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Home My WebLink About15. Receive update and authorize the General Manager to select insurance options to renew excess General Liability insurance coverage Page 1 of 11 Item 15. Algi CENTRAL SAN BOARD OF DIRECTORS WE VS.101 M POSITION PAPER MEETING DATE: JUNE 17, 2021 SUBJECT: RECEIVE UPDATE ON THE CURRENT STATUS OF RECENT INSURANCE MARKET CONDITIONS AND AUTHORIZE THE GENERAL MANAGER TO SELECT AND PURCHASE THE MOST BENEFICIAL POLI CYOPTION TO RENEW EXCESS GENERAL LIABILITY INSURANCE PRIOR TO THE JULY 1, 2021 RENEWAL PERIOD, EITHER THROUGH A COMMERCIAL INSURER OR POOLED LIABILITY INSURANCE PROGRAM SUBMITTED BY: INITIATING DEPARTMENT: SHARI DEUTSCH, RISK MANAGEMENT ADMINISTRATION DEPARTMENT - RISK ADMINISTRATOR MANAGEMENT REVIEWED BY: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION Roger S. Bailey Kenton L. Alm General Manager District Counsel ISSUE Central San's current excess General Liability insurance policy through a commercial insurer expires on July 1, 2021 and is non-renewable with no temporary extension available until a new policy can be thoughtfully chosen. Insurance market conditions have shown a significant increase in premium rates with limitations on coverage. Staff has not received all quotations to make a definitive recommendation and will not have further information to present to the Board at its next scheduled meeting until after the renewal deadline. Board of Director approval is requested to authorize the General Manager to select the most beneficial policy option on behalf of Central San to purchase insurance coverage by the J my 1 deadline. June 17, 2021 Regular Board Meeting Agenda Packet- Page 114 of 168 Page 2 of 11 BACKGROUND At the May 25, 2021 Finance Committee meeting, staff reported on recent trends in the insurance industry and how those changes may affect Central San's insurance renewals on July 1, 2021. As a result of prior catastrophic events and the uncertain impact of claims arising from the COVI D-19 pandemic, the commercial insurance market has become extremely volatile. Insurance premiums can no longer be projected by evaluating the usual cost drivers: past underwriting practices, investment returns, reinsurance rates and incurred loss ratios. While staff expected continued market volatility with corresponding premium increases for the July 1, 2021 renewal, current indications suggest Central San will face both significant premium increases and potential reductions in both coverage and limits. I n April 2021, staff learned that public agencies were receiving premium increases in excess of 100 percent of expiring premiums. I n addition, some companies were reducing the scope of coverage and/or limits in an effort to reduce their total risk portfolio. Of most concern to Central San, some of the very few companies that provide coverage for inverse condemnation claims have refused to continue this coverage. I n some instances, insurance companies require their insureds to accept higher self-insured retentions as a condition of continued coverage. This combined scenario presented a problem. If Central San continues to purchase insurance in the commercial market, it could lose coverages, including coverage for inverse condemnation. Additionally, Central San could be forced to assume a higher self-insured retention and will likely pay significantly more for it. I n May 2021, Central San's insurance broker advised staff that Argonaut, the insurance company providing Central San's first layer of excess coverage ($5,000,000 above its $500,000 self-insured retention), refused to renew this policy at any price. The Finance Committee reviewed the following diagram which details the current structure of Central San's General Liability program and the most likely renewal scenario. June 17, 2021 Regular Board Meeting Agenda Packet- Page 115 of 168 Page 3 of 11 General Liability Coverage by Layer Expiring Renewal Offer $8 ,190 Allied World Allied World $5 mil xs $10.5 rnil $$ rnil xs$10.5 mil --- Safety National � Safety rVational $77,435 $5mil x5 5.5 mil S mil xs$10.5 mil Argonaut Safety National $430,456 $267.364 $5 mil xs SIR 5 mil xs$5.5 mil $426,992 Matters of Concern, * Argonaut Refusal to Renew Coverage ■ Known and Unknown Price Increases • Potential Required SIR Increase to 1 million Potential Less of Coverage for Inverse and Earth Movement • Short Window to Seek Board Approval/Authorization Staff has not yet received quotes for the $5 — 10 million excess layer or the $10 — 15 million excess layer. Given the matters of concern shown above, staff chose to investigate alternative risk financing options. Of the programs and services available to Central San, staff has identified an option having the least impact on Central San's operations and practices while retaining the current scope of coverage and providing higher policy limits; membership in the general liability risk retention program sponsored by the California Association of Sanitation Agencies (CASA). This pool, the California Sanitation Risk Management Authority (CSRMA), provides primary and excess general liability coverage to most of the small and medium sized wastewater