles, and $10 per
vehicle to increase the UM/UIM limit to $1,000,000.
I A city might decide add UM/UIM coverage on vehicles where it's not required, or to carry a
higher UM/UIM limit for a couple reasons:
I • if the city believes that workers' compensation benefits are insufficient to compensate their
injured employees; or
t • 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 cases
the passenger's own UM/UIM would also respond.)
IAutomobile liability covera g e—employees'or volunteers'vehicles used on city business
Cities have the option to make the LMCIT auto liability coverage primary for privately owned
I vehicles used on city business by specified individuals or groups in specified circumstances (e.g.,
firefighters responding to calls). There is a premium charge per vehicle for this optional
Icoverage.
This option may make sense for situations where an employee or volunteer uses his/her own
I vehicle on city business but the city doesn't reimburse mileage for that use. A volunteer
firefighter responding to an emergency call is a common example of that situation.
I On the other hand, it probably doesn't make sense for the city to make the LMCIT auto liability
coverage primary for situations where the city is reimbursing the employee or volunteer for
mileage. In that situation,the city is effectively paying part of the individual's own liability
I insurance premium, since that cost is included in the mileage reimbursement rate. Since the city
is paying a proportionate part of the premium of the individual's liability insurance, it's
reasonable that the city should receive the benefit of that insurance.
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Liability coverage issues
IFireworks displays
ICities sometimes put on fireworks displays for Independence Day or other celebrations. The
city's LMCIT liability coverage document excludes coverage for any liability arising out of the
city's ownership, sponsorship, or operation of fireworks displays. This exclusion applies both if
Icity employees or volunteers are setting off the fireworks, and if the city itself sponsors or
contracts for a fireworks display. (The exclusion does not apply to a fireworks display that is
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sponsored and operated by someone else. Where the city's only role is in regulating, licensing,
or providing public safety services, the city's LMCIT coverage will cover liability the city incurs
because of those activities.)
If the city is involved in a fireworks display as an operator or as a sponsor, the city won't ,
automatically have coverage for liability for any damages arising out of the display,unless the
city takes special steps to put fireworks display coverage in effect.
There are a couple possible solutions to this problem. The preferred approach is for the city to
contract with an experienced, reputable contractor to handle the fireworks display. The city
should make sure that the contractor has adequate insurance limits, and that the city is named as
an"additional insured"under the contractor's insurance. At the city's request, LMCIT can then
also delete the fireworks exclusion from the city's coverage for a small cost. The city's LMCIT
coverage would then apply as excess over the contractor's coverage; this would give the city
additional protection in case of a very large claim, or if the contractor's insurance company went
broke, etc. '
Unfortunately,it's not always possible for cities to hire a private contractor to handle the
fireworks display. Sometimes the only feasible option is for the city to put on the display itself,
using city staff and volunteers to handle the display. In this situation, LMCIT can by
endorsement provide the needed liability coverage to the city,provided that the city has
adequately trained staff and a safe location for the display. '
Cities considering a fireworks display should contact LMCIT as early as possible. This will give
LMCIT's loss control consultants time to work with the city to help make the display as safe as
possible; and it will give LMCIT's underwriters time to evaluate the risk properly to determine
whether LMCIT will be able to provide the requested coverage.
Joint powers contracts
The city's LMCIT liability coverage does not apply to "liability arising out of the activities of a '
joint powers entity." Unless the joint powers entity has arranged for coverage in its own name,
neither the city and its officers and employees,nor the joint entity and its officers and employees
will have coverage for a liability claim or suit arising out of the joint powers entity's activities.
To avoid this problem, if the city is involved in a joint powers contract that creates a separate
joint powers entity, make sure that the entity has liability coverage. When LMCIT issues
liability coverage to a joint powers entity,that coverage protects not only the joint powers entity
and its officers, employees, and volunteers,but also the constituent political subdivisions and
their respective officers, employees, and volunteers, for claims arising out of the joint entity's
activities.
Keep in mind that not every joint powers contract creates a joint powers entity. Most mutual aid '
contracts do not, for example. Often too, cities enter contracts under which one political
subdivision provides certain services to another in return for a fee; again, this kind of contract
typically won't create a new joint entity, though there are exceptions.
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I Cities should review all of the joint powers contracts they are involved in, including mutual aid
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agreements, service contracts, etc. Remember: the name given to a contract doesn't necessarily
Itell you what's in the contract. We've seen examples of contracts that were called mutual aid
agreements,but which very clearly had the effect of creating a new joint operating entity. You
Ineed to look at what the contract actually does,not just what it's called.
In very general terms, the joint powers coverage exclusion will come into play if the joint powers
Icontract creates a separate board with power to do any of the following:
• receive and expend funds;
• enter contracts;
• hire employees;
• purchase or acquire real or personal property; or
I • sue or be sued.
If you're not sure about a particular contract, send LMCIT a copy. We'll review it and give you
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a definite answer as to whether the city's own coverage will apply or if the contract creates a
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joint entity that needs its own coverage.
I Independent administrative boards
Statutes and some charters allow cities to create independent administrative boards to manage
Icertain city operations; utility commissions and hospital p boards are common examples. Other
statutes allow cities to create separate public corporations for certain purposes; Port Authorities,
HRAs, and EDAs are examples. The statutes generally give these boards and authorities full
power to manage the activities for which they are responsible, including the authority to
purchase the appropriate liability,property, and other coverages needed for those activities.
IIf your city has any of the following, you need to make sure there is adequate coverage for its
activities:
li I • gas, electrical, or steam utilities commission;
• port authority,housing and redevelopment authority, economic development authority,
municipal redevelopment authority, or similar agency;
I • municipal power agency;
• municipal gas agency;
I • airport board or commission; or
• hospital,nursing home, and medical clinic board or commission.
I There are some particular coverage issues to be aware of for certain specific types of boards,
commissions, and entities, as described below:
I Airports. The basic LMCIT coverage covers liability for claims arising from the operations of a
city airport except for"bodily injury", "property damage", or"personal injury". In other words,
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it automatically covers the"E&O" exposure for things like employment-related liability claims
involving the airport,but doesn't automatically cover the"airport operations" exposure.
For smaller airports (i.e., those that don't have any scheduled air service), LMCIT can endorse
the coverage to pick up the airport operations liability. Contact your LMCIT underwriter for an
application. The alternative is for the city to purchase separate airport liability coverage from a
private specialty carrier. Cities doing so should carefully review that coverage for potential
coverage gaps and exclusions.
Airports with scheduled flight service—police security. The Transportation Security
Administration requires airports with scheduled passenger flight service to have arrangements in
place for law enforcement officers to provide back-up security service. In many cases, city
police are performing this function. If your city police are providing this type of airport security
service, make sure you talk to your LMCIT underwriter and have your city's LMCIT liability
coverage endorsed to cover this exposure. Without that endorsement,your city liability
coverage won't respond to claims arising from this activity. '
Hospital, nursing home, and medical clinic boards or commissions. These boards or commissions
require specialty coverages. LMCIT cannot provide all the coverages that the city and the board or
commission require. LMCIT provides coverage to the city and the board or commission for liability,
except for"bodily injury", "property damage", or "personal injury". That is, as with airport boards,
the LMCIT coverage is picking up the "E&O"exposure for things like employment-related liability
claims involving the board,but not the"medical malpractice"or"general liability"exposures. You
will need to purchase coverage for the other unique exposures from specialty insurance companies.
Contact LMCIT for any assistance. '
HRAs, EDAs, and port authorities. These entities are legally separate political subdivisions and are
not covered automatically under the city's LMCIT liability coverage. (This is true even if the council ,
members themselves also make up the board of the political subdivision). Unless the city has
specifically indicated that these entities are to be covered, a claim against one of these political
subdivisions would not be covered. Nor would the city be covered for claims arising from the ,
activities of these entities.
These entities' status as separate political subdivisions creates a coverage limits issue that the '
city needs to consider. Since the city and the EDA(for example) are each separate political
subdivisions, each could potentially be liable for up to the statutory liability limit. If the EDA is
added as an additional covered party on the city's LMCIT liability coverage, and if both the city
and the EDA were sued for the same occurrence, you conceivably could have a total of
$2,000,000 of liability. However, you'd have only$1,000,000 of coverage limits available for
that occurrence.
In most cases, LMCIT can provide the needed coverage in either of two ways: by adding the
authority onto the city's policy, or by issuing separate coverage to the authority itself. If the
coverage is added to the city's policy,both the city and the authority are covered under the city's
coverage. If this approach is used the city may wish to consider also carrying excess liability
coverage to address the potential limits problem.
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' covered
If the authority purchases separate coverage from LMCIT, the city will be added as a
party under the board's coverage. If this is done, the city would then have primary coverage
under the authority's coverage for claims arising from the authority's activities, and excess
coverage for these activities under the city's own coverage.
IIf the political subdivision purchases private insurance elsewhere, the city and the board or
commission need to review the following questions to assure adequate coverage. Remember,
LMCIT does not automatically cover the city for claims arising from the EDA's,HRA's or port
Iauthority's activities.
I • What type of coverage is provided to the city and the authority? Is the coverage as broad as
provided by the LMCIT covenant? Does it cover employment-related liability, land use or
development litigation, etc.?
• Is the city named as an additional insured on the authority's policy?
If the city needs coverage for a gap left by private insurance that the EDA, HRA, or port
I authority purchased,urchased,p lease contact LMCIT. Note that additional premium may be required.
li
I Gas, electrical or steam utilities commissions. These boards and commissions are not covered
automatically under the city's LMCIT liability coverage. Unless the city has specifically
indicated that these entities are to be covered, a claim against one of these boards or authorities
I would not be covered. Nor would the city be covered for claims arising from the activities of
these boards or commissions.
I Coverage for a utilities commission's activities can be provided in either of two ways: by adding
it on to the city's coverage, or by issuing separate liability coverage to the utilities commission
itself.
Ili
I RA and port authorities, a utilities commission is usually not legally a
Unlike the EDAs,HRAs, p Y
separate political subdivision. (There may be a few exceptions where city charters make the
' utilities commission a separate legal entity.) Generally though, covering the utilities commission
under the g city's general coverage doesn't create the same coverage limits problem that you can
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encounter with EDAs, HRAs or port authorities.
IIf the utilities commission purchases coverage elsewhere,the city and the commission need to
review that coverage carefully to make sure it doesn't leave gaps. Remember that LMCIT does
Inot automatically provide coverage to the city for the utilities commission's activities. If the
utilities commission purchases separate private insurance, the city can't just assume that the
city's LMCIT liability coverage will protect the city and fill any gaps that the utilities
Icommission's insurance leaves.
IAgain, cities should look at a couple of issues:
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• What type of coverage is provided the city and the board or commission? Is the coverage as
broad as that provided by the LMCIT covenant? Does it cover employment liability, EMF,
failure to supply utilities services, etc.?
• Does the utilities commission's insurance company understand that the city and the utilities '
commission are not separate entities? That is, do they understand that they must handle a
claim arising from the utilities operations that names the"City of Mosquito Heights" as the
defendant? (One way to clarify this might be to have the utilities commission's insurance
issued to"City of Mosquito Heights DBA Mosquito Heights Utilities Commission".)
If the city needs to cover a gap in coverage that's left by the utilities commission's private
insurance,please contact your LMCIT underwriter. Additional premium maybe necessary.
Municipal power agencies and municipal gas agencies. Under the statutes, a municipal power
agency or municipal gas agency is legally a separate political subdivision, even though it's
created by contract among two or more cities. Thus these organizations have some
characteristics of both political subdivisions and joint powers entities.
The city's LMCIT liability coverage excludes claims arising from the activities of a municipal
power or gas agency. If your city participates in a municipal power or gas agency, you need to
make sure that the agency has appropriate liability coverage. You need to look at the same kinds
of coverage questions that arise with covering EDA's, etc. '
Medical payments coverage
The"Medical and Related Payments Coverage"is part of LMCIT's general liability coverage
agreement. This coverage provides a limited amount($1,000) of"no-fault"medical payment
coverage for those injured on city property because of a condition in the property. '
Some question whether there is a valid purpose for cities to pay these funds in situations when
the city is not legally liable. Others argue that the payments provide a simple and inexpensive
way to possibly head off what might turn into a more expensive liability claim. LMCIT
therefore gives the city the option to delete this medical payments coverage if they wish.
Whether to waive the statutory per person limit for liability coverage
The LMCIT liability coverage is issued with a$1,000,000 per occurrence limit. The coverage '
form does not automatically waive the statutory provisions that limit the city's liability to
$300,000 per claimant. However, the city has the option to waive the statutory per-person limit.
Each city needs to consider whether or not to waive the statutory per-person limit. Here's a
shorthand summary of the practical effects of that decision.
• If the city does not waive the statutory tort limits, an individual claimant would be able to
recover no more than $300,000 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
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Istatutory 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.
I • If the city waives the statutory tort limits and does not purchase excess liability 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
Itort limits apply would also be limited to $1,000,000, regardless of the number of claimants.
I • 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
I statutory tort limits apply would also be limited to the amount of coverage purchased,
regardless of the number of claimants.
I The LMCIT memo "LMCIT Liability Coverage Options: Liability Limits, Coverage Limits, and
Waivers"discusses this in more detail. The memo is available at the LMCIT web site or by
calling LMCIT.
Excess liability coverage
I LMCIT provides a standard$1,000,000 liability coverage limit to match the statutory limit.
However,there are a number of ways in which that coverage could turn out not to be enough:
federal civil rights suits, liability assumed by contract, liability for actions in another state,
I inverse condemnation liability for land use claims, the possibility of the caps being found
invalid, and exhaustion of annual aggregate limits on products liability, limited pollution and
land use claims are some examples.
IIn light of these various ways cities can be exposed to liability beyond the statutory limits, the
city should consider purchasing higher limits of liability coverage. LMCIT makes available up
Ito $5,000,000 of additional limits at the city's option.
Sometimes city officials reason that"we're only a small city, so we don't need high liability
Icoverage limits." But arguably the opposite is true: A big city has much more tax base and
many more taxpayers over which to spread, say, a$1,000,000 excess judgment; in a small city,
the burden per taxpayer could be enormous.
IThe LMCIT memo "LMCIT Liability Coverage p Covera e O tions: Liability Limits, Coverage Limits, and
Waivers"discusses this in more detail. The memo is available at the LMCIT web site or by
Icalling LMCIT.
IContractual liability/additional covered parties
The LMCIT covenant provides coverage for most contracts. The covenant can also be endorsed
provide coverage for additional covered parties when requested. It is important to review all
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contracts and requests for additional insureds, and to consider the following points:
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• Sometimes a contractor I ty will request an"additional insured"endorsement,when what
the contract actually calls for is a Certificate of Insurance. I
• The contract and the hold harmless provisions should be reviewed by legal counsel; and
• Contracts with railroads or involving work on railroad property need special attention—
contact LMCIT for assistance.
I
Liquor liability coverage
If the city is involved in any way in selling liquor or beer, the city should have adequate amounts I
Y Y Y
of liquor liability coverage. This includes not just cities with a municipal,liquor store. Fire relief
associations, for example, sometimes are involved in special-event beer sales as a fundraiser and
I
may need liquor liability coverage.
LMCIT offers this coverage as part of the LMCIT property/casualty program,both for municipal
I
liquor stores and for special-event sales by city-related entities such as a fire relief association.
Standard coverage limit options are $500,000 or$1,000,000. Higher limits are also available
upon request. Note that LMCIT underwriting guidelines for liquor liability coverage require that
I
servers be adequately trained.
Cities should be especially careful to make sure the liquor liability coverage limits are adequate,
I
since there are no statutory limits on liability for illegal liquor sales. A typical liquor liability
claim involves a car accident. If a breadwinner with several dependents is killed or disabled in
I
an accident, damages can easily reach or exceed the half-million dollar mark. If the city's
coverage limits aren't sufficient,the city can still be liable for the excess. We suggest that as a
minimum any city involved in liquor or beer sales should have at least$500,000 of coverage, t
whether from LMCIT or from a private insurer.
No-fault sewer back-up coverage
I
1 Under the basic LMCIT liability coverage, claims for damages caused by sewer back-ups are
covered and treated like other liability claim. LMCIT would reimburse the claimant for the I
sewer back-up damages only if the back-up was caused by some negligence on the city's part
which makes the city legally liable.
LMCIT now offers cities an optional "no-fault" sewer back-up coverage for an additional I
premium. Under the optional no-fault sewer back-up coverage, the property owner would be
reimbursed for damages resulting from a back-up of the city's sewers, irrespective of whether the I
back-up was caused by city negligence. If the situation isn't one where the no-fault coverage
applies,the city's LMCIT liability coverage would respond as it does now. The intent is both to
promote public health by encouraging quick clean-ups of property when a back-up occurs; and to I
give the city a way to address the political problems that can arise in a case where LMCIT and
the city disclaim legal liability for sewer back-up damages based on the facts of the case.
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The"no-fault" coverage does have some important exclusions and limitations. Two of the more
significant exclusions are for certain"catastrophic" situations that might cause back-ups in a
large number of homes and properties; and for costs covered by a homeowners' or other property
111 coverage. More detailed information on the no-fault sewer back-up coverage is available at the
LMCIT web site, or by calling LMCIT. To get a quote, contact your LMCIT underwriter.
Other issues
' Bond limits and forms
The minimum limit available for LMCIT fidelity and faithful performance bonds is $25,000.
That may be adequate for a very small city,but most cities should consider higher bond limits.
The very low bond coverage limits that many cities have historically carried—some as low as
' $5,000 or$10,000—really wouldn't provide much protection if a loss were to occur.
Another important point to consider is that the statutes call for certain officers to be covered by a
' "faithful performance"bond. A faithful performance bond guarantees that the officer will
faithfully perform the duties of his or her office, and it is required for a statutory city clerk or
treasurer, for example. An ordinary fidelity bond protects the city only against losses caused by
' the individual's dishonesty. If the city suffers a loss because of the officer's mistake,or because
the officer simply didn't perform his or her duties properly, an ordinary fidelity bond won't help;
a"faithful performance"bond,however,might.
To avoid these roblems we suggest the following:
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' • Review the limits on the city's current bond coverage. The Government Finance Officers'
Association several years ago developed a formula for suggested bond limits based on the
' city's annual revenues and the amount of negotiable securities on hand. It's not an absolute
or infallible rule,but this formula can give the city a starting point for thinking about what
bond limits to carry. We would be happy to provide information on this formula.
1 • Make sure that you have `faithful performance"bond coverage on those positions where the
statutes require it. Some of the most common examples are statutory city clerks and
' treasurers and their deputies, and relief association treasurers.
LMCIT gives the city the choice of either blanket faithful performance bond coverage, or blanket
' fidelity coverage with faithful performance coverage only on those positions where it's required
by statute. Cities that purchase bonds from private insurers may find that the carrier is reluctant
to extend"faithful performance" coverage to positions where it's not required by statute.
' Petroleum tank leaks or spills
' Minnesota's Petrofund provides reimbursement for 90%of the first $250,000 and 75% of the
next $750,000 of clean up and liability costs from a petroleum products storage tank leak or spill.
But to be eligible for this reimbursement, the tank owner must be in compliance with applicable
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PCA and EPA regulations and requirements. The Petrofund reimbursement can be reduced or
refused if the owner is not in compliance. In any event the city will be responsible for at least
10% of the cleanup and liability costs, as well as all legal defense costs associated with the leak
or spill. '
If your city has any tanks,the first priority is make sure you comply with the applicable
regulations, so that you'll be eligible for Petrofund reimbursement if you ever have a problem.
This is an oversimplification,but the key points are:
• Make sure the tank is registered with MPCA; '
• Make sure you meet EPA's requirements and timetable for technical improvements to the
tank, for leak monitoring, corrosion resistance, spill prevention, etc.; and '
• Make sure you report any known leaks or spills to MPCA immediately.
Cities with tanks also need to think about how best to handle the costs that Petrofund won't
reimburse; i.e.,the defense costs and 10% of the first $250,000 and 25%of the next$750,000 of
liability and cleanup costs. For most cities,there are two choices: either retain these risks, or '
purchase LMCIT's optional Petrofund Supplement coverage.
EPA financial responsibility compliance is not an issue in Minnesota, since EPA accepts '
Minnesota's Petrofund as satisfying the financial responsibility requirements. Thus, cities can
approach this as a straightforward financial risk management issue: Does it make more financial
sense to pay the premium to LMCIT to assume these risks for the city, or for the city to simply
retain these risks itself?
Open meeting law defense cost reimbursement '
From time to time, city council members may get sued for alleged violations of Minnesota's
Open Meeting Law. The LMCIT liability coverage does not cover these suits unless there is
some other covered claim included as part of the complaint. Consequently, the cost of defending
these suits for individual council members can sometimes be fairly expensive.
To avoid this uncovered exposure to the council member or to the city, LMCIT has made
available Open Meeting Law Defense Cost Reimbursement Coverage. The coverage reimburses
individual council members for up to $50,000 of their Open Meeting Law defense costs per
person. The city now can select either of two coverage options,which reimburse these costs at
80% and 100%respectively.
Specialty coverages you probably don't need
The LMCIT liability coverage provides most of the coverages that a city or its independent '
boards or commissions need. If you are still also purchasing any of the following coverages
from a private insurance company, you should review closely for duplication of coverages:
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• Police Liability • Public Officials Liability
• Employment Practices Liability • Fiduciary Liability for Relief Associations
• Employee Benefit Liability • Ambulance Professional Liability
• Firefighters Professional Liability
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LMCIT
I
LMC IRisk Management Information
ILeague of Minnesota Cities 145 University Avenue West, St. Paul, MN 55103-2044
Cities promoting excellence Phone: (651) 281-1200 • (800) 925-1122
I Fax: (651) 281-1298 • TDD (651) 281-1290
www.lmcit.lmnc.org
I THE AGENT'S ROLE AND COMPENSATION IN LMCIT
The LMCIT property/casualty and workers compensation programs are designed to operate
Ithrough a local agent. The city must designate an agent as a condition of participating in the
property/casualty program. The selection the agent is entirely up to the city, and any licensed
agent is eligible to participate. The city has the option not to use the services of an agent for the
Iworkers compensation program, although most but not all cities do work with an agent on work
comp as well.
IBecause LMCIT is a cooperative self-insurance pool of cities and not an insurance company,
there has sometimes been some confusion and uncertainty about the role of the agent. Also,not
everyone has been completely aware of the flexibility and options that are available for
Istructuring the relationship between the city and the agent.
LMCIT believes it's important for city officials and agents to periodically discuss the agent's
I role. The critical points are to make sure that everyone involved understands and agrees on what
duties and responsibilities the agent will perform, and to make sure that both parties are
comfortable with the compensation the agent receives for those services.
ILMCIT recommends that the selection of the agent and the establishment of the agent's duties
and compensation should be addressed at the city council level. A good way to do this is
I through a council motion or resolution. That resolution should not only name the agent,but
should also specify what services the agent will be expected to provide and what compensation
the agent will receive for those services.
IAnother approach is to develop a formal written contract between the city and the agent
addressing those same points. Such a contract might also address the agent's role in insurance
I that the city may purchase from sources other than LMCIT, such as specialty liability coverage
for a hospital or nursing home, etc.
I To help cities and agents address these points, LMCIT in cooperation with the Minnesota
Independent Insurnace Agents (MIIA)has developed the attached model resolution for
appointing an agent. We'd emphasize that this resolution is intended only as a starting point.
Some cities may be able to use it nearly verbatim,while others will wish to make substantial
changes in the list of services to be provided by the agent, in the amount or basis of the
compensation the agent receives, or both.
1
I
Here are some key points to keep in mind:
1. The selection of an agent is entirely up to the city. ,
The city can select any licensed agent to work with the city on LMCIT coverages. If the city is
considering changing agents, you should begin this process well in advance of city's coverage
renewal date, so that the selection of the agent is resolved before work begins on the renewal.
That way, if there is a change the new agent is in place to handle the renewal work.
2. The amount of the agent's fee is entirely negotiable between the city and the agent.
LMCIT's practice is to include an allowance for a 10% agent's fee in the premium for I
property/casualty coverage,unless the city and agent have agreed on something else. LMCIT
then pays that fee to the agent. However,the city and the agent are free to agree on a higher or
lower percentage fee, or on a different basis for compensating the agent. 1
If the city and agent agree on a different percentage fee,the LMCIT underwriter should be
notified. The premium quote will then reflect that change. Any increase or decrease in the I
agent's compensation will flow through directly as a dollar-for-dollar increase or decrease in the
city's premium.
Another possibility is for the city and agent to agree on a different compensation basis instead of
the percent-of-premium approach. A flat annual or monthly retainer fee or an hourly rate for
services performed are some of the possibilities. When the city and agent move to this sort of
arrangement, it generally works best for the city to compensate the agent directly. In that case,
LMCIT would provide the property/casualty coverage quote on a "net of commission"basis.
LMCIT work comp rates include an allowance for a 2% agent's fee. If the city chooses not to
use an agent for work comp, or if the agent's services on work comp are included and
compensated under a direct contract for service with the agent,that 2% agent fee allowance is
refunded to the city.
3. The services the agent provides are also negotiable between the city and the agent.
The focus in LMCIT is more on the agent's role as an adviser and service provider to the city,
rather than as a salesperson for LMCIT. The attached model resolution includes a suggested list
of services which an agent would typically provide. This list of suggested agent services was
developed in cooperation with the MIIA. However, the city and agent are free to negotiate their
own arrangement,providing for a broader or narrower range of functions to be performed by the
agent. What services the city needs and wants will vary from city to city. The important thing is
that the city and the agent discuss and agree on what the expectations are.
LMCIT can also provide additional information and materials such as sample city-agent service t
contracts and RFP's, articles discussing agent services and agent selection, etc. Feel free to
contact the LMCIT staff at the League office.
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MODEL RESOLUTION APPOINTING A CITY AGENT
1 WHEREAS, the League of Minnesota Cities Insurance Trust requires cities to use the
services of an agent in order to participate in the LMCIT property/casualty program; and
IWHEREAS, the City Council has reviewed and considered the written materials from
LMCIT discussing the agent's role and compensation in LMCIT; and
IWHEREAS, has agreed that he/she/they is/are willing to
provide to the city the services listed below under the terms and conditions listed below;
IThe City Council of the City of resolves as follows:
APPOINTMENT
I1. The City of hereby appoints as its agent for purposes of the City's
participation in the League of Minnesota Cities Insurance Trust(LMCIT)property/casualty [and
Iworkers compensation] program[s].
TERM
III I 2. This appointment shall remain effective until (date) .
[or]
2. This appointment shall remain effective indefinitely unless and until it is terminated or
Iamended by council action.
COMPENSATION
1 3. As compensation for the services provided to the city as described in Paragraph 4 below,the
agent will receive annually a fee equal to % of the annual premiums paid by the city to
, LMCIT for property, liability, and automotive coverages [and 2% of the annual premiums paid
by the city to LMCIT for workers compensation coverage]. This fee shall be included in the
amounts billed to the city by LMCIT and shall be paid to the agent by LMCIT on the city's
Ibehalf.
[or]
II3. As compensation for the services provided to the city as described in Paragraph 4 below, the
city will pay to the agent a fee of $ annually. The city hereby directs LMCIT not to
I include any allowance for an agent's fee in quoting and billing the city's premiums for property,
liability, and automotive coverage [and to refund the 2% workers compensation coverage agent
fee allowance to the city].
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SERVICES I
[The following list is intended as a starting point. The city and agent should review and discuss
this list to determine if specific services should be added to or deleted from this list to meet the 1
city's needs and situation]
4. The agent will perform the following services: 1
a) Advise and assist the city in assembling and accurately reporting underwriting data,
including updating property values, for rating purposes.
b) Advise and assist the city in evaluating and selecting among coverage alternatives such as
deductibles, limits, optional coverages, alternative coverage forms, etc.
c) Review coverage documents and invoices to assure coverage has been correctly issued
and billed.
d) Advise the city on potential gaps or overlaps in coverages.
e) Assist the city as requested in submitting claims and interpreting coverage as a pp lied to
particular claims.
1) Review loss reports for correct reporting, appropriate reserves, etc.
g) Assist as requested with safety and loss control activities. 1
h) Assist the city in identifying risk exposures and developing appropriate strategies to
address those exposures. J
Adopted by the City Council of the City of
Minnesota, on this day of , 200_.
1
Mayor
Attest:
City Clerk
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12/03/2001 -PST 1
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League of Minnesota Cities
Insurance Trust
M 145 University Avenue West,St. Paul,MN 55103-2044
(651)281-1200 • (800)925-1122
I I\ L°°g1°°f M'rt"a'O Cii;� Fax:(651)281-1298 • TDD:(651)281-1290
Ci6as pro»wt;rtg exaenartw
J www.l m nc.org
I
November 22,2004
ITo: LMCIT members and agents
IFrom: LMCIT
Re: 2005 Property/Casualty and Workers' Compensation rates and dividend
IPremiums
Here are the premium rate changes LMCIT members will see at their next renewal. The
Iproperty/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%.
• Petrofund supplement rates will decrease 10%.
• Work comp rates will increase 7%.
IRates for all other coverages will be unchanged.
For most cities,the property/casualty rate changes will add up to a small net decrease in
Ipremium 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
IIexperience rating.
Dividends
IProperty/casualty program members will again share a$9 million dividend this year.
This is the same amount we've returned in each of the past two years. As in the past,
I we'll distribute the dividend in mid-December. The dividend formula will be the same as
we've used for several years. Under that formula, 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
formula.
IThe work comp program will not return a dividend this year.
I
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What's behind the rate changes?
Property/casualty I
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 amount of risk
LMCIT retains on liability claims, from$500,000 to $1,000,000 per occurrence. We're
also increasing LMCIT'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'll 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 cities will also see more variability in
dividends from year to year as well. In the long run, we expect that the increased I
retention will produce a significant net savings for LMCIT members.
Work comp I
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 comp injuries. Medical costs now make up just about half of the total cost
of work comp 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 comp 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 comp 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.
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IHow was the dividend 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
I 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 returned to
Imembers.
One fact of life in any insurance operation is that it can take several years until claims are
I finally settled and we know for sure what the actual loss costs were. For this reason, we
have to work with estimates, which are continually revised and updated. The program's
results and the amount of dividend we can return in any one year therefore don't just
I 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.
IHere's a summary of what makes this year's dividend possible:
• At this point, the estimated cost of losses incurred during the past year is in line
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with what we'd projected when the rates were set. In other words, it doesn't
IIappear 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
i than our earlier projections. The funds that we'd previously set aside for those
losses are therefore freed up.
I • Both earned premiums and realized investment income for the past year have
been somewhat higher than projections.
II 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,
Iespecially in some higher-risk areas like liquor liability; and the increased amount of risk
LMCIT will now be retaining.
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League of Minnesota Cities
LMC Insurance Trust
145 University Avenue West,St Paul,MN 55103-2044
(651)281-1200 • (800)925-1122
League of Mianaeota Cities Fax:(651)281-1298 • TDD:(651)281-1290
Otiar promoting ozcelloxce
www.1mnc.org
November 22, 2004
To: LMCIT Members and Agents
From: Pete Tritz
Re: Coverage Changes for 2004-2005
Here's a summary of coverage changes that cities will see for the coming year. These changes
apply to property/casualty coverage written or renewed on or after November 15, 2004.
All coverages
• Allocation of recoveries. A new clause is added to the property/casualty common conditions,
specifying that when we receive a subrogation recovery that's less than the full amount of the
loss,the recovery is to be allocated between the city and LMCIT in proportion to the shares
of the total loss that each has paid.
This same comp change is made in the work coverage document as well, for coverage written
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or renewed on or after January 1, 2005.
• Waiver of subrogation. A new clause is added to the property/casualty common conditions,
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making it clear that the city can waive subrogation in a contract that the city enters prior to a
loss; that the city does not have to notify LMCIT when they do so; and that such a waiver is
binding on LMCIT. This applies to claims under the liability,property, and auto physical
damage coverages. The city may not waive subrogation on any crime or bond loss.
Liability coverage
• Attorneys fees in claims for state constitutional rights. Under the existing coverage, a claim
for attorneys fees in a federal civil rights suit or a state human rights suit is considered a
claim for damages and therefor triggers coverage. This now will also apply to suits seeking
Ito enforce rights under the state constitution.
• Leaks and spills of pollutants. The liability coverage generally excludes coverage for
liability relating to pollution, but then builds coverage back in for a number of types of risks
as exceptions to that exclusion. One of the exceptions is the "limited pollution" exception,
which grants coverage for liability resulting from accidental releases that begin and end
within 72 hours. The intent is to provide some coverage for liability for"sudden event"
types of accidental releases of pollutants. However, the current coverage applies only if the
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AN EQUAL OPPORTUNITY/AFFIRMATIVE ACTION EMPLOYER
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the damages are entirely above ground and not in or on a body of water.
pollutant release and he dam g y g y
This"above ground/not in a body of water" restriction is now eliminated, which
significantly broadens the protection the city receives. "Limited pollution" claims continue
to be subject to a$1 million annual aggregate limit.
• Pollution exclusion—products liability claims. We've clarified that the pollution exclusion I
does not apply to liability claims for damage caused by contaminated city products such as
city water, food or drinks at a community center or municipal liquor store, etc.
• Pestic i des and herbicides. Liability ty claims arising from the a pp lication of pesticides or
herbicides" will now be covered, subject to the $1 million annual aggregate limit on coverage
for"limited pollution"claims. I
Excess liability coverage
In general,the same clarifications and coverage expansions apply to the optional excess liability
coverage as well,with one exception: The "above ground/not in a body of water"restriction
will still apply to limited pollution claims under the excess coverage. In other words,the excess 1
liability coverage will not apply to pollution claims if either the release or the damage is below
ground or in a body of water.
Property coverage
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• Criminal damage. The property coverage is expanded for damage caused by criminal acts of
a third party. A$1 million annual aggregate limit applies to damage from criminal acts other
than vandalism.
• Pollution clean-up limit. The coverage limit for pollution clean-up is increased from$10,000 I
to $100,000. This provides increased protection in situations where the pollutants that need
to be cleaned up were not the result of a"specified cause of loss". I
Machinery breakdown coverage
• Coverage for mold damage resulting from a machinery breakdown accident will now be I
subject to a $1,000,000 annual aggregate limit.
Open meeting law defense coverage i
• Statute references in the coverage document are updated.
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League of Minn
Insurance esota TrusCities t
145 University Avenue West,St. Paul,MN 55103-2044
(651)281-1200 • (800)925-1122
I,aagua of Minnesota Canto
Cities ng �� Fax:(651)281-1298 • TDD:(651)281-1290
r www.l m nc.org
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 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/completed operations $1,000,000 annually
Failure to supply utilities $1,000,000 annually
EMF $1,500,000 annually
Limited pollution* $1,000,000 annually
Lead and asbestos* $200,000 annually
Mold $1,500,000 annually
Land use litigation** $1,000,000 annually
Employers liability(work comp) $1,000,000 annually
* 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.
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If the statute limits our liability to $1,000,000 per occurrence,why would the city purchase
higher coverage limits than that?
1 consider carrying higher limits of
There are several different reasons why cities should strongly rry g gh
liability coverage.
I to several The statutory tort limits either do not or may not apply o se a ral typ es of claims. Some
examples include:
• ti 1 the under federal civil rights laws. These include Section 983, h e Americans with
Disabilities Act, etc.
• city assumed by contract. This occurs when a city
for tort liability that the c ty has ss y y
agrees in a contract to defend and indemnify a private party.
• Claims for actions in anothe r state. T his 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. I
• 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 1
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 I
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
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risks that are subject to aggregate limits:
• The excess coverage does not apply to four risks: lead and asbestos,f ailure 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. I
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 I
limits. Carrying excess coverage is a way to meet these requirements. (There's also another
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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 another 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?
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 of liability 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(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
UM/UIM limits is worth that cost.
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The UM/UIM coverages are intended to assure that an injured driver will be compensated if s/he
is injured in an accident caused by an uninsured or underinsured driver. The UM/UIM coverage I
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 I
vehicle would in most cases be covered by workers' compensation. The amounts the individual
would be able to recover from UM/UIM would be in addition to the medical, indemnity, and
other benefits paid under work comp. 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' I
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 cases the passenger's I
own UM/UIM 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 s/he 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 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 I
is to the injured party.
The statutory liability limit only comes into play in a case where I
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 N
compensated for his/her 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
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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 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 $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.
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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 summarize the options?
It's not necessarily simple,but the table on the following page is a shorthand summary of what I
the effect would be of the various coverage structure options in different circumstances.
I'm still confused. Who can I talk to? 1
Give us a call at the League office. Pete Tritz, Tom Grundhoefer, Bill Everett, Doug Gronli,or
any of LMCIT's property/casualty underwriters will be glad to talk with you.
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League of Minnesota Cities
IInsurance Trust
145 University Avenue West,St.Paul, MN 55103-2044
(651)281-1200 • (800)925-1122
I �g ofMinnogo�Cfi� Fax:(651)281-1298 • TDD:(651)281-1290
Cities promoting exam=
www.l m nc.org
IRISK MANAGEMENT INFORMATION
LMCIT PROPERTY COVERAGE LIMITS
ILMCIT provides both property coverage and the machinery breakdown coverage on a
"scheduled limits"basis,unlike the "blanket limit"approach that had been used before 2002.