collection and treatment agencies in California. Central San is a member of CSRMA's Workers' Compensation risk pool. However, membership in the excess general liability pool would require some adjustment to current risk funding and claims practices. These and other important issues are detailed below. June 17, 2021 Regular Board Meeting Agenda Packet- Page 116 of 168 Page 4 of 11 CSRMA 6l Pool Cans Safety National 15 rail xs X10.5 keep 500,0 00 SIR • Membership Subject to Exec PrtCommittee Approval {late June} * Mlnimur1 3 yr Commitment • Keep Coverage for In�rerse a 6 Months Advance Written Potentially More Stable Notice to Leave Pool Munich Re Premiums • SIR Becomes a Deductible 10 mil xs SIR Seat on the Executive . Lose Control of Claims Handling Committee* Beyond Initial Response • Program Administration $418,000 • Must Use Panel Counsel ' same as workers Camp Pool • Settlement Authority Reduced to 5,000 As shown in the middle column, the benefits of pool membership include higher policy limits, continuity of coverage including inverse condemnation, familiarity with the program management team, and a potential seat on the pool's Executive Committee. The rightmost column shows the changes pool membership would have on Central San's current practices. These are discussed in more detail below. Membership • Staff submitted an application for Central San membership in CSRMA's excess general liability risk retention program. Its application will be considered by CSRMA's Board of Directors on June 24, 2021. The Board rarely denies membership to applicants, but approval is not guaranteed. • Pool membership requires an initial 3-year commitment and thereafter requires 180 days advance written notice if Central San chooses to leave the pool. While this appears to be a new burden, these conditions should be considered in light of Central San's use of the same commercial insurance program and structure for over 15 years. Claims Management • All pool members must participate in a consolidated claims administration program through a third- party administrator(TPA) under contract to the pool. • Central San may continue to respond to overflows and other claims where initial contact is an essential part of claim control. However, once this initial response concludes, Central San must transfer responsibility for claims investigation and possible settlement to the TPA. • Furthermore, Central San's self-insured retention of $500,000 per occurrence would convert to a $500,000 per occurrence deductible. With a self-insured retention Central San controls claims handling and pays claim expenses up until the claim approaches the retained limit. Once claims costs approach or exceed the retained limit, the excess insurer will often assume further responsibility for resolving the claim. While Central San's interest may be considered by the excess carrier, it would no longer be the primary criterion for claims outcomes. • With a deductible, Central San has neither the obligation nor the authority to pay upfront claims expenses and settlements. The TPA assumes this duty and the member will be invoiced for settlements within its deductible. June 17, 2021 Regular Board Meeting Agenda Packet- Page 117 of 168 Page 5 of 11 In the past, the Board has considered the loss of claims control to be more problematic than the benefits of pool membership. Current circumstances may warrant reconsideration under present circumstances. Staff has not yet received quotes for the two upper layers of commercial insurance nor for the upper layer of CSRMA's coverage. Staff is also waiting to learn of any carrier-mandated changes to coverage, limits and/or the self-insured retention. As a result, staff is currently unable to make an informed recommendation between excess general liability insurance program options. The information is anticipated to be received within the next few weeks; however, the Board will not meet again until after the July 1, 2021 renewal date. While the Board on June 3, 2021 authorized the General Manager to renew the excess liability and property insurance policies for amounts not to exceed $900,000 and $450,000, respectively, this matter is being brought back to the Board for further consideration given the potential substantive changes to the policy terms apart from the premium costs. ALTERNATIVES/CONSIDERATIONS The Board may opt to direct staff to immediately enter into insurance policy through a commercial insurer(s) or through the CSRMA pool pending application acceptance, or may provide other direction. FINANCIAL IMPACTS Pending the receipt of requested quotations and coverage options, the premium amount is not currently known.At the June 6, 2021 public hearing to consider and adopt the Fiscal Year(FY) 2021-22 Budget, staff advised renewal costs may be in excess of the budgeted amounts due to the insurance market conditions and requested Board authorization the General Manager to renew the excess liability and property insurance at costs higher than those budgeted. COMMITTEE RECOMMENDATION The Finance Committee discussed this situation at length at its May 25, 2021 meeting and expressed concerns about joining CSRMA's general liability risk pool with