I Because there is a specific limit on the amount of coverage for each individual covered property,
it is important that the city review the estimated replacement cost figures for each building to
make sure the available coverage limit is adequate. In addition to the specific property limit,
Ithere is also a general limit on total coverage for all of the city's property.
This memo discusses how the"scheduled limits" approach works; some potential problems cities
I and agents will need to watch out for, such as historically significant buildings or vacant
buildings; and other limits that apply to particular risks or properties.
IWhat coverage limit is available for each covered property?
For each building, the limit is 150% of the estimated replacement cost shown on the coverage
I schedule for that building. This is the "specific property limit". The estimated replacement cost
is the value figure that was used to establish the city's premiums.
I For example, if the estimated replacement cost of a building and its contents is $2,000,000,the
city's premium for that building will be based on that value. If that building is destroyed, the
most LMCIT would pay to repair or replace the building and its contents is $3,000,000—i.e.,
1 150% of$2,000,000.
A specific property limit also applies to any property in the open which the city has scheduled
I for coverage. As with buildings, the specific property limit for property in the open is equal to
150% of the estimated replacement cost shown on the schedule.
IWhat costs and damages does the specific coverage limit apply to?
The limit applies to the cost to repair or replace the building and the building's contents.
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There are several additional types of covered loss which are in addition to and outside of the
specific coverage limit. These are listed below.
ICoverage Limit
Asbestos clean up $250,000 per location
Loss of revenue/extra expense/expediting expense $5,000,000 per occurrence
ILoss of revenue, etc.—electric utilities $500,000 per occurrence
I This material is provided as general information and is not a substitute for legal advice,
Consult your attorney for advice concerning specific situations,
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Demolition and debris damage d e to covered An amount equal to 25%of the estimated
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property replacement cost of the covered property
per occurrence
Debris removal/no physical damage to covered property $50,000 per occurrence _
Leasehold interest $500,000 per location
Pollutant clean-up and removal $100,000 per location
Rental reimbursement $25,000 annual aggregate
Arson reward $5,000 per occurrence
Accounts receivable $500,000 per location
Valuable papers and records $500,000 per location
Utility service interruption $100,000 per occurrence
Since these costs are covered in addition to the specific coverage limit, you don't need to
consider these costs in evaluating whether the specific coverage limit is adequate for a specific
building. But you should review whether each of these additional limits is adequate for your
exposures.
Where do those estimated replacement cost figures on the schedule come from?
In most cases, the estimated replacement cost figures were established by the professional
appraisals LMCIT has been conducting over the past four years, updated as necessary to reflect
increased construction costs since the time of the appraisal. Appraisals have now been
completed for virtually all LMCIT members' buildings.
For recently constructed buildings,the estimated replacement cost may instead be based on the
actual construction cost.
Where can we find the property schedules and appraisal information?
of the city's property schedule, showing the most current estimated
LMCIT will send a copy y p p y g
replacement cost figures for each building, along with the renewal application. I
The city received a copy of the a pp raisal report on its buildings when the a pp raisal was
completed. If you can't find it or need another copy, contact your LMCIT underwriter. I
What happens if the actual cost to repair or replace the property turns out to be more than
the estimated replacement cost on the schedule? I
As long as the actual cost is not more than the specific property limit, the claim is paid in full,
even if it turns out to be greater than the estimated replacement cost shown on the schedule. But
if the actual cost to replace the property is more than the specific property limit—i.e.,more than
150% of the estimated replacement cost—the excess would not be covered by LMCIT. The city
would need to either find a way to scale back the cost of the repair or replacement, or pay the
additional cost itself.
This material is provided as general information and is not a substitute for legal advice.
Consult your attorney for advice concerning specific situations.
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When might the specific property limit not provide enough coverage for the city?
IFor most city buildings it shouldn't be a problem. The appraisal figures for the estimated
replacement cost should be reasonably accurate for most buildings, and the 150% provision
Iallows a substantial margin for error. But there are some situations where it could be a problem:
• cost figures reflect the cost to
Historically significant cant buildings. The estimated replacement ost igur
I repair or rebuild the "typical"building,based on the size, use,type of construction, etc. In a
historically significant building, repair or replacement may become much more expensive,
because of the need to reproduce specific historical construction techniques used in the
I building, such as ornate stonework, decorative plaster, etc. In some cases,these
considerations can increase the cost to repair or rebuild a structure by as much as five or ten
times.
I • Unique architectural features. A building that incorporates unusual or unique architectural
features—e.g., special woodwork, murals or other artwork, etc. —can pose similar issues.
I • Building code compliance. If an older building that doesn't meet current building codes
suffers significant damage, the building code may require that the building be brought up to
current code standards. In some cases,that can substantially increase the cost.
IAre these the only typ buildings of buildin s we need to worry about?
IThese are the types of buildings where it's probably most likely that the specific coverage limit
could be a problem,but they're not necessarily the only place where a problem could arise. It's
important to review the estimated replacement costs for all of the city's buildings to make sure
Ithey seem reasonable,that there aren't any typos, etc. Remember: The specific property limit—
that is, 150% of the estimated replacement cost figure shown on the schedule for that building—
is the absolute most that LMCIT would pay to repair or replace that building.
IWhat should we do if we're concerned that the specific coverage limit may not be adequate
for a particular building?
IGive your underwriter a call right away. As an interim measure, we can temporarily use a
reasonable"best guess" estimate as the amount shown on the schedule. We'll then schedule an
appraisal to develop an estimated replacement cost figure that will reflect the property's unique
characteristics.
How will it affect our premiums if we increase the estimated replacement cost for a
particular building?
If you decide mid-term to increase the scheduled estimated replacement cost for a building, it
won't have any immediate effect on your premiums. In other words, there won't be any charge
for the endorsement increasing the estimated replacement cost.
IThis material is provided as general information and is not a substitute for legal advice.
Consult your attorney for advice concerning specific situations.
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However that new, higher estimated replacement cost will be used in calculating the city's
premiums at the next renewal. Your LMCIT underwriter can on request provide an estimate of
how the increased values will affect the city's future premiums. I
Since we have the 150% provision,can we save some premium by scheduling the building
for an amount less than the estimated replacement cost? I
No. Premiums will always be based on the actual estimated replacement cost of the building.
The 150%provision is intended only to provide a buffer or margin for error in those estimates. I
A primary consideration for LMCIT is to make sure we treat all members equitably. That means
that we need to make sure we're figuring every member's premiums the same way—based on
the best estimate we have of what it would cost to replace that building. Allowing one member
to arbitrarily select a lower valuation figure would mean that that member wouldn't be paying
their fair share relative to the actual risk they're contributing to the pool. I
What limit applies to buildings under construction?
If the total cost of the building under construction is less than$2,000,000,LMCIT automatically
provides builders risk coverage for that building while it's being constructed, with a limit of
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$2,000,000. I
If the total cost of the building under construction is more than$2,000,000, that building must be
scheduled in order to have builders risk coverage from LMCIT. The estimated construction cost
will be shown on the schedule. The specific property limit for builders risk coverage for that
building is 150% of the amount shown on the schedule.
How does coverage work for newly constructed buildings? I
If the city constructs a new building during the year,that new building is automatically covered.
That building must then be added to the schedule at the city's next renewal. Until the new
building is scheduled, the applicable coverage limit for the newly-constructed building will be
150% of the construction cost or$5,000,000, whichever is less.
What if we acquire an existing building?
A newly-acquired building is also automatically covered, subject to a limit of 150%of the I
purchase price, or$5,000,000,whichever is less. However,we'd suggest that as soon as possible
the city should provide an estimated replacement cost figure to their LMCIT underwriter, since
in some cases the cost to rebuild a building may be substantially more than the acquisition cost.
LMCIT will then schedule a formal appraisal of that building as quickly as possible.
1
This material is provided as general information and is not a substitute for legal advice.
Consult your attorney for advice concerning specific situations.
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What is the general limit and how does it work?
IThe general limit is the most that LMCIT would pay to repair or replace the building and
contents if all of the city's properties were destroyed. The general limit is equal to the total
I scheduled values of its covered property. That is, it's the sum of the estimated replacement costs
shown on the schedule for buildings and contents (including property under construction),
property in the open, and mobile property,plus the market value of any vacant buildings.
' An example might help clarify how the schedule, the specific property limit, and the general
limit fit together. Suppose the city's covered property consists of three buildings, each with an
estimated replacement cost of$100,000. The general limit is therefor$300,000. If one building
Iburns down, LMCIT will pay a maximum of$150,000 (150% of$100,000)to repair or replace
it. If all three burn down, LMCIT will pay a maximum of$300,000 to replace the three
buildings and their contents.
IThe additional coverages listed in the table on pages 1-2 are in addition to and outside of the
general limit as well. The following coverages are also in addition to and outside of the general
Ilimit:
Coverage Limit
I Buildings under construction $2,000,000 per location
Newly constructed property Lesser of$5,000,000 per location or the construction cost
Newly acquired covered property Lesser of$5,000,000 per location or the purchase price
a Newly acquired mobile property $250,000 per unit
Extraordinary expense $100,000 annual aggregate
IAre there any other limits that the city needs to be aware of?
Yes. The LMCIT property coverage includes sub-limits on coverage for certain types of
IIIbuilding contents or causes of damage. These are listed below:
Coverage Limit
Computer equipment,data,and media $1,000,000 per occurrence
Fine arts $500,000 per occurrence
Personal Effects $25,000 per occurrence/$2,500 per employee
Business personal effects $25,000 per occurrence/ $5,000 per employee
T he computer, fine arts, p ersonal effects, and business personal effects limits should be sufficient
in most cases for most cities, but they can be increased by endorsement if necessary. If the city
Ihas unusual exposures in these areas, you need to make sure that both the sub-limit and the
specific property limit are sufficient to cover those exposures.
I
IThis material is provided as general Information and is not a substitute for legal advice.
Consult your attorney for advice concerning specific situations.
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There are also sublimits on damages from two specific causes:
Coverage Limit I
Terrorism losses $1,000,000 annual aggregate
Criminal acts other than vandalism $1,000,000 annual aggregate
Because of reinsurance restrictions,the limits for terrorism and criminal acts other than
vandalism cannot be increased.
How are vacant buildings handled?
After a building has been vacant for 60 consecutive days,it is no longer covered for replacement
cost. Instead, it will be covered only for the building's actual fair market value. In other words,
if the vacant building is damaged or destroyed, the most LMCIT would pay to repair or replace it
is the fair market value of the building. I
Note: The limit for a vacant building is the fair market value—not 150% of the fair market
value. I
When is a building considered "vacant"?
A city-owned building is considered vacant if for a period of 60 consecutive days less than 31% 1
of the building's total square footage is either being used by the city for customary operations or
leased out. I
If the city is covering a building that the city rents but doesn't own,that building is considered
vacant if for a period of 60 consecutive days it doesn't contain enough contents to conduct
customary operations.
A building under construction or renovation is not considered to be vacant. Also, a building that
is intended to be used only on a seasonal basis—a park shelter, for example—is not considered
to be "vacant"during the times when it's not actually in use.
What should the city do if we have a vacant building? j
We suggest that you notify your LMCIT underwriter right away when a covered building
becomes vacant, and provide the information on the building's market value at the same time.
Keep in mind though that after 60 days the coverage on a vacant building is automatically
limited to the building's market value,whether or not you've notified LMCIT that the building is
vacant. Similarly, if a vacant building becomes occupied during the year, you should also notify
your LMCIT underwriter.
If a mid-term change in a building's status—i.e., a building becomes vacant, or a vacant building
is re-occupied—results in a premium decrease, the city will receive a mid-term credit. If it
results in an increase, the increase is waived until renewal.
This material is provided as general Information and is not a substitute for legal advice.
Consult your attorney for advice concerning specific situations.
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I At the city's next renewal, the renewal premiums for the vacant building will be based on the
building's market value, rather than on the estimated replacement cost. A higher rate per$100
value is used for vacant buildings,reflecting the higher risk due to vandalism, etc.
IDo these changes affect our LMCIT machinery breakdown coverage?
I Yes. The specific property limit and the vacant building provisions also apply to the LMCIT
machinery breakdown coverage.
Can we just buy blanket limits coverage,rather than having the specific property limits to
Iworry about?
No. LMCIT no longer offers the"blanket coverage"option. Mostly this is because of
Ireinsurance restrictions. In the current very tight reinsurance market, our reinsurers were no
longer willing to support a "blanket limits" approach. This is very much the trend in the
commercial insurance world. Very few private insurance companies still provide true blanket
Ilimits coverage.
The blanket limits approach also created some issues of fairness among members. Under the
I blanket limits system, a city might have, say, a historical building, where the cost to reproduce
the building would be much greater than the estimated replacement cost shown on the schedule.
That city would be paying in less than other cities, relative to the actual amount of risk it's
1 contributing to the pool; that is, that city is effectively getting the benefit of a higher limit but not
really paying for it. The "scheduled limits"approach helps correct that kind of inequity among
members.
IWho should we call if we have questions?
I Call your LMCIT underwriter, or talk with LMCIT Administrator Pete Tritz or LMCIT
Associate Administrator Bill Everett.
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IPST 12/04
This material is provided as general information and is not a substitute for legal advice.
Consult your attorney for advice concerning specific situations.
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1 LMCIT
I L MC _Risk Management Information
League of Minnesota Cities University Avenue West, St. Paul, MN 55103-2044
Cities promoting excellence Phone: (651) 281-1200 • (800) 925-1122
I Fax: (651) 281-1298 • TDD (651) 281-1290
www.lmcit.lmnc.org
I BUILDERS RISK INSURANCE
INSURING BUILDINGS IN THE COURSES
I OF CONSTRUCTION, ALTERATION, OR REPAIR
IWhat is Builders Risk Coverage?
Builders Risk Coverage is designed to cover the property loss exposures associated with
Iconstruction projects. Construction projects often involve unique risks not usually contemplated
by standard property coverage forms. For instance, structures under construction are more
subject to damage from the elements than are completed structures; the project property values
Ido not remain stable through the policy period; the property used in the construction may be
owned by different parties during the course of construction(e.g., general contractor,
subcontractors, and the city); and the property may be in transit, on the job site, or at off-site
I storage locations. Given these unique coverage issues, the typical contract between an owner and
a contractor will usually require that one of the parties procure builders risk coverage for the
project.
What interests does Builders Risk Coverage seek to protect?
IWho is covered?
Ownership of a construction project is generally more complicated than ownership of a
I completed structure. While the City may own the land,the contractor or subcontractor may own
the building materials, equipment and supplies. At any point in time, the ownership interests of
any particular party to the construction project may vary. As owners or part-owners of the
I insured property, both the city and the contractor (or subcontractor)may rightly have a claim to
builders risk insurance proceeds. Accordingly,under most builders risk policies the parties will
want to include the city,the contractor and all subcontractors as named insureds on the builders
Irisk form.
What property is covered?
IIn addition to the building or structure being constructed, the typical builders risk policy will
covers things like fixtures,materials, supplies, machinery, and equipment to be integrated into
I the completed structure. The coverage will also usually include scaffolding, falsework, fences,
and temporary structures incidental to the project. In addition, since it is also common for the
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city to be responsible for materials in transit or those stored away from the job, a builders risk
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form that limits coverage to property at the job site should be avoided. Items typically not
covered as part of a builders risk form include automobiles,trees and other vegetation, and I
contractors tools, equipment and machinery not destined to become part of the structure.
How does LMCIT's property coverage deal with Builders Risk exposure?
For the 2001-02 underwriting year, LMCIT redesigned and rewrote its property coverage
relating to buildings under construction(including additions to and renovations of existing
structures). The revised coverage is now included in a separate section of LMCIT's coverage
agreement. The builders risk exposures are now handled as follows:
• A building under construction is covered by the new builders risk coverage.
• A building being renovated is covered by both the builders risk coverage and the property
coverage. The cost of the renovation is covered under the builders risk coverage and the
existing building is scheduled as a building under the property coverage.
• An addition to an existing building is covered by both the builders risk coverage and the
property coverage. The addition is covered by the builders risk coverage and the existing
building is scheduled as a building under the property coverage. I
The key features of the builders risk coverage are as follows:
• A building under construction is automatically covered if the total project cost is$2 I
million or less, without having to be specifically scheduled.
• No additional mid-term premium is charged for these projects. However, the city's next 1
renewal of these values will be included in calculating the city's property renewal
premium. I
• The contractor's and subcontractors' interests in the property are automatically covered,
to the extent the construction contract makes it the city's responsibility to provide
coverage for these interests.
• Items such as temporary scaffolding, falsework, foundations, etc., which are normally
covered by specialty"builders risk"policies, are now explicitly covered.
For larger projects-those over$2 million—the city must contact LMCIT and specifically
schedule the building in order to have coverage. LMCIT has taken this approach because:
• coverage issues can become more complicated in larger projects;
• risks may be greater than LMCIT can reasonably accommodate without making a charge;
and,
• contractors in some cases may have special arrangements with insurers under which they
can provide the builders risk coverage less expensively than LMCIT.
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Requiring specific action on larger projects assures that any special issues can be identified and
addressed, and the city can evaluate whether LMCIT, the contractor, or another source is the
most economical way to address the builders risk exposures on the project.
What are the Builders Risk issues that arise in standard form construction contracts?
Depending on the size of the construction project, contracting parties often utilize "standard"
contract forms developed by various trade associations. The most widely used forms are those
t promulgated by the American Institute of Architects (AIA). In particular, "AIA Document A201
— 1997 General Conditions of the Contract for Construction" is one of the most common
contracts encountered by cities.
Section 11.4 of that agreement specifically deals with the property insurance requirements. Two
important contract considerations must always be evaluated when reviewing the property
insurance obligations articulated in this section. First, a decision has to be made about who will
provide the builders risk coverage. Paragraph 11.4.1 states "Unless otherwise provided, the
Owner[City]shall purchase and maintain ...property insurance written on a builders risk "all-
risk"or equivalent policy form . . ."As an alternative,under paragraph 11.4.1.2,the contractor
may purchase the insurance. The most important priority is to make sure one of the parties has
procured the coverage.
( As discussed above, on smaller projects LMCIT automatically provides builders risk protection
at no additional premium, so there is no need for either the city or the contractor to purchase a
separate policy.
The second significant contract issue involves Paragraphs 11.4.5 and 11.4.7 dealing with
"Waiver of Subrogation"rights. Under these provisions,the city and contractor waive
subrogation rights against each other,to the extent a loss is covered by property insurance
applicable to the work. " Generally,this does not present an issue because the parties have jointly
agreed to cover their risk through a single insurance product. However, a problem can arise if a
contractor's negligence causes damage to non-work areas.
For instance, if a contractor's work on an addition to city hall results in damage to the remainder
of the building, the city would not want to be precluded from recouping its loss from the
negligent contractor. The intent is to allow the city to seek recovery from a negligent contractor
1 that causes damage to the city's existing building(s). However, damages to that portion of the
city's building that is being renovated or under construction would not be recoverable from the
negligent contractor.
Recent court decisions have held, absent a separate builders risk policy, this standard contract
language results in a waiver of all subrogation rights, even as to "non-work. "Accordingly, if a
city is meeting its builders risk obligation through use of its LMCIT property coverage,the city
should insist on a contract language modification to protect the city's and LMCIT's right to seek
recovery from a negligent contractor who causes damage to non-work property. In this regard,
we have included at the end of this memo, some suggested modifications to the Standard AIA
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The modifications should also be included in the bid specifications. Use of the sample
form. he mo f s p p
language will likely preserve the city's and LMCIT's right to recover from the contractor.
What are the issues associated with having the contractor procure Builders Risk coverage?
There are a number of issues a city ought to think about when confronted with the alternative of
covering builders risk exposures through a policy procured by the contractor.
• Price should always be a consideration. Inevitably,the cost of an insurance policy purchased
by the contractor will simply be added to the cost of the overall project. Some contractors
may access to very economical insurance products; others may not.
• Confirm the city is included as a named insured on the builder risk policy. Simply being
named as a certificate holder is not enough.
• Pay attention to deductibles and coverage limits. The city will want to assure itself that there
aY g y
are not unanticipated gaps where the city could be financially exposed. Cities should be
aware that Paragraph 11.4.1.3 of the A201- 1997 construction document, states that the
"Owner"(i.e. city) will be responsible to "pay costs not covered by deductibles." If the city
is concerned about deductible exposure, this paragraph should be eliminated or modified to
shift the risk to the contractor.
• Make sure the policy covers items such as work stored off site or work in transit.
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Sample Language to Include in Bid Specifications and Contract Provisions
P P
Modification to 1997 AIA Document A201. (Changes bolded.)
1 11.4.75[DELETE]
11.4.7 Waiver of Subrogation. Except as otherwise provided herein, the Owner and
1 Contractor waive all rights against(1) each other and any of their subcontractors, sub-
subcontractors, agents and employees, and(2) the Architect, Architect's consultants,
separate contractors described in Article 6, if any, and any of their subcontractors, sub-
subcontractors, agents and employees,for damages caused by fire or other causes of loss
to the extent covered by property insurance applicable to the Work, except such rights as
they have to proceeds of such insurance held by the Owner as fiduciary. The Owners or
I Contractor, as appropriate, shall require of the Architect, Architect's consultants,
separate contractors described in Article 6, if any, and the subcontractors, sub-
subcontractors, agents and employees of any of them, by appropriate agreements, written
I where legally required for validity, similar waivers each in favor of other parties
enumerated herein. The policies shall provide such waiver of subrogation by
endorsement or otherwise. A waiver of subrogation shall be effective as to a person or
entity even though that person or entity would otherwise have a duty of indemnification,
contractual or otherwise, did not pay the insurance premium directly or indirectly, and
whether or not the person or entity had an insurable interest in the property damaged.
I Notwithstanding the above, Owner does not waive its rights to subrogate against(1)
contractor, any of its subcontractors, sub-subcontractors, agents or employees, or(2)
the Architect,Architect's consultant, separate contractors described in Article 6, if any,
or any of their subcontractors, sub-subcontractors, agents or employees,for damages
caused to non-Project related property, real or personal or both, at or adjacent to the
site of the Project, caused by the negligent, intentional or other willful act or omission
I of the(1) contractor, any of its subcontractors, sub-subcontractors, agents or
employees, or(2) the Architect,Architect's consultants,separate contractors described
in Article 6, if any, or any of their subcontractors, sub-subcontractors, agents or
employees.
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tT Grundhoefer 04/15/02
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League of Minnesota Cities
mcInsurance Trust
145 University Avenue West,St. Paul,MN 55103-2044
(651)281-1200 • (800)925-1122
,)magus of Minnesota Cities Fax:(651)281-1298 • TDD:(651)281-1290
CMMes promoting ascallonce
,u www.lmnc.org
IRISK MANAGEMENT INFORMATION
COVERAGE DAMA BUILDINGS
IThis memo outlines the different sources FLOOD of coverage for GE the risk TO of flood CITY damage to city
buildings and how the different coverages fit together.
IFEMA disaster assistance
I FEMA can provide extensive and valuable help in a flood disaster,but FEMA assistance isn't an
alternative to flood insurance.
I There are some common misconceptions about the assistance that FEMA (the Federal
Emergency Management Administration)would provide if a city were hit by a flood. One
misconception is that it's a waste of money to buy flood insurance because FEMA will take care
I of it if a flood occurs. Another misconception is that the city gets a"first bite", and that you only
have to worry about buying flood insurance if you've received FEMA assistance for flood
damage in the past. Neither of these is correct, and a city that relies on one of these
Imisconceptions could be forced to eat some significant costs for flood damage.
Two points cities should be aware of regarding FEMA assistance for flood damage to public
Ibuildings:
• If a city building that's in a"Special Flood Hazard Area"(i.e., the 100-year flood plain) is
I damaged by a flood, FEMA disaster assistance will be reduced by the amount that NFIP
(National Flood Insurance Program) flood insurance would cover,whether or not the city
actually has that NFIP insurance. In other words, for a building in the 100-year flood plain,
FEMA won't pay for any flood damage the city could have insured with NFIP.
• If FEMA has previously provided assistance for flood damage to a building not in the 100-
' year flood plain,FEMA will not provide any assistance for damage to that building caused
by a subsequent flood unless the city has flood insurance on the building.
It's also important to remember that not every flood is necessarily a"disaster" for which FEMA
will provide assistance. Localized flooding that affects only a limited area may be too small in
scope for the presidential disaster declaration that's needed in order to qualify for FEMA help,
but could still cause substantial damage to individual buildings.
A FEMA fact sheet entitled"Insurance Considerations for Applicants"provides specific
I information about how insurance coverage relates to the assistance FEMA will provide. The fact
sheet is available at http://www.fema.gov/rrr/pa/9580_3.shtm.
I This material is provided as general Information and is not a substitute for legal advice.
Consult your attorney for advice concerning specific situations.
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LMCIT coverage for flood and water damage
The LMCIT property coverage provides some protection for flood damage to city buildings in I
certain circumstances. It's important that cities understand what is and is not covered, and the
limitations and restrictions that apply to the LMCIT coverage.
There is a$500,000 limit on LMCIT coverage for water and flood damage. This is an aggregate
limit, which applies regardless of how many city buildings may be affected.
There are three components to LMCIT's coverage for water and flood damage:
1. Damage from water and related risks such as mudslides, sewer back-ups, seepage through
foundations, surface water entering through doors or windows, etc. is automatically covered
for all buildings, as long as it's not related to a"flood"—that is, as long as there hasn't been
an event that would trigger coverage under an NFIP flood policy. I
2. Damage from a flood (again, meaning an event that would trigger coverage under an NFIP
policy) is covered for any building that's not in a flood hazard area,which is the 500-year
flood plain. In order to have this coverage for a particular building, the city must identify
each building that is outside the flood hazard area, and have that building scheduled as "Code
A"on your coverage. '
3. For buildings in a flood hazard area, the city can add supplemental flood coverage, IF the city
has NFIP flood insurance in place on that building. The supplemental flood coverage covers
damages that NFIP doesn't, such as replacement cost or certain contents. There's an
additional charge to add this supplemental coverage, which is shown as "Code B" on the
schedule. I
Note that the"flood hazard area" for purposes of LMCIT coverage is not the same as the
"Special Flood Hazard Area" in which the restrictions on FEMA disaster assistance apply. For 111 LMCIT coverage purposes,the"flood hazard area" is the 500-year flood plain. For FEMA
purposes, the "Special Flood Hazard Area"is the 100-year flood plain.
The LMCIT flood coverage codes I
Here's a summary of the coverage codes LMCIT uses to specify the water damage and flood
coverage that applies to each building. Cities and agents should review the city's property
schedule to make sure that each city building has the proper coverage code.
• Code C is the default. This is what the building gets unless you've taken steps to change it. 1
Under Code C, the building is covered only for water damage that is not the result of an
event that the NFIP would consider a"flood".
This material is provided as general Information and is not a substitute for legal advice.
Consult your attorney for advice concerning specific situations.
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• Code B is for the supplemental flood coverage for buildings within the 500-year flood plain.
I Code B means that 1)the building is in the 500-year flood plain; 2)the city has NFIP flood
insurance on the building; and 3)the city has purchased the LMCIT supplemental flood
coverage. For buildings in the flood plain, there is a charge to go from Code C to Code B.
I • Code A is for buildings that are not within the 500-year flood plain. A building with Code A
coverage is covered both for flood damage and non-flood water damage. Any building that
is not within the 500-year flood plain should receive Code A. There is no additional charge
Ito go from Code C to Code A. However, it is the city's responsibility to provide the
information showing where the building is, in order to get that building classed as Code A. If
Ithe city doesn't provide that information to LMCIT,the building remains in Code C.
Similarly, any newly-acquired building automatically receives Code C coverage unless and until
I the city provides information on the building's location to the LMCIT underwriter. That is, any
newly-acquired building is treated as though it is in the 500-year flood plain until the city
provides information showing that it's not.
IThe National Flood Insurance Program
The National Flood Insurance Program (NFIP) is a federal program managed by the Federal
IInsurance Administration(FIA)that makes flood insurance available to property owners. Here's
a quick summary of some key points regarding the NFIP. More detailed and complete
information is available at the FEMA website—http://www.fema.gov/nfip/.
ICommunity participation
I In order for any property owner to be eligible to purchase NFIP flood insurance,the city in
which he/she lives (or the county, for residents of unincorporated areas)must be a program
participant. Thus the city must first become an NFIP participating community in order for the
Icity to be able to purchase NFIP flood insurance for its own buildings.
To qualify to participate in NFIP, the community must adopt and enforce a flood plain
I management ordinance regulating the use of land in the flood plain. State statutes require the
city adopt a flood plain management ordinance if there is a flood plain within the city. M.S.
103F.101 — 103F.155. State law also requires a city to participate in the NFIP if the DNR
I Commissioner determines that the city has any areas that are"subject to recurrent flooding."
M.S. 103F.165.
I About half of the cities and most counties in Minnesota currently participate in NFIP.
Participating communities are listed at http://www.fema.gov/cis/mn.pdf. This document also
lists about 100 Minnesota cities in which"special flood hazard areas" (i.e.,the 100-year flood
Iplain) have been identified but which don't participate in NFIP.
i -- This material i s provided a s general information and is not a substitute for legal advice.
Consult your attorney for advice concerning specific situations.
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How to purchase NFIP flood insurance
Most NFIP flood insurance is written by private insurance companies under NFIP's "Write Your
Own" (WYO)program. The policy forms are standardized and the premium rates are set by the
FIA, so the cost and coverage will be the same regardless of which insurance company writes the
insurance. The flood insurance buyer pays a premium to the insurer and receives a standard
NFIP flood insurance policy. The company keeps part of the premium to cover its expenses and
profit, and forwards the rest to the FIA. The FIA acts as a reinsurer for the insurance company,
and reimburses the insurance company for any flood insurance claims that it pays. I
LMCIT is now an NFIP carrier, so cities can purchase NFIP flood insurance for city buildings
through LMCIT. The cost and the coverage of NFIP flood insurance purchased through LMCIT
are the same as if it were purchased from any other carrier. But by buying it through LMCIT,
the city benefits because the premiums and losses are included in the LMCIT dividend
calculation. LMCIT claims staff will also assist the city at claim time. I
What would an NFIP flood insurance policy on a city building cover?
In very general terms, the NFIP policy would pay for the actual cash value of flood damage to '
the building and contents. It will also pay for the cost of protective measures such as
sandbagging to protect the building. The maximum limit available is $500,000 per building.
Coverage is limited for below-ground contents and fixtures. In general, an NFIP policy would
only cover structural damage to basement walls or foundations, damage to heating and cooling
equipment for the building's operations, and clean-up costs. It wouldn't cover other equipment
or contents,or any costs for carpeting, painting and finishing, etc.
Which city buildings can be covered under NFIP? 1
There's a common misconception that NFIP coverage is only available for buildings that are in a
flood hazard area. This is not correct. Most city buildings are eligible for NFIP coverage,
regardless of their location. In fact,the FIA says that about a quarter of the claims paid under the
NFIP are for buildings outside the 100-year flood plain. NFIP premiums are substantially less
for buildings outside the flood plain.
Certain buildings are not eligible for NFIP coverage at all. If more than 49% of the value of the
building and contents are below ground, the building is not eligible unless the lowest basement
floor is above the 100-year flood level. Water and sewer plants in particular are sometimes
ineligible for NFIP coverage because of this restriction.
(Note: Many homeowners share that same misconception that they can't buy NFIP flood
insurance if their home or building isn't in a flood plain. Assuming the city is a participating
community,those homes and buildings are eligible for NFIP flood insurance, and at much less
expensive rates. This might be a good point to cover as part of a community flood hazard
awareness effort.)
This material is provided as general information and is not a substitute for legal advice.
Consult your attorney for advice concerning specific situations.
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Deductible options
Optional deductibles of up to $50,000 are now available on NFIP flood coverage. Using a large
deductible can reduce the cost of NFIP flood insurance significantly. This insurance continues to
be relatively expensive, so a large deductible option may be worth considering for many cities.
Of course, choosing a big deductible means the city will be financially responsible for that
amount if a loss occurs. But one option to consider is using the extraordinary expense coverage
to cover that deductible if a flood loss occurs. Extraordinary expense coverage is a standard
feature of the city's LMCIT property coverage.
The extraordinary expense coverage is a mechanism by which the city can spread an
unanticipated but necessary expenditure over several years. When the city submits a claim under
1 the extraordinary expense coverage, the city then has up to five years to repay that amount to
LMCIT. The repayment is added to your city's future LMCIT premiums as a surcharge or
retroactive premium. Interest at the rate of 3% is applied beginning in the second year.
If a city were to purchase NFIP flood insurance with a large deductible and a flood loss to that
building were to occur, the city could then use the"extraordinary expense"coverage provisions
of the LMCIT property coverage to finance the city's cost under the deductible. For some cities,
this approach of combining high-deductible NFIP coverage with the LMCIT extraordinary
expense coverage might be a practical way to obtain flood insurance at a reduced cost.
' The NFIP Community Rating System
The NFIP Community Rating System offers discounts from standard NFIP rates for buyers in
cities that have taken extra steps to reduce flood risks, beyond the minimum needed to qualify
for participation in the NFIP. If the city qualifies for Community Rating System discounts,both
' the city itself and every private purchaser of NFIP flood insurance within the city receive the
discount on their premiums.
' Briefly, the Community Rating System gives the city points for a variety of activities relating to
public information about flood risks and preparedness; open space preservation and stormwater
management; relocation and retrofitting activities; and flood warning and safety systems. The
discounts range from 5%to 45%; the more points the city accumulates, the greater the discount.
More detailed information on the Community Rating System can be found at
http://www.fema.gov/nfip/crs.shtm.
The NFIP Community Rating System seems to be little known and little used in Minnesota.
According to the FIA, only two Minnesota cities and one county have qualified for discounts.
1
Pete Tritz 9/04
This material is provided as general information and is not a substitute for legal advice.
Consult your attorney for advice concerning specific situations.
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LMCIT
Risk Management Information
1'1 g
ILeague of Minnesota Cities 145 University Avenue West, St. Paul, MN 55103-2044
Cities Promo g excellence Phone: (651) 281-1200 • (800) 925-1122
I Fax: (651) 281-1298 • TDD (651) 281-1290
www.lmcit.lmnc.org
I MUNICIPAL ELECTRIC UTILITIES
"BUSINESS INTERRUPTION" COVERAGE LIMIT CHANGES
IFor renewals after November 15, 2000, a$500,000 per occurrence sub-limit will apply to claims
for loss of income and extra expense relating to municipal electric utilities. This is a reduction
I from the $5,000,000 limit that's available for these claims under the current coverage. Higher
limits will continue to be available for electric utilities' loss of income/extra expense exposures,
for an additional charge.
IThis change only affects municipal electric utilities. For cities' other loss of income/extra
expense risks, LMCIT will continue to automatically provide a standard coverage limit of
I $5,000,000.
Why is this change being made?
IThree years ago, LMCIT completely revised the property coverage provided to member cities.
The goal was to provide member cities with better protection for their property risks and to make
I the process simpler and more foolproof for cities. Changes included moving to a"blanket limits"
approach for all cities, and providing all coverage on a replacement cost basis with no
coinsurance provisions. A number of broadening features were also incorporated, so that cities
I would no longer need to specifically request and pay extra to cover a variety of typical risks.
These included providing automatic coverage for computer exposures, valuable papers, glass,
police dogs,and fine arts; and automatically providing $5,000,000 of coverage for the"business
Iinterruption"risks; i.e., loss of revenue, extra expense, and expediting expense.
As we've gained experience with the revised coverage, it's become clear that this"business
interruption"risk is much more significant for municipal electric utilities than for other types of
Icity operations. If the utility's generating capacity is impaired because of a fire, explosion, or
similar loss*, it can sometimes mean very substantial amounts of lost revenue for the utility until
that generating capacity can be replaced. And in many cases, municipal utilities are required by
Icontract to provide specified amounts of power to the grid; if the utility has to purchase power to
meet those obligations; that extra expense can also be very substantial. To be fair to all of
LMCIT's member cities,we need to make sure that these risks are appropriately reflected in the
Ielectric utilities' premiums.
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O interruption limits for utilities Optional higher business interru
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The basic business interruption coverage limit that municipal utilities receive as part of the
property coverage will now be $500,000 per occurrence. This is a sub-limit within the overall
loss of income/extra expense limit of$5,000,000 per occurrence.
Municipal electric utilities will have the option to increase that sub-limit for an additional
premium. The additional charge will be based on the limit selected, the types of generating
equipment involved,the condition and maintenance of that equipment, and the utility's
contractual obligations to provide power. Contact your LMCIT underwriter to obtain a quote for
those higher limits.