insufficient time to evaluate the required changes outlined above. The Committee also determined that retaining coverage for inverse condemnation was more important than it was concerned about accommodating risk pool terms and conditions. The Committee opted to advise the Board of its finding and recommend that the Board authorize the General Manager to select the most beneficial option for general liability insurance, in accordance with the Finance Committee's direction, when additional information becomes available. RECOMMENDED BOARD ACTION Authorize the General Manager to consider new insurance rate and coverage information in order to select and purchase the most beneficial policy option prior to the July 1, 2021 renewal period, either through a commercial insurer or pooled liability insurance program. June 17, 2021 Regular Board Meeting Agenda Packet- Page 118 of 168 Page 6 of 11 Strategic Plan Tie-In GOAL THREE:Fiscal Responsibility Strategy 1—Maintain financial stability and sustainability ATTACHMENTS: 1. Presentation June 17, 2021 Regular Board Meeting Agenda Packet- Page 119 of 168 Page 7 of 11 14 General Liability Insurance Y Renewal Options Board of Directors Meeting June 17, 2021 -w Shari Deutsch, Risk Management Administrator Phil Leiber, Director of Finance and Administration MOO h0j'AM", 1 COMMERCIAL INSURANCE MARKET • Highly volatile since 2020, more so in 2021 • Uncertainty driven by cost of prior disasters and unknown effect of COVID-19 on claims/loss ratio. •2021 renewals demonstrate insurance companies' unwillingness to retain as much risk as in previous years. CENTRALSAN 2 1 June 17, 2021 Regular Board Meeting Agenda Packet- Page 120 of 168 Page 8 of 11 COMMERCIAL INSURANCE MARKET •Companies refusing to renew: •Abandoning states with unfavorable regulations •Abandoning regions with higher loss ratios •Abandoning entire lines of coverage •Companies that will renew are mandating changes in terms and conditions: • Reductions in coverage: excluding inverse condemnation? • Reduction of policy limits • Requiring higher self-insured retentions CE NTRALSAN GENERAL LIABILITY - EXPIRING VS. MOST LIKELY RENEWAL SCENARIO General Liability Coverage by Layer Expiring Renewal Offer $82,190 Allied World Allied World $5 mil xs$10.5 mil $5 mil xs$10.5 mil $ Safety National Safety National $77,435 $Smit xs$5.5 mil $5 mil xs$10.5 mil $ Argonaut Safety National $430,456 5267.364 $5 mil xs SIR EW $5 mil xs$5.5 mil (61%) $426,992 Cost of first$5 million replacement coverage is higher than cost of entire expiring coverage. CENTRAL SAN 4 2 June 17, 2021 Regular Board Meeting Agenda Packet- Page 121 of 168 Page 9 of 11 MATTERS OF CONCERN •Argonaut has refused to renew first excess general liability policy • $5 million above Central San's$500,000 self-insured retention • Projected 61% increase in premium with replacement carrier • Unknown premium increases for $5-10 million policy and $10-15 million policy • Potential increase to Self-Insured Retention ($1,000,000) • Potential loss of coverage for inverse condemnation OPTION TO REPLACE EXCESS GENERAL LIABILITY FROM COMMERCIAL MARKET • Join CSRMA's Excess General Liability Risk Pool CSRMA GL Pool Cons Safety National Pros • Membership Subject to Exec Committee Approval(late June) $15 mil xs$10.5 . Keep$500,000 SIR . Minimum 3 yr Commitment • Keep Coverage for Inverse . 6 Months Advance Written • Potentially More Stable Notice to Leave Pool Munich Re Premiums • SIR Becomes Deductible • Seat on the Executive $10 mil xs SIR Committee* Lose Control of Claims Handling • Program Administration Beyond Initial Response* $418,000 same as Workers Comp Pool Must use Panel Counsel • Settlement Authority Reduced to $5,000 6 3 June 17, 2021 Regular Board Meeting Agenda Packet- Page 122 of 168 Page 10 of 11 FINANCE COMMITTEE'S MATTERS OF CONCERN • Membership: • Application for membership submitted in May 2021 • Approval required by pool Board of Directors • Next Board meeting is 6/24/21. Decision pending until then. • Commitment: • Initial 3-year membership • 180 days written notice of intent to leave the pool • Claims Management: • Relinquish all but initial claims handling to TPA • SIR becomes a deductible • Must use panel counsel for litigation ` _ I 7 FINANCE COMMITTEE FINDINGS • Retaining coverage for inverse condemnation is the highest priority. • If commercial insurance continues to cover inverse condemnation, Central San should purchase it, even at significant premium increases. • If commercial coverage refuses to cover inverse condemnation Central San should join the CSRMA excess general liability risk pool, subject to approval of CSRMA Board. • Currently there is insufficient information to choose between options. Lhen information arrives, there is limited time to decide yet no ditional Board meetings until after renewal. 8 4 June 17, 2021 Regular Board Meeting Agenda Packet- Page 123 of 168 Page 11 of 11 BOARD RECOMMENDATION •Accept the Finance Committee Findings; •Authorize the General Manager to select the best general liability insurance renewal option in accordance with Board direction. 1 Questions? CENTRALSAN 10 5 June 17, 2021 Regular Board Meeting Agenda Packet- Page 124 of 168