* Note: It's important to keep in mind that this loss of income/extra expense coverage is only
triggered where there's been some direct physical damage of a type that's covered by the city's
property coverage, such as a fire or storm damage. It would not apply in a situation where the
damage to the utility's generating capacity was caused solely by a machinery breakdown
problem; i.e, where only the utility's "boiler"or"machinery breakdown" coverage, and not the
utility's property coverage, is triggered.
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League of Minnesota Cities
' Insurance Trust
145 University Avenue West,St. Paul,MN 55103-2044
rcLitiaw ta Cihes (651)281-1200 • (800)925-1122
cellence Fax:(651)281-1298 • TDD:(651)281-1290
www.lmnc.org
MUNICIPAL ELECTRIC UTILITY
PROPERTY AND MACHINERY BREAKDOWN
' COVERAGE OPTIONS
Covering damage to municipal electric utilities' generation equipment poses some issues and
considerations that are different from other types of municipal property. To address these issues,
LMCIT has developed some special coverage forms and options for property coverage for
municipal utilities. The intent is to meet municipal utilities' property coverage needs in as
' flexible and cost-effective a way as possible.
This memo outlines the special coverage options LMCIT has developed for municipal utilities.
' We'd urge municipal utility staff and agents to contact LMCIT with any questions, or with any
suggestions you have for ways LMCIT could better meet municipal utilities' needs.
Replacement cost coverage for generation and related equipment
The replacement cost coverage LMCIT provides for electric utility equipment differs from the
' coverage LMCIT provides for other municipal property in an important way: the coverage for
utility equipment allows for the use of used parts and materials to repair or replace damaged
utility property, if used parts and materials of comparable kind and quality are available. By
' contrast, the replacement cost coverage for other municipal property specifies that repairs or
replacement will be made with new materials of like kind and quality.
' There are two main reasons why LMCIT has adopted this approach as the standard coverage for
electric utility equipment:
• In some cases with older equipment, new parts may not be available, so the only feasible
option for making repairs is with used equipment or parts.
1 • It reduces the cost. If comparable used equipment is available, it will generally be less
expensive than using new parts and materials. That difference in loss cost directly affects
premium costs.
The utility does have the option in most cases to purchase replacement cost coverage which
entitles it to "new for old"replacement coverage. A higher premium rate is charged for this
option. In most cases the "new for old" coverage option probably offers little real advantage to
the utility. Note that the "new for old" coverage option will only be offered if it can be verified
that new parts are in fact available for the particular equipment.
AN EQUAL OPPORTUNITY/AFFIRMATIVE ACTION EMPLOYER
1
Replacement cost values and limits
Estimating the replacement cost of electric utility equipment can be difficult, in part because of
the wide variety of types and ages of the equipment. The goal is to come up with a figure for
what it would cost to reconstruct the facility exactly as it was, using new materials, if the facility
were completely destroyed. This "estimated replacement cost" figure is then used as the basis
both for the specific coverage limit for that building, and for the premium charge.
Note that although the coverage document provides that used parts and equipment may be used if
they're available, the "estimated replacement cost" is always based on the cost of making the
repairs or replacement using new equipment. That's because we can ne%er be assured that
comparable and appropriate used equipment will actually be available at the time a loss occurs,
so it's always possible that new materials would therefor have to be used for the repair or
replacement.
In most cases, the "estimated replacement cost"for each covered structure is developed through '
an appraisal by LMCIT's appraisal contractor. For relatively new equipment— i.e.,no more than
a few years old—the "estimated replacement cost" figure may be based on the equipment's
original cost. In any case, it's always extremely important that the utility staff review these
"estimated replacement cost" figures and make sure that they appear reasonable.
The "estimated replacement cost" for each structure is listed on the property schedule. The '
specific coverage limit for that structure is 150% of the "estimated replacement cost". This is the
most LMCIT would pay to repair or replace that structure and its contents if a loss were to occur.
While the 150% provision allows a sizeable margin for error in the "estimated replacement cost",
we'd again stress the importance of reviewing the "estimated replacement cost" figures shown
on the schedule to make sure they seem reasonable.
Agreed amount options
In some situations, the standard replacement cost approach could result in the municipal utility ,
purchasing and paying for higher coverage limits than what are actually needed. Here are two
situations where this might occur:
• The existing facility has a greater generating capacity than what the utility ty actuall needs. If
the facility were destroyed or substantially damaged, the utility would likely replace it with a
smaller facility,possibly of a different type.In this situation, it may make sense to use an
"agreed amount" coverage limit based on the cost of the type and size of replacement facility
that the utility would actually construct.
The existing facility uses older technology, its capacity could be replaced for less cost
• g ty gY, P tY p
using a different technology. (I.e., it may be less expensive to build a gas turbine generation
facility with X megawatt capacity than to rebuild a coal-fired steam turbine facility.) In this
case, it may make sense to use an "agreed amount" coverage limit based on the cost of the
type of replacement facility that would actually be constructed.
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In these types of situations, LMCIT offers the utility the option to purchase coverage for an
"agreed amount" which is less than the estimated replacement cost of the facility. Both the
coverage limit and the premium will be based on that lower"agreed amount".
In some circumstances, this "agreed amount" approach may be an attractive option for the utility,
but it has to be done carefully. Here are some points to keep in mind:
• When the "agreed amount" approach is used, the coverage limit for the facility is equal to
that agreed amount—not 150% of the agreed amount. Therefore, it's important to calculate
and select the agreed amount carefully, and perhaps to incorporate some safety margin in that
amount as well. If the actual cost were to turn out to be greater than the agreed amount that
was scheduled for that facility, the utility would have no coverage for that excess cost.
• In selecting an"agreed amount" for a particular facility, we recommend that the amount be
based on the cost of constructing the needed generating capacity using new materials and
equipment. If the amount were based on the estimated construction cost using used
equipment, the limit could be inadequate if it were to happen that appropriate used equipment
happened not to be available at the time of the loss.
• It's important in these situations to make sure that the coverage limit for demolition and
debris removal is adequate, especially in situations where there's an old facility that has
substantial unneeded and unused generating capacity. If a facility is partially destroyed and
the cost to repair that damage is equal to or greater than the agreed amount, the utility will
presumably choose to replace the facility. But a substantial portion of the old facility might
still be standing and need to be demolished and removed.
Obsolete equipment
Some utilities have old and essentially obsolete generating equipment. In some cases, that
equipment may be used on a occasional basis, perhaps to provide peaking power or replacement
power while other equipment is being serviced, etc.
This sort of obsolete equipment presents several problems for both the utility and LMCIT. In
some cases,replacement parts— either new or used—may simply not be available. That could
effectively turn what might otherwise be a minor loss into a total loss. Providing replacement
cost coverage on this type of equipment is problematic therefor, since the risk is significantly
greater than with repairable equipment. At the same time though, that old equipment may be
serving an important need for the utility, by providing needed emergency back-up or peaking
capacity.
I ,
In general, an "agreed amount" approach will be used for this type of equipment as well. In some
cases—e.g., where the equipment doesn't play a critical role for the utility—the amount might
simply be the current market value of the property. In other situations, a larger agreed amount
may be appropriate, to address the cost of replacing that functional capacity. LMCIT
underwriters will work with the utility to try to find a workable solution for each situation.
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Loss of revenue/extra expense coverage limit
The LMCIT roe coverage includes $500,000 of coverage for loss of revenue, extra expense, I
property rtY g g
and expediting expense arising from covered damage to utility property. Higher limits are
available for municipal electric utilities, but there will be an additional premium charge. Contact
I
your LMCIT underwriter for information.
1
Keep in mind that the loss of revenue/extra expense coverage would not apply to al oss or
revenue or extra expense resulting solely from a machinery breakdown—i.e., from a "boiler and
machinery" type loss. The loss of revenue /extra expense coverage is only triggered if there has
been damage of a type that is covered under the basic LMCIT property coverage document, such
as fire, windstorm, etc.
Machinery breakdown ("boiler and machinery") coverage
I
Municipal electric utilities pose some special issues with regard to machinery breakdown
coverage. The needs, problems, and risks of different municipal electric utilities vary I
substantially, and the coverage terms, limits, deductibles, exclusions, and pricing must therefor
be individualized as well. In some cases, it may be possible to use an"agreed amount"approach
on the machinery breakdown coverage as well, but this would need to be discussed and approved
on an individual basis. I
LMCIT can provide machinery breakdown coverage for Diesel generating equipment,but not for
other types of electrical generation equipment such as steam or gas turbines,wind turbines, or I
hydro-electric facilities. LMCIT can also provide machinery breakdown coverage for
transformers, switching equipment, etc. for municipal electric utilities that don't have generation I
capacity. For utilities that have generation equipment other than Diesels, LMCIT will assist in
placing the machinery breakdown coverage with HSB. If the utility has both Diesel and other
types of equipment, the entire risk will be placed with HSB.
When LMCIT is providing machinery breakdown coverage for Diesel generation facilities,
newly-acquired Diesel equipment will be automatically covered for up to 90 days, subject to a
$5,000,000 limit. However, the newly acquired equipment must be reported to LMCIT within
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that 90-day period in order to have continued coverage. In general, any newly-acquired
equipment should be reported to the underwriter as soon as possible, regardless of whether the
machinery breakdown coverage is being provided by LMCIT or by HSB.
I
Two other points should be noted:
I
1. Each utility's equipm e nt has to be evaluated individually. Certain equipment ma not qualify
for breakdown coverage because of its age or condition.
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2. At this time, neither LMCIT nor HSB is able to provide coverage to electric utilities for loss
of income or extra expense resulting from a machinery breakdown loss.
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Utility Poles and Wires
ILMCIT's standard property coverage excludes coverage for damage to city utility poles and
lines. This could leave some utilities with a significant uncovered expense in the event of a
widespread ice or windstorm that downs lines.
ITo help avoid this potential problem, LMCIT offers optional property coverage for city utility
poles and transmission and distribution lines. The coverage is subject to a $50,000 deductible per
1 occurrence and a $500,000 limit. The rates for the coverage are based on the number of miles of
transmission and distribution lines.
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' LMCIT
L MC
Risk Management Information
I sagas of Minnesota Cities 145 University Avenue"West, St. Paul, MN 55103-2044
Cities promoting excellence Phone: (651) 281-1200 • (800) 925-1122
Fax: (651) 281-1298 • TDD (651) 281-1290
www.lmcit.lmnc.org
NEW COVERAGE FOR EXTRAORDINARY CITY EXPENSES
LMCIT member cities' property coverage now include a new type of coverage for extraordinary
expenses. This new coverage provision is designed to assist a city that's been unavoidably hit by
unexpected expenses—necessary costs and expenditures that the city wasn't able to anticipate
and budget for.
One of the LMCIT Board's strategic goals is to explore ways to assist cities with a broader range
of risks than those that have traditionally been considered"insurable". This new"extraordinary
expense" coverage is one such initiative.
This new extraordinary expense coverage is very experimental. There's no precedent for any
pool or insurer to do anything like this, and no real experience we can draw on. It's conceivable
that we may find that it isn't feasible to continue providing this coverage, and that we'd be
forced to discontinue it. We don't expect that that will be necessary,but the LMCIT Board can if
necessary discontinue this coverage at any time during the coverage period.
Another thing to consider is that the new extraordinary expense coverage works quite differently
from other LMCIT coverages. It will be very important for any city making a claim under this
coverage to understand exactly how it works and what the city's obligations will be.
How does this new coverage work?
The coverage is designed to operate mostly as a risk financing mechanism, rather than as a risk
transfer mechanism. That is,unlike other LMCIT coverages, it doesn't spread the city's risk
among all the other member cities; instead, it's a way for the city to spread an expense over time.
A city that incurs an extraordinary and unexpected expense could submit up to $100,000 of that
expense for payment under this coverage. The city would then in effect repay that amount to
LMCIT over a period of up to five years. The repayment would be made in the form of a
surcharge—a"retroactive premium", if you will—added to the city's future premiums.
If the repayment is made within a year, the repayment would be on a dollar-for-dollar basis. If
the city chooses to make the repayment over a longer period, an additional charge—the
equivalent of a 3%interest rate—would be added beginning in the second year. If the city were
to Ieave LMCIT,the entire amount would be immediately due and payable.
I
What kinds of"extraordinary expenses" are eligible? '
To be eligible under the"extraordinary expense"coverage, the city's expenditure must meet four
basic criteria:
1. The expenditure must be "extraordinary". That is, it must be greater than what the city's
normal expected expenditures would be.
2. The expenditure must be"unanticipated". That is, it must be something that the city didn't
anticipate and couldn't have reasonably been expected to anticipate.
3. The expenditure must be something that's necessary either to protect the public health and
safety, or to meet the city's legal obligations.
4. The expense must be something that's not covered under any other coverage or insurance
policy.
These criteria are intentionally fairly broad, in order to make the coverage as flexible and useful
to cities as possible. The idea is to address a wide variety of unanticipated and extraordinary
expenses which the city might be obliged to incur. Some possible examples of such expenditures
are
I
• Additional police or prosecution costs for a significant criminal incident
• The city's share of clean-up costs for a landfill that city refuse once went into 1
• Uninsured flood damage to a city building
• Storm clean-up costs where there's no damage to city buildings
• A liability judgment or settlement that exceeds the city's available coverage I
• Extra snowplowing costs in a year with an extraordinarily high snowfall.
A city submitting a claim will need to provide information showing that its expenditure meets
the coverage criteria; i.e.,that the expense was in fact extraordinary,unanticipated, and
necessary. The final determination will be made by the LMCIT Board. Normally, of course,the I
Board doesn't become directly involved in individual claims unless there's a problem of some
sort. But given the experimental nature of this new coverage and the very broad and somewhat
"judgmental"criteria for claims eligibility, the Board concluded that it was appropriate in case,
at least initially.
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What's the limit on this coverage?
IThere are a couple limits to be aware of. First, the coverage itself has a limit of$100,000 per
year on the city's claims under the extraordinary expense coverage. That limit applies regardless
of the number of claims, occurrences or incidents the city has.
ISecond,the LMCIT Board has authorized an appropriation of up to $3,000,000 in total for
claims from all cities under this coverage. If the total of claims that cities submit under the
I coverage were to approach or exceed the amount appropriated, the Board would review whether
it's feasible to continue the coverage. Note that the LMCIT property coverage document
specifies that the Board has the authority to terminate the extraordinary expense coverage at any
I time, if the Board determines it's necessary to protect the interests of LMCIT and its member
cities.
I This limited appropriation and the Board's ability to terminate the coverage if necessary reflect
the experimental nature of this coverage. Since there isn't any precedent or experience we can
draw on, we really can't be sure exactly what to expect.
IWho can we contact with questions or to submit a claim?
IContact Pete Tritz or Doug Gronli at the League office.
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I \ League of Minnesota Cities
LMC Insu rance Trust
145 University Avenue West,St.Paul,MN 55103-2044
of Meanasota Citrae (651)281-1200 • (800)925-1122
"" Fax:(651)281-1298 • TDD:(651)281-1290
Cities promoting t ccanonc.
www.lmnc.org
LMCIT RISK MANAGEMENT MEMO
LMCIT AUTO COVERAGE
I1
Like all LMCIT coverages, the LMCIT auto coverage is designed to meet member cities' auto
II coverage needs in as simple and foolproof a manner as possible. This memo addresses some of
1 10 the unique coverage approaches and coverage options that LMCIT has developed in order to
better meet cities' unique needs. These include:
I • How premiums are established
• What does and doesn't need to be reported and scheduled
1 • Replacement cost coverage for certain vehicles
• Optional no-fault(PIP) coverage for certain public safety vehicles
• Optional uninsured/underinsured motorist(UM/UIM) coverage for certain public safety
vehicles
• Optional higher limits for UM/UIM
• Liability coverage for private vehicles used on city business
i • Personal use of city vehicles
Auto coverage premiums
1 LMCIT bases premiums for auto liability and auto physical damage coverage on the schedule of
vehicles the city provides at the beginning of the coverage period. New vehicles the city acquires
I,I I are automatically covered. They do not need to be reported or scheduled mid-term, and there is
no additional mid-term premium charge for adding those vehicles. Of course,those newly
acquired vehicles would have to be reported at the city's next renewal,assuming the city still has
I the vehicle. Similarly, if the city gets rid of a vehicle during the year,there is no return premium
due for deleting that vehicle.
IlAuto physical damage coverage options
The LMCIT auto physical damage coverage now applies automatically on a blanket basis to all
1 vehicles that the city owns, leases, rents, or borrows,unless the city specifically elects not to
cover a particular vehicle or vehicles. With respect to auto physical damage coverage,there are
three situations that must be reported to LMCIT and specifically scheduled or endorsed:
I • Any individual vehicle the city wishes to cover for replacement cost. Generally, replacement
cost coverage is available for public works,utility, and public safety vehicles that are less
than 10 years old. Consideration will be given to older vehicles that have been well
maintained and overhauled or updated as needed.
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• Any owned,borrowed,rented, or leased vehicle for which the city does not want coverage
for physical damage. In other words, the "default"is that the city will automatically have
ACV coverage on every vehicle the city owns, rents, leases, or borrows,unless the city tells
LMCIT otherwise. Note: When a city employee or volunteer uses his/her own vehicle on city
business, that vehicle is not considered to be a"borrowed"vehicle and is not covered for
physical damage.
• Any non-city-owned vehicle that is not borrowed,rented, or leased for city use, on which the I
city wants coverage for physical damage.
An example of the latter might be an auto that the city has seized as evidence or impounded for a
traffic or parking violation. In order to have physical damage coverage on these vehicles, the
vehicles would need to be specifically scheduled. Keep in mind though that the city's liability
coverage would in any case apply to damage to a seized or impounded vehicle if the city is
legally liable for that damage; i.e., if the damage was due to some negligence on the city's part.
In most cases, there seems little reason from a public policy standpoint why the city would want
to add physical damage coverage on impounded vehicles, since the liability coverage will
already pick up whatever damage to those vehicles the city is liable for.
No-fault(PIP) Coverage I
LMCIT automatically provides no-fault(PIP) coverage on any vehicle for which the city is
required by law to carry no-fault coverage. In general, state law requires no-fault coverage on I
every registered vehicle.However, certain public safety vehicles"the general appearance of
which is unmistakable"—i.e., fire vehicles,ambulances, and marked police vehicles—are not
required to be registered, and therefore are not required to be covered by no-fault. Unmarked
squad cars and police undercover vehicles are required to be registered, and are therefor
automatically covered by no-fault.
If the ci ty wishes to have no-fault coverage on its fire, ambulance, or marked police vehicles,
you must specifically request and schedule that coverage. The cost is 11% of the auto liability
premium for that vehicle. I
The primary purpose of PIP is to cover injuries to the operator and/or occupants resulting from
an accident in that vehicle. In general, medical costs and treatment for a city employee operating
a city vehicle on city business will be covered by work comp if s/he were injured in an accident,
so the PIP coverage really doesn't offer any advantage in that circumstance.
However, there are a few other circumstances in which PIP coverage on a city vehicle can come
into play:
• PIP would also protect a passenger in the vehicle who is not a city employee. The city should
consider whether the city vehicle will have non-employee passengers,and if so whether you
wish to provide PIP protection to those passengers. Keep in mind that in very many cases the
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non-employee will also have his/her own no-fault coverage under his/her personal auto
I policy. If so,the only real effect of adding PIP coverage on the city vehicle would be that the
city's PIP rather than the individual's would be first in line to pay.
• The city's policies may allow the employee to use the vehicle for personal, non-city business.
An example might be a squad car take-home program for police officers. Again, keep in
mind that most employees will have PIP protection under their own auto policies,which
Iwould apply if the city does not have PIP on the city vehicle.
• Another situation in which the no-fault coverage can cover a non-employee is if a city
vehicle were to hit a pedestrian who doesn't have no-fault coverage of his own. Of course, if
I that accident were the city driver's fault, the LMCIT auto liability coverage would cover the
city's or the driver's liability for the injuries to the pedestrian. The PIP coverage would come
Iinto play only in a case where the pedestrian accident wasn't the city driver's fault.
In deciding whethe r or not to purchase PIP coverage on vehicles where it's not required by law,
the city should evaluate whether the benefit in these relatively limited circumstances is worth the
5 cost.
I Uninsured/underinsured motorist coverage
As with no-fault, LMCIT automatically provides UM/UIM coverage on any vehicle where it's
I YP g Y
required by statute. But, again like no-fault, the statutes don't require UM/UIM coverage on
those public safety vehicles which are not required to be registered. We believe it makes sense
for most cities to carry the minimum limit rather than providing higher limits, and to cover only
those vehicles where it's required by statute.
IThe UM/UIM coverages are designed to help assure that an injured driver will be compensated if
s/he 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 other driver should have had. But
in most cases an injury to a city employee driving a city vehicle would be covered by workers'
compensation, and the amounts that individual would recover from UM/UIM would be in
I addition to the medical, indemnity, and other benefits paid under work comp. In many cases,that
would amount to a double recovery for the individual's injuries.
I The city has the option to add UM/UIM coverage on vehicles where it's not required, or to
increase the UM/UIM coverage limit form the basic $50,000 to $1,000,000. The cost is $4 per
vehicle to add basic UM/UIM coverage on unregistered public safety vehicles, and $10 per
Ivehicle to increase the UM/UIM limit to $1,000,000.
A city might decide add UM/UIM coverage on vehicles where it's not required, or to carry a
Ihigher UM/UIM limit for a couple reasons:
• if the city believes that workers' compensation benefits are insufficient to compensate their
Iinjured employees; or
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• 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 cases
the passenger's own UM/UIM would also respond.)
• if the city allows personal use of the vehicle. Injuries from an accident occurring while the I
employee is using a city vehicle for non-city business would not be covered by work comp.
Again, keep in mind that most employees will also have UM/UIM protection under their own
personal auto policies.
Auto liability coverage—employees' or volunteers' vehicles used on city business
Cities have the option to make the LMCIT auto liability coverage primary for privately owned
vehicles used on city business by specified individuals or groups in specified circumstances (e.g.,
firefighters responding to calls). There is a premium charge per vehicle for this optional
coverage.
This option may make sense for situations where an employee or volunteer uses his/her own
vehicle on city business but the city doesn't reimburse mileage for that use. A volunteer
firefighter responding to an emergency call is a common example of that situation.
On the other hand, it probably doesn't make sense for the city to make the LMCIT auto liability
coverage primary for situations where the city is reimbursing the employee or volunteer for
mileage. In that situation, the city is effectively paying part of the individual's own liability
insurance premium, since that cost is included in the mileage reimbursement rate. Since the city
is paying a proportionate part of the premium of the individual's liability insurance,it's
reasonable that the city should receive the benefit of that insurance.
Personal use of city vehicles
to use city vehicles for personal non-city business. Take-
home sometimes allow employees ty p y
home squad cars are one example. Another is that cities will sometimes allow a public works
employee to take a city vehicle home if that employee will be on call to respond to emergencies. I
The city's LMCIT liability coverage on the vehicle will cover the employee or any authorized
other operator of a city vehicle for personal use of the vehicle provided that the use is within the I
scope of what the city has authorized. LMCIT will also cover the city for any liability the city
incurs resulting from personal use of the vehicle, even if that use was outside the scope of what
the city authorized.
If the city does allow personal use of city vehicles by city employees or volunteers, it's important
to make sure that it's clear exactly what use is and is not permitted. One way to do this would be
for the city to develop and adopt a formal policy on personal use. If it's a unique situation
involving only one city employee, an alternative would be to develop a written memo spelling
out the arrangements for personal use of the city vehicle. I
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IRegardless of the form it takes, here are some points that should be addressed:
• Is anyone other than the city employee him/herself allowed to operate the city vehicle?
I: LMCIT recommends that only the city employee him/herself be permitted to operate the
vehicle. Family members and others should not be permitted to operate the vehicle except in
case of a bona fide emergency.
I • Anyone operating a city vehicle is expected at all times to obey all traffic laws.
• LMCIT recommends that the city specify that the employee may not operate the vehicle after
any consumption of alcohol.
• Are there any restrictions on where the vehicle may be taken on personal use?E.g., can the
vehicle be taken outside city limits or some other specified geographical region?
I • City reserves the right to revoke the permission for personal use of the auto at anytime.
• If the city allows any exceptions to the personal use policy, it should be clear in the policy
I which city official has the authority to authorize an exception, and a written record should be
made of any exception that is authorized.
I Obviously, it's important that the city employees be aware of and understand the city policy. For
this reason, it may be helpful to keep a copy of the policy or memo in the vehicle at all times. It
may also be helpful to require affected employees to sign an acknowledgment form, stating that
I they have read, understood, and agreed to the policy.It's especially important that the employee
understand that if the vehicle is used outside the scope of what the city has authorized, they
and/or their family members will not be covered by the city's LMCIT auto coverage.
A final comment
i The LMCIT risk management memo "Operation of Employees' and Volunteers' Vehicles on
City Business"provides additional information on related topics. That memo is available on the
LMC website www.lmnc.org or by contacting LMCIT.
Please keep in mind that this memo is a general summary of how auto coverage works. We can't
anticipate and address every possible combination of facts and circumstances that might affect
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coverage in a particular situation. In any situation, we need to look at what the specific facts are
and how the actual language of the applicable coverage documents applies to those facts.
Finally, if you have particular questions that this memo doesn't address, feel free to give Pete
Tritz, Bill Everett or any your LMCIT underwriters a call.
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I145 University Avenue West, St. Paul,MN 55103-2044 1.4MC Phone: (651) 281-1200 • (Soo) 925-1122
League of Minnesota Cities Fax: (651) 281-1298 •TDD (651) 281-1290
Cities promoting excellence
www.lmcit.lmnc.org
I
IFebruary 20,2004
To: LMCIT member cities and agents
IFrom: LMCIT
IRe: PIP/UM/UIM coverage review
A recent court decision (04/03) created an issue concerning PIP (no fault) and
I uninsured and underinsured motorist coverage. The court held that the statute that
requires PIP coverage only applies to vehicles that are required to be registered and that
automobiles such as marked police, fire and ambulances that are not required to be
Iregistered are therefore not automatically covered for PIP.
While this court decision only applies specifically to PIP, it also affects UM and UIM
coverage as well since the UM/UIM statute uses the same language as the PIP statute.
LMCIT PIP/UM/UIM coverages
I Since these coverages are not required by statute, on vehicles that are not required to be
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registered such as marked police, fire and ambulances; LMCIT does not provide
Icoverage unless the city specifically requests either or both of these coverages. This
applies to all covenants .
ICoverage options
After November 14, 2003, or the city's next renewal date,whichever is later,the city
can choose either or both of these optional coverages on these unregistered vehicles.
There will be additional premium charged.
IIn addition, if the city wants either or both of these coverages before their next renewal
date, the city should contact their agent and LMCIT will add these coverages the date
I the city contacted their agent. The premium will be waived for the current coverage
term only. The city should specifically request if they want coverage for their current
coverage period only or, for both their current and renewal coverage periods.
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Things to think about The city should review these coverage options closely .We
have included a brief discussion of these options below, which is also found in the
LMCIT risk information memo, Things To Think About When Renewing Your City's
Property/Casualty Coverage. There is also a discussion about the optional higher limits
for UM/UIM . I
No-fault(PIP) Coverage
LMCIT automatically provides no-fault(PIP) coverage on any vehicle for which
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the city is required by law to carry no-fault coverage. In general, state law
requires no-fault coverage on every registered vehicle. However, certain public
safety vehicles"the general appearance of which is unmistakable"—i.e., fire
vehicles, ambulances, and marked police vehicles—are not required to be
registered, and therefore are not required to be covered by no-fault. Unmarked
squad cars and police undercover vehicles are required to be registered, and are
therefore automatically covered by no-fault.
If the city wishes to have no-fault coverage on its fire, ambulance, or marked
police vehicles, you must specifically request and schedule that coverage. The
cost is 11% of the auto liability premium for that vehicle.
In general, a city employee operating a city vehicle on city business will be
covered by work comp if s/he were injured in an accident. However, one possible
reason a city may wish to have no-fault protection in place on these vehicles is to
protect passengers who are not city employees. Another possible reason for
adding no-fault coverage where it's not required by statute is if the city allows
off-duty use of the vehicle by the employee; a take-home squad car might be an
example. Of course, in many cases a passenger or off-duty city employee may
also already be covered by no-fault coverage through a private auto insurance
policy on his/her own vehicle. Another situation in which the no-fault coverage
can cover a non-employee is if a city vehicle were to hit a pedestrian who doesn't
have no-fault coverage of his own.
Uninsured/underinsured motorist coverage I
As with no-fault, LMCIT automatically provides UM/UIM coverage on any
vehicle where it's required by statute. But, again like no-fault, the statutes don't
require UM/UIM coverage on those public safety vehicles which are not required
to be registered. We believe it makes sense for most cities to carry the minimum
limit rather than providing higher Iimits, and to cover only those vehicles where 1
it's required by statute.
The UM/UIM coverages are designed to help assure that an injured driver will be I
compensated if s/he is injured in an accident caused by an uninsured or
underinsured driver. The UM/UIM coverage steps into the place of the liability
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Iinsurance that the other driver should have had. But in most cases an injury to a
city employee driving a city vehicle would be covered by workers' compensation,
and the amounts that individual would recover from UM/UIM would be in
Iaddition to the medical, indemnity, and other benefits paid under work comp. In
many cases, that would amount to a double recovery for the individual's injuries.
IThe city has the option to add UM/UIM coverage on vehicles where it's not
required, or to increase the UM/UIM coverage limit form the basic $50,000 to
I $1,000,000. The cost is$4 per vehicle to add basic UM/UIM coverage on
unregistered public safety vehicles, and$10 per vehicle to increase the UM/UIM
. limit to $1,000,000.
IA ci ty mi gh t decide add UM/UIM coverage on vehicles where it's not required, or
to carry a higher UM/UIM limit for a couple reasons:
I • if the city believes that workers' compensation benefits are insufficient to
compensate their injured employees; or
I • 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
I underinsured vehicle. (Note that in most cases the passenger's own
UM/UIM would also respond.)
If you have any questions, please contact Pete Tritz,LMCIT Administrator or
your LMCIT underwriter.
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LMCIT
Risk Management Information
League of Minnesota Cities 145 University Avenue West, St. Paul, MN 55103-2044
Cities promoting excellence Phone: (651) 281-1200 • (800) 925-1122
Fax: (651) 281-1298 •TDD (651) 281-1290
www.lmcit.lmnc.org
OPTIONAL "NO-FAULT" SEWER BACK-UP COVERAGE
LMCIT offers property/casualty member cities"no-fault" sewer back-up coverage. This new
optional coverage will reimburse a property owner for up to $10,000 of clean-up costs and
damages caused by a sewer back-up, irrespective of whether the city was negligent or legally
liable for those damages.
This new coverage option is intended to do several things:
To reduce health hazards by encouraging property owners to get back-ups cleaned up as
quickly as possible.
• To reduce the frequency and severity of sewer back-up lawsuits. I.e.,property owners may be
less inclined to sue if they receive conciliatory treatment at the time of the back-up.
I • To give cities a way to address the sticky political problems that can arise when a property
owner learns that the city and LMCIT won't reimburse him for his sewer back-up damages
because the city wasn't negligent and is therefor not legally liable.
Many cities and their citizens may find this new coverage option to be a helpful tool. However,
it's also important to realize that it's not a complete solution to sewer back-up problems, and that
not every possible back-up will be covered.
What sewer back-ups would be covered by the new coverage?
The no-fault coverage would reimburse the property owner for sewer back-up damages,
regardless of whether the city was legally liable, if the following conditions are met:
• The back-up must have resulted from a condition in the city's sewer system or lines. A back-
up caused by a clog or other problem in the property owner's own line would not be covered.
• It's not one of the situations that's specifically excluded in the coverage.
• The coverage limit has not been exceeded.
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Which situations ar e excluded?
The no-fault coverage will not apply in several"catastrophic"type situations. Specifically,these j
are:
• Any weather-related or other event for which FEMA assistance is available; I
• Any interruption in the electric power supply to the city's sewer system or to any city sewer
lift station which continues for more than 72 hours; or I
• Rainfall or precipitation that exceeds the amount determined by the National Weather
Service to constitute a 100-year storm event. 1
What costs would be covered?
The no-fault sewer back-up coverage would reimburse the property owner for the cost of
cleaning up the back-up, and for any damage to the property, up to the coverage limit. For
purposes of the city's deductibles, claims under the no-fault coverage are treated as liability
claims, so the same per-occurrence and/or annual deductibles will apply.
However, there are certain costs that would not be reimbursed under the no-fault coverage: I
• Any costs which have been or are eligible to be covered under the property owner's own
homeowner's or other property insurance; and I
• Any costs that would be eligible to be reimbursed under an NFIP flood insurance policy,
whether or not the property owner actually has NFIP coverage. I
What is the coverage limit?
The limit is$10,000 per building per year. For purposes of the limit, a structure or group of I
structures that is served by a single connection to the city's sewer system will be considered a
single building.
Only true "no-fault" claims are counted toward the $10,000 limit. Claims for damages caused by
city negligence, for which the city would be legally liable in any case, are not charged against
that limit.
What does it cost?
The premium charge for the optional no-fault sewer back-up coverage will be 8.5% of the city's
municipal liability premium. The LMCIT Board's intent is that this coverage option be self-
supporting, so we'll be monitoring and if necessary adjusting these charges in the future.
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Is every city automatically eligible?
INo. The city will need to meet these underwriting criteria:
• The city must have a policy and practice of inspecting and cleaning its sewer lines on a
reasonable schedule.
• If there are any existing problems in the city's system which have caused back-ups in the past
I . or are likely to cause back-ups,the city must have and be implementing a plan to address
those problems.
I • The city must have a system and the ability to respond promptly to back-ups or other sewer
problems at any time of the day or week.
I • The city must have in place an appropriate program to minimize stormwater inflow and
infiltration.
I • The city must have in place a system to maintain records of routine sewer cleaning and
maintenance, and of any reported problems and responses.
I We'd stress that in making the underwriting evaluation we're trying to focus on reasonableness,
rather than on creating very specific standards. That is, the intent isn't to set an arbitrary
requirement that sewers be inspected and cleaned every six months or every three years or
I whatever. What makes sense in one city with some older and sometimes sagging clay lines
probably wouldn't make sense in a city with newer plastic lines, and vice versa. From the
underwriting standpoint, the real concern is that the city has considered its own situation and
Ideveloped polices,practices, and schedules that make sense for its own situation.
How would the no-fault coverage work if we had a sewer back-up that was caused by city
Inegligence, and where the city was legally liable for the resulting damages?
If the situation isn't one where the no-fault coverage applies,the city's LMCIT liability coverage
I would respond just as it does now. That is,LMCIT would investigate and if necessary defend the
claim on the city's behalf, and would pay the resulting damages if in fact the city is legally liable
for those damages.
IThe same would be true for damages that exceed the $10,000 no-fault limit, or for a subrogation
claim against the city by the homeowner's insurance company. The city's existing LMCIT
Iliability would respond just as it does now.
What's the legal basis for this coverage? Wouldn't it be a gift of public funds to pay
Idamages that the city isn't legally liable for?
First, as noted earlier, one goal is to help reduce health hazards by encouraging prompt clean-
ups.That's clearly a public purpose and in the public interest.
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Second, the law and facts surrounding most sewer back-up claims are rarely so clear that the
liability issue is entirely black and white. There's virtually always a way that a claimant's
attorney can make some type of argument for city liability. Having this coverage in place should I
help eliminate the need to spend public funds on litigation costs in many of these cases.
Finally,part of the process for putting the coverage in place is for the city council to pass a
formal resolution that makes this no-fault sewer back-up protection part of the agreement
between the city and the sewer customer. The idea is that by paying his sewer bill, the sewer user
is purchasing not just sewer service but also the right to be reimbursed for certain specified sewer I
back-up costs and damages. In other words, the basis for the no-fault payments to the property
owner would be the contract between the city and the sewer user.
How do we put coverage in place?
Contact your LMCIT underwriter for an application. If the city qualifies for coverage,we'll send
the city a formal quote, along with a model resolution. To put coverage in place, the city council
must formally pass that resolution, and send a copy to LMCIT.
If the city decides to add this coverage, it will also be important to make sure the citizens know
about it. LMCIT can also provide models for a press release,newsletter article,utility bill insert,
etc. I
Who can we contact with questions or comments? 111 Contact your LMCIT underwriter,or Pete Tritz at the League office.
We're also interested in hearing cities' reactions to this new coverage option, especially if there
are changes you'd like to see.
PST 3/10/2003 I
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t LMCIT
] /[MC Risk Management Information
League of Minnesota Cities 145 University Avenue West, St. Paul,MN 55103-2044
Cities promoting excellence Phone: (651) 281-120o • (800) 925-1122
Fax: (651) 281-1298 •TDD(651) 281-1290
www.lmcit.lmnc.org
i LMCIT BOND COVERAGE
LMCIT offers public employee bond coverage as part of the overall package of coverage for
cities. LMCIT's bond program is designed to make available all of the fidelity and faithful
performance bond coverage and limits that cities and city officials need, and to coordinate the
bond coverage with the city's other coverages to avoid gaps, overlaps, and inconsistencies. Over
500 cities now obtain their bond coverage through LMCIT.
The LMCIT bond coverage can be structured in one of three ways:
• Blanket fidelity coverage only
• Blanket fidelity coverage, with faithful performance coverage on specified positions.
(Typically, this would be the positions for which the statutes require a faithful
performance bond.)
• Blanket faithful performance coverage.
The minimum bond coverage available is $25,000 and limits up to $1,000,000 are available. The
bond coverage is part of the overall property and liability, and is therefor subject to the same
per-occurrence or aggregate deductibles as the rest of the city's coverages. In addition, LMCIT
provides an automatic $100,000 of crime protection as part of each city's property coverage.
What are the advantages of LMCIT bond coverage?
1. The city's fidelity bond coverage should be coordinated with the city's other crime coverages,
1 to make sure there are neither gaps nor overlaps of coverage. With faithful performance bond
coverage, there's a potential overlap with the city's liability coverage as well. By providing
the bond coverage, LMCIT makes the different coverages fit together and meet the city's
needs.
If different carriers provide the bond and the crime coverages, it can be a problem for the city
at claim time. The city has to be able to show whether the theft was by a city employee,
which is the bond's responsibility; or by an outsider, which falls under the crime coverage. If
it's not clear who stole the money,the city can be left in the middle of a finger-pointing
contest between the two carriers. LMCIT eliminates that problem for the city by providing
both coverages.
1 2. In many cases the bond coverage forms commercial carriers use don't really seem to provide
what the statutes require. This is particularly true with faithful performance bonds.
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The LMCIT bond coverage forms are specifically designed to meet the needs and requirements
of Minnesota cities. Where outside parties such as the Farmers Home Administration or the State
Lottery Board require specialized bond forms, these can be incorporated into the basic bond
coverage by endorsement, generally for no charge.
Coverage for city relief associations is included as a standard feature of the city's bond coverage.
Other city-related organizations such as EDAs,port authorities, HRAs, etc. can also can be
included under the city's bond coverage as well if the city wishes.
What's the difference between a fideli ty bond and a faithful performance bond?
A fidelity bond covers the risk of employee dishonesty-that is,the risk that the employee will 1
steal the money. A faithful performance bond covers any loss the city or a member of the public
suffers because the employee failed to faithfully perform his duty. In other words, the faithful
performance bond would protect the city and members of the public against losses caused either I
by dishonesty or by other types of employee malfeasance beside dishonesty.
What are some examples of what a faithful performance bond would cover that a fidelity
bond would not?
A faithful performance bond will cover the same dishonesty risks that a fidelity bond would. In
addition, it could come into play in two other kinds of situations.
• A loss to the city that results from the employee's malfeasance, willful neglect of duty, or bad
faith. An example might be a treasurer who intentionally invests city funds in an investment
that's not permitted by statute, in order to serve his/her own personal purposes.
• A loss to a member of the public caused by an employee's malfeasance, willful neglect of
duty, or bad faith. The city's LMCIT liability coverage would not cover damages awarded
against an employee because of the employee's own intentional wrongdoing. Nor is the city
required by statute to defend and indemnify the employee for the employee's own
malfeasance, willful neglect of duty, or bad faith. In that kind of situation, a member of the
public who was injured by an employee's intentional wrongdoing might not receive any
compensation if the employee didn't have sufficient assets to pay the damages. The bond
would pay the injured member of the public if the injured party was not able to recover from
the guilty employee. ,
M.S. 574.24 arguably may also require the bond to cover losses caused by the bonded
employee's ordinary negligence as well. In order to be sure it meets the strictest reading of this
statute,the LMCIT faithful performance bond coverage provides a small amount of coverage for
claims caused by an employee's ordinary negligence. This is limited to 10%of the bond
amount. I
The coverage that the bond provides for acts of ordinary negligence probably doesn't have much
practical effect. Most negligence claims against the city by the public ("third party"claims) are
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already covered by the city's LMCIT liability coverage. There is at least some doubt whether
the city can make a claim against its own employee for a loss to the city ("first party"claim)
based on the employee's ordinary negligence, because of the statutory requirement that the city
defend and indemnify its employees for tort claims based on ordinary negligence.
Why would we want to protect an employee from the consequences of his/her own
intentional wrongdoing?
1 The faithful performance bond does not protect the employee. It protects the city and the public.
A member of the public can't collect under an employee's faithful performance bond unless s/he
has a valid claim against the employee, and has first tried and failed to collect directly from the
employee. The statute (M.S.574.25) says that when a member of the public has a claim against a
public employee covered by a faithful performance bond,the claim is to be paid first "...out of
the property of the principal, if sufficient can be found, and, if not, out of the property of the
surety."
Whenever LMCIT pays any loss under the bond coverage, LMCIT is entitled to attempt to
recover that loss from the employee who caused it. That's true whether the loss resulted from the
employee's dishonesty, carelessness,negligence, incompetence, or intentional wrongdoing; and
whether the bond payment was to the city or to a member of the public.
It's important to understand this point,particularly if the city is considering filing a claim under a
faithful performance bond to recover a loss the city suffered because of an employee's mistake or
carelessness. By making that claim, the city is saying that the employee failed to faithfully
perform his/her duties and that the employee him/herself should therefor repay the city for the
loss he caused. The bond doesn't relieve the employee of the duty to make the payment; it
relieves the city of the hassle and uncertainty of trying to collect it from him/her. But remember
that the bond pays only if the employee has a duty to do so; and if the employee has a duty to
pay,the bond carrier is entitled to attempt to recover from the employee anything it pays on the
1 employee's behalf.
Can the city file a claim under a bond for a loss occasioned by the simple negligence of one
of its employees?
Yes, but there may be little point in doing so. As stated above, third-party negligence claims will
be covered by LMCIT's liability coverage. The faithful performance bond's limit of liability for
negligent acts is limited to 10% of the bond amount. Remember also that the bond carrier is
entitled to attempt to recover from the employee anything it pays on the employee's behalf. As
previously stated, for a first-party losss, it is unclear whether a city could bring a direct claim
against one of its employees for simple negligence. If a city could assert such a claim,LMCIT
would have the right to assert that same claim against the employee if LMCIT paid a first-party
loss arising out of the employee's negligent act. By making a claim in such a situation, a city is
essentially saying that the employee him/herself should be responsible for repaying the city for
such a loss.
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So the employee is completely on his/her own if s/he's accused of intentional wrongdoing?
No, not if s/he's only accused of intentional wrongdoing. But s/he is on his/her own to pay the
damages if the court determines s/he actually did it.
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Remember, the LMCIT liability coverage will pay for the employee's defense on a liability
claim, even if the claim accuses him/her of intentional wrongdoing. But if the court determines
that the employee actually was guilty of malfeasance, intentional neglect of duty,or bad faith,
the LMCIT liability coverage won't pay for any damages the employee is ordered to pay. In that I
situation,the claimant could look to the employee's faithful performance bond if s/he can't
collect directly from the employee. The bond would then pay the claimant(subject to the bond
limits,of course), and in turn LMCIT would attempt to recover from the employee whose
intentional wrongdoing caused the damage.
Doesn't a faithful performance bond overlap with the city's liability coverage for other
kinds of tort claims against the city?
No. Remember, a third-party claimant can only make a claim against a bond after first trying
and failing to collect from the employee. Where the liability coverage applies, the claimant
would already have been paid under the liability coverage.
What about tort claims that are excluded under the city's liability coverage but which don't
involve intentional wrongdoing by the employee- a pollution claim, for example?
Theoretically a faithful performance bond might come into play, if an outside party made a claim
against an employee and could show that the employee's negligence caused the damage. But it
would be pointless for the city to let that happen, since the statutes require the city to defend and
indemnify its employees. If LMCIT paid on the employee's behalf under the bond, LMCIT
would in turn seek reimbursement from the employee and the employee would in turn be entitled
to be reimbursed by the city.
Remember,unlike liability coverage,the bond doesn't transfer risk from the individual- it
guarantees that the individual will pay.
You said earlier that standard faithful performance bond forms may not meet statutory
requirements. What do you mean?
A number of statutes require certain officers to be bonded for the faithful performance of their
duties. M.S.412.111 for statutory city clerks and treasurers; M.S. 69.051 for relief association
treasurers; and M.S. 469.051 and 469.096 for port authority and EDA treasurers,respectively,
are examples. M.S. 347.167 for gambling managers could also come into play for a relief
association that conducts charitable gambling. Another statute, M.S. 574.24, specifies that a
public officer's bond is security to any person who is injured by the officer's official misconduct
or neglect.
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Many p ublic official bond forms we've seen include a "sole benefit" clause. This clause states
that the bond is only intended for the benefit of the public body itself and that no one else may
Imake a claim against the bond. This seems directly contrary to what M.S. 574.24 requires.
Public official bond forms also very commonly incorporate exclusions for torts or civil rights
I I violations. Obviously this is one of the ways a public official could fail to perform his duties.
Another common exclusion is for losses resulting from trading securities or from other
investment activities. A main reason why the statutes require a faithful performance bond on
positions such as a relief association treasurer is because of the treasurer's investment
responsibilities. It would seem to miss not only the letter but the intent of the law if the bond
Iexcludes coverage for that exposure.
Are you saying that the LMCIT faithful performance bond coverage would protect us
Iagainst the risk of losing money on our investments?
Yes,but only if the loss resulted from the individual's failure to faithfully perform his/her duties.
I The investment officer might have failed to perform his/her duty if, for example, the city could
show that he/she made an investment decision that the statutes don't authorize; or violated the
investment guidelines and limitations the governing body had established; or made an investment
I for the purpose of benefiting him/herself rather than the public; etc. If so, the bond would
protect the city from the losses resulting from that failure.
I But not every investment loss would give rise to a claim under a faithful performance bond. The
mere fact that an investment has lost money doesn't automatically mean that the individual who
made that investment decision failed to faithfully perform his/her duties. Investing carries risk,
1 and even a reasonable decision to invest in a legal investment security can result in a loss. The
key question is whether the loss resulted from the individual's failure to perform his/her duties.
II Again, it's important to remember that when the city makes a claim against a faithful
performance bond,the city is saying that the individual should repay the city for the loss the
individual has caused by failing to perform his/her duties. The claim for reimbursement is really
Iagainst the individual; all the bond does is to guarantee the payment.
Why doesn't LMCIT give us the option to carry fidelity bonds only on certain individuals
Ior positions,or to carry smaller limits on some employees, as our city has done in the past?
When you structure bond coverage in that way, you're in effect betting that you know who's
I going to steal the money and how much they'll each be able to steal. From the standpoint of
protecting the public's funds, it seems better to simply cover all the possibilities,however
remote.
1 Having different coverage amounts on different people or no coverage on some people would
also once again re-introduce that problem of the city having to prove not only that the money
Iwas stolen but also who stole it. To the extent possible,both LMCIT's and the city's goals are
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that if a loss occurs, it's covered. The fewer hoops we make the city
the same: to make sure p y
jump through,the better.
How do we decide what bond limits to carry?
This is one of those "how high is up?" questions that there really isn't a single good answer to.
The lowest bond coverage limit LMCIT offers is $25,000 and limits up to $1,000,000 are
available.
The statutes specify minimum bond limits for certain positions:
• A relief association treasurer's bond must be at least 10% of the relief association's assets
or$500,000,whichever is less. M.S. 69.051, subd. 2.
• A gambling manager's bond must be at least$10,000. M.S. 349.167, subd. 1. 1
• An EDA or port authority's bond must equal at least "twice the amount of money likely to
be on hand at any one time" or$300,000, whichever is less. M.S. 469.051, subd. 6; and
M.S.469.096, subd. 6.
Keep in mind that these are minimums, and the governing body could decide that higher bond
limits are appropriate. Some charters may also require specific bond amounts for some
positions. Generally though the statutes leave the amount of the bond to the council's judgment.
We still occasionally see cities that have very low bond limits—sometimes so low that the bond
doesn't really provide any significant financial protection to the city. There have been a number
of cases in the past several years of significant employee dishonesty losses in small Minnesota
cities. A couple of those cases were especially notable. Both involved thefts by trusted,
long-term employees over a period of many years. In one case the total loss was about
$100,000; in the other it exceeded$200,000. In both cases the available fidelity bond limits
covered only a small fraction of the loss.
Keep in mind that a fidelity bond is triggered by when the loss is discovered -not by when the
theft occurred. You can't make a claim against last year's bond for a loss you discover this year,
regardless of whether the actual theft occurred last year. In other words, even if the city had a
$5000 bond in place for ten years and the employee stole $5000 in each of those ten years,the
city will still recover only$5000 from the bond carrier.
A number of years ago,the Municipal Finance Officers Association developed a formula for
determining suggested fidelity bond amounts for city officers. This formula uses an "exposure
index" equal to the sum of 10% of the city's annual revenues,plus the market value of negotiable
securities. A table then gives a recommended minimum fidelity bond limit range for the city's
exposure index. The table is shown on the following page. Of course,there's nothing magic
about this formula,but it does provide a starting point for thinking about amounts of bond
coverage. i
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SUGGESTED MINIMUM AMOUNTS OF BONDING COVERAGE
G S TED M N IMUM AM OU
IExposure Index Bracket Suggested Bond Amount
$ 0 - $ 25,000 1 $ 15,000 - $ 25,000
1 25,000 - 125,000 2 25,000 - 50,000
125,000 - 250,000 3 50,000 - 75,000
I250,000 - 500,000 4 75,000 - 100,000
500,000 - 750,000 5 100,000 - 125,000
1 750,000 - 1,000,000 6 125,000 - 150,000
1,000,000 - 1,375,000 7 150,000 - 175,000
1 1,375,000 1,750,000 8 175,000 - 200,000
- 200 000 - 225 000
1,750,000 2,125,000 9 ,
I2,125,000 - 2,500,000 10 225,000 - 250,000
2,500,000 - 3,325,000 11 250,000 - 300,000
3,325,000 - 4,175,000 12 300,000 350,000
4,175,000 - 5,000,000 13 350,000 - 400,000
5,000,000 - 6,075,000 14 400,000 - 450,000
6,075,000 - 7,150,000 15 450,000 - 500,000
7,150,000 9,275,000 16 500,000 - 600,000
9,275,000 - 11,425,000 17 600,000 - 700,000
11,425,000 - 15,000,000 18 700,000 - 800,000
I15,000,000 - 20,000,000 19 800,000 - 900,000
20,000,000 - 25,000,000 20 900,000 - 1,000,000
1 25,000,000 - 50,000,000 21 1,000,000 - 1,250,000
50,000,000 87,500,000 22 1,250,000 - 1,500,000
I87,500,000 - 125,000,000 23 1,500,000 - 1,750,000
125,000,000 - 187,500,000 24 1,750,000 - 2,000,000
1 187,500,000 - 250,000,000 25 2,000,000 - 2,250,000
250,000,000 - 333,250,000 26 2,250,000 - 2,500,000
1 333,325,000 - 500,000,000 27 2,500,000 - 3,000,000
The city's"exposure index" equals 10% of the city's gross annual revenues,plus the market
value of any negotiable securities.
PST-03/10/03-fax 66130
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I LMCIT
LMCRisk Management Information
ILeague of Minnesota Cities 145 University Avenue West, St. Paul, MN 55103-2044
Cities promoting g excellence Phone: (651) 281-1200 • (800) 925-1122
I Fax: (651) 281-1298 • TDD (651) 281-1290
www.lmcit.lmnc.org
I AIRPORT LIABILITY COVERAGE
ILMCIT offers optional airport liability coverage to property/casualty program member cities.
Coverage is available for most municipal airports,however, larger airports that have scheduled
service will not be eligible for LMCIT coverage at this time. The liability coverage is very broad,
and carries a limit of$1,000,000 per occurrence, $2,000,000 annual aggregate. The cost is at or
slightly below market rates.
IHow's the coverage written?
The city(or joint powers board, if it's a joint airport)that choose the LMCIT airport coverage
option will not receive a separate airport liability policy. Instead, coverage for the city airport is
provided under the city's existing LMCIT liability coverage document. We'll simply issue an
I endorsement that modifies the"airport"exclusion in the basic municipal liability coverage
document. Coverage for airport exposures is subject to the same deductibles that apply to the
city's general liability coverage.
IWhich airports are eligible?
At least initially, LMCIT does not offer airport liability coverage for those larger municipal
airports that have scheduled flight service. Otherwise, coverage is available for any airport that's
operated by a city,by a joint powers entity that includes at least one city, or by a special purpose
district. Note though that airport liability coverage is not offered as a "stand-alone"option. It's
Ionly available as part of the overall package of liability, property, and auto coverages.
What coverage limits are available?
IThe basic LMCIT liabili ty coverage limit is $1,000,000 per occurrence. There are also sub-limits
on certain specific exposures.) In addition, airport liability coverage will be subject to a
I $2,000,000 annual aggregate limit.
Higher limits can be provided through LMCIT's optional excess liability coverage. ote though
Ithat the city will not have the option to purchase higher coverage limits for its airport risks only.
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What does it cover?
Since the airport liability exposure is wrapped under the basic LMCIT liability coverage ,
document, the coverage for liability related to airport operations is extremely broad. There are
only a few specific airport-related exclusions to be aware of:
• Any racing, stunting, aerobatics, or similar activities that the city sponsors or participates in.
• Liability relating to any aircraft service,maintenance, or repair which the city performs (i.e., 1
"fixed base operator" activities), or to any aircraft products the city sells. However, the
liability coverage would cover liability relating to fueling operations by the city.
• Liability damage dama e to an aircraft that's in the city's care, custody, and control while that
aircraft is in flight.
• Liability arising from operation of an aircraft by the city is generally excluded. (However,
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there's an exception to this exclusion for situations where the city might"operate" someone
else's aircraft simply for the purpose of moving it around on the airport premises.) But if a 1
city employee is going to be flying airplanes on city business, you need separate liability
coverage for that risk.
Keep in mind, of course, that an independent contractor is not a covered party under the city's
coverage. If the city contracts with an independent contractor for airport management or other
services related to the airport, the contractor needs his/her own liability insurance. I
The LMCIT coverage is specifically designed to address several important airport exposures,
including 1
• Damage to an aircraft that's in the city's care, custody, and control (i.e., "hangarkeeper's
liability"coverage) 1
• "Products liability"coverage for city fueling operations
• Claims relating to noise,vibration,etc.
Finally, remember that the city's existing LMCIT liability coverage is already picking up many
of the"errors and omissions"type exposures (i.e., liability for damages other than bodily injury,
personal injury, or property damage; employment liability is an important example)relating to
the city airport.
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What will it cost?
IPremiums should be comparable to or perhaps slightly less than typical market rates. Premiums
are based on the number and length of runways,plus additional charges for the hangarkeeper's
risk based on the value of the airplanes, and for the products risk based on the value of products
' sold. (In most cases, the only products involved would be fuel.)
If it's not significantly cheaper than what we've got,why consider switching to LMCIT for
Iour airport liability coverage?
•
I LMCIT's primary goal in setting up the airport liability coverage program is to improve cities'
protection for the risks associated with operating an airport. In reviewing some conventional
airport liability insurance policies, three things are striking:
• Airport liability policies are often very convoluted and hard to read,with complicated
language,multiple endorsements, endorsements modifying other endorsements, etc. We
suspect that many airport operators may not really have a good idea of what they actually do
Iand don't currently have coverage for. .
• Airport liability policy wording is not at all standardized. There can be subtle (and not so
' subtle)variations in how an exclusion or definition or coverage grant is worded in one policy
compared to another. Those variations can make a significant difference in what is and isn't
covered under one policy compared to another.
I • Airport liability policies sometimes leave some surprising and potentially problematic
coverage gaps.
IThe following are a few examples of exclusions and limitations found in some airport liability
policies. Of course,not every airport liability policy has all of these provisions, and how the
I provisions are worded varies from policy to policy. And most of the time they won't matter—
unless, of course, you happen to be hit with the wrong claim.
I • Personal injury. This could leave the city with no coverage for a defamation claim relating to
the airport operations. E.g., suppose an airport board member or employee made a critical
comment about a contract service provider or an airport user, and that individual were sued
Ifor defamation.
• Products/completed operations. If the city sells fuel,this could be a problem; imagine a
crash caused by contaminated fuel, for example. Or think about a contaminated sandwich in a
vending machine, for that matter.
• "Noise", "interference with the use of property", or "electromagnetic interference". A city
airport might very well face these kinds of claims, especially if there are residences or
businesses near the airport. Even a successful defense could be expensive.
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• "Medical malpractice". This exclusion is often worded so it applies to any medical treatment
—not just treatment provided by medical personnel. It could leave an airport employee
without coverage if s/he provides CPR or other first aid in an emergency, and a liability
claim results. The Good Samaritan law may ultimately protect you from liability, but defense
costs could still be significant.
• "Any malicious act or act of sabotage". Suppose vandals damage runway lights or beacons,
or place an obstruction on a runway. This exclusion would leave the city airport without
coverage for a claim from a resulting accident.
• "Damages arising out of an air traffic control facility". This exclusion is sometimes written
so it applies even if it isn't the city's air traffic control facility. Suppose there's an accident
caused by an air traffic control problem, and the city airport gets"shotgunned" into the suit.
The city's defense would be to show that the problem was caused by the air traffic controller
and not by the city—which would also establish that the coverage doesn't apply.
• "Combined claims". Normally,the rule is that if a suit involves a combination of covered
and non-covered claims,the insurer must defend the entire suit. This provision says that in a 1
"combined claim", the insurer will only reimburse the insured for that portion of the defense
costs which the city proves can be attributed to a covered claim. This effectively eliminates
the "benefit of the doubt"which the insured normally gets on coverage issues. In some cases, I
it could be very expensive.
• `Airmeets". Most policies have this exclusion in one form or another. Sometimes it's worded I
so broadly that the exclusion would apply to a simple"fly-in"type event that doesn't involve
any racing, stunting, etc.
With regard to cost,the airport liability coverage is no different from any other LMCIT
coverage. If claims and expenses turn out to be less than premiums, the excess funds are
eventually available to be returned to member cities in the form of dividends. I
How do we get a quote?
Have your agent contact the city's LMCIT underwriter for an application form. The application
will request information about size and length of runways,the typical values of any planes or
other property of others in the city's care, custody, and control at the airport, and the volume for
fuel sales if any. We'll also be looking for information about contracts or leases with FBOs or
other contractors, and the insurance the city requires the contractor to provide under those
agreements. I
Who can we contact with questions?
Contact your LMCIT underwriter, or Pete Tritz at the League office. If you'd like to review the
actual airport liability endorsement language, let us know and we'll send you a copy.
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1 LMCIT
I LMC Risk Management Information
League of Minnesota Cities 145 University Avenue West,St.Paul,MN 55103-2044
Cities promoting excellence Phone: (651)281-1200•(800) 925-1122
I Fax: (651)281-1298 •TDD (651)281-1290
www.lmcit.lmnc.org
I COMPARING CITY LIABILITY, PROPERTY, AUTO,
CRIME, AND BOND COVERAGE QUOTES
ISome Questions to Ask
For several years, the commercial insurance market has been very competitive, with lots of
I insurance companies that want to sell insurance to cities. That's now changing, and that the
insurance market seems to be entering one of its periodic "hard"phases. But regardless of the
state of the market,many cities feel it's a good management practice to periodically compare
I what the commercial companies offer with the coverage available from LMCIT. But in making
that comparison, it's important to look not just at cost but also at the coverage as well.
I The LMCIT coverage was designed specifically to meet cities'needs, and is broader than any we
have seen offered to a city by any commercial insurance carrier. If you are looking at a
commercial insurance company's policy or policies as an alternative to LMCIT,this list of
I questions can help identify some of the differences in coverage. LMCIT can answer"yes"to all
of these questions. If a private carrier can't,their coverage isn't as good as LMCIT's. (Note that
some of these coverages are optional in LMCIT.)
IAsk the agent or insurance company offering the coverage to answer these questions in writing.
If you buy their insurance,keep a copy of the response with your policy. It will be useful when
Iyou have a claim.
ISome questions to ask about liability coverage
1. Does it cover the liability exposures of ambulance attendants, paramedics, and"First
IResponders"?
2. Does it cover the professional malpractice exposure of an engineer, surveyor, or accountant
Iwho is a city employee?
3. Does it cover libel, slander, defamation, and invasion of privacy arising out of the operation
I of a public access or city government cable TV channel, or a cable broadcast of council
meetings?
I 4. Suppose a police officer acting in good faith misjudges the amount of force that is
reasonable to use in making an arrest;that is, the officer in good faith thought that the force
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he used was reasonable, but a court later disagrees. Does the policy cover both the city's
and the officer's liability for assault and battery or for using unreasonable force?
5. Suppose an officer acts in bad faith and intentionally uses an unreasonable amount of force
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on a suspect, who then sues both the city and the officer. Is the city's liability covered?
6. Are each of the following"named insureds"under the policy?
a) City council members
b) Members of boards or commissions
c) City volunteers, whether individuals or organizations
d) Other elected or appointed city officials 1
e) City employees,whether full-time,part-time, or temporary
f) Relief associations and their officers,employees, and members
g) The ambulance service medical adviser or medical adviser 1
h) Former city officers, employees, and volunteers
7. Does it provide at least$1,000,000 of coverage for each occurrence, regardless of the
number of occurrences,the number of defendants, or the number of claimants? (Many
policies have a"general aggregate" limit, which limits the total amount the insurance
company will pay under the policy, regardless of the number of claims. LMCIT's coverage
has no general aggregate limit, although there are aggregate limits on coverage for products
and completed operations, "limited pollution", land use liability, EMF and stray voltage
claims,claims for failure to supply utilities, and lead and asbestos claims.)
8. Does it cover liability for employment actions such as hiring, firing, disciplining or
promoting?
9. Does it cover liability for claims of sexual or racial harassment?
10. Does it cover punitive damages to the extent permitted by statute?
11. Does it cover violations of civil rights? 1
12. Does it cover the city's statutory duty to indemnify volunteer firefighters for automobile
liability incurred while responding to a fire?
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13. For any"claims-made"policy(most public officials "errors and omissions"policies are
' claims-made):
a) Does it guarantee you the right to purchase an unlimited extended reporting period, even
' if you cancel the policy or decide not to renew it?
b) Is the price of the extended reporting period specified in the policy itself?
1 14. Does it cover city liability arising from a city officer's or employee's malfeasance?
15. Does it pay for the defense of an officer or employee accused of malfeasance?
1 16. Does the errors and omissions policy cover property damage or bodily injury resulting from
a"wrongful act"? (Don't confuse this with coverage for property damage or bodily injury
' caused by an "occurrence.")
17. Does it cover suits by one city employee against another employee or against the city?
' 18. Are general liability, police liability, ambulance liability, firefighters'liability, errors and
omissions, and employment liability coverage provided in a single form by a single carrier?
1 (If not,there is a possibility for coverage disputes among the insurers.)
19. Are special events covered? (LMCIT does not exclude coverage for special events per se,
1 though certain activities sometimes associated with special events are excluded; motor
vehicle races, fireworks, and mechanical rides are examples.)
1 20. Does the coverage preserve all of the city's statutory and common-law defenses? (Some
policies explicitly waive all "governmental immunity" defenses.)
1 21. Does it cover liability arising out of strikes,riots, or civil commotion?
22. Does it pay on behalf of the insured, rather than reimbursing you after you have paid the loss
and defense costs?
23. Does it provide "overlap" coverage? ("Overlap" coverage provides that if there is a dispute
between two or more of the city's insurers as to which is liable for a particular claim, the
insurers and not the city bear the cost of resolving that dispute.)
1 24. Is the carrier willing to provide coverage for joint powers entities such as watershed
management organizations, cable TV commissions, sewer boards, and so on?
1 25. Does it cover the liability of the ambulance services medical adviser or medical director for
his/her administrative actions? (The medical director's own malpractice coverage might not
apply to administrative actions, as distinguished from professional medical activities.)
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26. Does it cover liability for inverse condemnation when a court determines that a zoning or
other land use regulation has resulted in a temporary taking of private property?
27. Does it cover claims for attorneys' fees that are claimed as part of a civil rights suit seeking
an injunction but not seeking monetary damages?
28. Does it cover the liability arising out of operating an employee benefit plan or advising
employees regarding such a plan?
29. Does it cover the fiduciary liability of board members of a fire relief association?
30. Does it cover accidental, aboveground spills of pollutants? 1
31. Does it let you buy higher liability coverage limits where needed, without waiving the
statutory liability limits where they apply? I
32. Does it cover liability for lead contamination?
33. Does it cover liability for asbestos contamination?
34. Does it defend employment-related charges against the city that are filed with the EEOC or
Human Rights Commission, even if those charges don't explicitly claim money damages?
35. Is coverage available to defend open meeting law charges against city officials? 1
36. Is coverage available for those liability, clean-up, and defense costs for an underground tank
leak or spill which are not reimbursed by the state Petrofund? 1
37. If back wages are awarded as damages for wrongful termination of an employee, are those
damages covered?
38. Is there coverage for the city's liability for loss of or damage to property belonging to others
that's in the city's care, custody and control?
39. Are claims for damages caused by electromagnetic fields covered?
40. Are claims for damages caused by stray voltage covered? 1
41. Does it cover damages from the failure to supply utilities?
42. Is coverage available for the professional activities of an attorney who is a city employee?
43. Does it cover legal costs for litigation relating to land use regulation, development, or 1
franchising, even if that litigation doesn't involve a claim for damages?
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44. Does it cover legal costs for litigation relating to land use regulation, development, or
franchising, even if the city initiated that litigation?
45. Suppose a city employee is sued because of some action he took as a member a joint powers
board that he sits onus the city's representative. The joint powers board doesn't have
insurance itself, and isn't a"named insured"on the city's insurance. Does the employee or
the city have any protection?
1 46. Is coverage available for liability claims relating to a city airport? (Coverage of bodily
injury and property damage claims relating to airport operations is an optional coverage with
LMCIT.)
47. Is coverage available for damages to private property caused by a sewer back-up,
irrespective of whether the city is legally liable for that damage because of city negligence?
' (The standard LMCIT liability coverage covers sewer back-up claims like any other liability
claim. LMCIT also offers a"no-fault" sewer back-up coverage option.)
Some questions to ask about property coverage
1 1. Is the coverage on a"blanket limits"basis? If not,you need to make sure that each specific
limit on each piece of property is adequate, for both the building and the building's contents.
2. Is the coverage written without a coinsurance clause? If not, the insurance company may
penalize you on a claim if they determine that you didn't purchase and pay for adequate
coverage limits.
' 3. Does the insurance company provide appraisals for your property? If not, you'll need to
either come up with the values yourself or pay for a professional appraiser. If the values you
' come up with aren't adequate, you may not have enough coverage if a loss occurs and you
might be subject to a coinsurance penalty.
4. Does the insurance company cover your buildings and their contents for replacement cost?
5. Does the insurance company cover your mobile equipment—i.e., "inland marine"property-
Iat replacement cost?
6. Is property coverage automatic for minor pieces of equipment, or do you have to specifically
' schedule each one in order to have coverage?
7. Does it cover sewer back-ups and other non-flood water damage to city property?
8. Does it cover flood damage for buildings outside the 500-year flood plain?
9. Is supplemental flood coverage available for buildings within the 500-year flood plain?
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10. Is loss of income and extra expense ense
included?
11. Are police dogs covered, including the cost of training a replacement dog? t
12. Do you have any protection if you forget to schedule property coverage for a particular
building or other piece of property? ,
13. Is coverage available for damage to city utility poles and lines?
14. Does it cover earthquake damage?
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15. Is ro ert in transit covered?
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16. Does it cover vandalism damage to golf course greens, tees, signs, etc.?
17. Does it cover damage to city property caused by an off-premises power failure? (Note: This
LMCIT coverage doesn't apply to municipal utilities property.)
18. Does it cover accounts receivable?
19. Does it cover computer equipment and media,including the cost to recover or reconstruct
data and programs?
20. Does it cover damage caused by a computer virus? '
21. Does it cover damage caused by a computer"hacker"?
22. Does it cover art objects?
23. Does it cover the cost to replace valuable papers? ,
24. If a building is damaged or destroyed,does the coverage pay the additional costs to clean up
asbestos and other pollutants?
25. Does it cover the cost to remove storm debris from a city park?
26. Does it cover property belonging to others that's in the city's care, custody, and control?
27. Does it cover your employees' personal tools or equipment used on city business?
28. Does it cover extraordinary and unanticipated expenses the city incurs to protect the public
health and safety or to meet the city's legal obligations?
29. Does it automatically cover a newly-acquired or newly-constructed building? (LMCIT
covers newly-acquired or newly—constructed buildings up to $5 million, at no additional cost
until the city's next renewal.)
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30. Does it automatically cover a newly-acquired piece of mobile equipment? (LMCIT covers
newly-acquired mobile property up to $250,000, at no additional cost until the city's next
renewal.)
' 31. Does it automatically cover the builders risk on a city building that's being constructed,
altered, or repaired? (LMCIT provides automatic builders risk coverage if the total project
cost is under$2 million.)
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' Some questions to ask about auto coverage
1. Does is cover all city vehicles automatically for physical damage, or do you have to report
and schedule each individual vehicle in order to have coverage?
2. Is replacement cost coverage available for city vehicles?
3. Does the auto liability coverage apply as excess over the personal auto coverage of an officer
or employee using his/her car on city business?
4. Does the auto liability coverage apply as excess over the personal auto coverage of a city
volunteer using his/her car on city business?
' 5. Does the city have the option to make its auto liability coverage primary for an officer,
employee, or volunteer using his/her own vehicle on city business?
6. Does the auto physical damage coverage apply automatically to a vehicle that the city
borrows,rents, or leases?
7. Does it cover the city's or the individual's liability for damage to a rental car that a city
officer, employee, or volunteer rents for use on city business?
8. Does it provide an auto liability coverage limit of at least$1,000,000?
9. Will there be an extra charge to add liability and or physical damage coverage for a vehicle
the city acquires mid-term?
10. Does it cover automotive liability the city has assumed by contract—through a defense and
' indemnification agreement, for example?
Some questions to ask about crime coverage
1. Does it provide a$100,000 limit for crime losses of money and securities?
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1 regardless which"premises"the funds
2. Does it provide a blanket limit for crime losses, gardl ss of p
were stolen from? (If the coverage is based on a particular"premises" and funds were stolen
by means of computer fraud or electronic funds transfer, you might have trouble proving that '
the theft was from a covered premises, or showing which specific covered premises the theft
was from.)
3. Does it cover theft of city funds by computer fraud?
4. Does it cover theft of city funds by fraud or swindle? (Many crime policies exclude coverage
if you were "induced by a dishonest act to voluntarily part with"the money or securities.)
5. Would it cover a burglary loss from a building following an unexpected event that impaired
the security of the building?
6. Does it cover theft by extortion or threat of violence? ,
7. Does it cover losses from forgeries or alterations?
8. Does it cover thefts from vending machines? (Many crime forms cover only vending
machines that have a"continuous recording device".)
9. Are relief association funds covered?
Some 9 uestions to ask about faithful performance and employee dishonesty
bond coverage
1. Does the "faithful performance"bond cover all losses resulting from the official's failure to
faithfully perform his/her duties? (Many"faithful performance"bond forms exclude various
claims. A bond form that excludes certain losses wouldn't seem to meet the statutory
requirements for those officials who are required by law to have a faithful performance
bond.)
2. Are the bond limits realistic? (A $5,000 or$10,000 bond might comply with the statute, but
doesn't give the city much real protection.)
3. Would the faithful performance bond cover a third party's loss caused by the officer's
dishonesty or other malfeasance? (Some bond forms have a"sole benefit" clause, and would
only cover the city's own loss. Those bonds wouldn't seem to meet the statutory
requirements for positions required to have a faithful performance bond.)
4. Would the faithful performance bond cover a tort claim or a civil rights claim against the
officer based on the officer's malfeasance? (These exclusions are often found in bond forms.
A faithful performance bond that excludes these losses would not appear to meet what the
statutes require.) 1
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5. Does the faithful performance bond cover investment losses caused by the officer's
' malfeasance?
6. Does it cover relief association funds?
7. Does it cover relief association officers?
Do These Things Really Matter?
' Some people might suggest that these items are merely unimportant"frills" that aren't worth
worrying about. But remember: Every"no" answer represents a claim which LMCIT would
cover but the private insurance company wouldn't.
It's easy to make insurance cheap by excluding coverage of certain items. But if coverage is
excluded for a particular kind of claim, it means the city retains the risk of loss in those areas.
From the city's standpoint,retaining risk is a great way to reduce premiums. But coverage
exclusions are an unpredictable way of retaining risk. You might not have a claim that falls into
one of the exclusions—but then you might have a$1,000,000 claim that falls into the exclusion.
A better and more predictable way to reduce costs by retaining risk is to use deductibles. This
could be a per-occurrence deductible, or an"annual"deductible under which the city keeps the
financial responsibility for claims up to a certain dollar amount each year, or a combination of
' the two. By retaining risk this way, you know how much you're retaining and can budget for it.
PST—12/19/2001 -fax-66150
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