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Memo - Election of Waiver on Tort Limits for Liability Ins CITY OF HOPKINS I FINANCE DEPARTMENT I MEMORANDUM From: December 8, 2005 Mayor & City Council Christine Harkess, Finance Director Date: To: Subject: Election of Waiver on Tort Limits for Liability Insurance The city is required to annually elect whether to waive or not waive the tort limits on liability insurance. In the past the city has chosen to waive the monetary limits on tort liability established by MN Statutes 9466.06. Waiver of the tort limits allows a claimant to receive a greater insurance settlement should they be awarded losses but provides additional exposure to the city through the potential for higher claims. This translates into higher premiums in the future. Choosing the waiver option also adds 3% or more to our annual premium costs. The statutory municipal tort liability limits continue to be $300,000 per claimant, $1,000,000 per occurrence. The statutory tort liability limit of $1 ,000,000 is the same as last year. The $300,000 per claimant liability is currently waived. If the city waives the tort limits instead of $300,000 a claimant could receive up to $1 ,000,000.The city council must make the decision to waive or not waive the tort liability limit. Due to changes in how the courts have awarded judgments for municipalities and governmental units who participate or are part of a Joint Powers Agreement our exposure potential has significantly increased. For this reason staff is asking the council to re-examine the option to waive the tort limits. Currently 78% of cities that purchase insurance through the LMCIT choose NOT to waive the monetary limits on tort liability. To limit our exposure staff is recommending to NOT waive the monetary limits on tort liability. Attached is information from the LMC on the liability coverage options. LMCIT LIABILTIY COVERAGE - WAIVER FORM Cities obtaining liability coverage from the League of Minnesota Cities Insurance Trust must decide whether or not to waive the statutory tort liability limits to the extent of the coverage purchased. The decision to waive or not to waive the statutory limits has the following effects. > If the city does not waive the statutory tort limits, an individual claimant would be able to recover no more than $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 statutory 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. > 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 tort limits apply would also be limited to $1,000,000, regardless ofthe number of claimants. > fr 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 statutory tort limits apply would also be limited to the amount of coverage purchased, regardless of the number of claimants. Claims to which the statutory municipal tort limits do not apply are not affected by this decision. The decision must be made by the city council. Cities purchasing coverage must complete and return this form to the LMCIT before the effective date of the coverage. For further information, contact LMCIT. You may also wish to discuss these issues with your city attorney. The City of HOl'kins accepts liability coverage limits of $ from the League of Minnesota Cities Insurance Trust (LMCIT). 1.000,000 Check one: The city DOES NOT WAIVE the monetary limits on municipal tort liability established by Minnesota Statutes 466.04. XX The city WAIVES the monetary limits on tort liability established by Minnesota Statutes 466.04, to the extent ofthe limits of the liability coverage obtained from LMCIT. Date of city council meeting Signature Position hntZ-l1~ j);""e.c.+oY Return this completedfrom to LMCIT, 145 University Ave. w., St. Paul MN 55103-2044 LMCIT(lIlOO)(Rev. 11/03) Page I of I LMC League of Minnesota Cities Insurance Trust 145 University Avenue West, St Paul, MN 55103-2044 (651) 281-1200 . (800) 925.1122 Fax: (651) 281-1298 . TDD: (651) 281.1290 www.lmnc.org League of M;nnesota Cities C;tiu promoting e10CellllflCIJ 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 $300,000 per claimant part of the statutory liability limit is not waived, so if the statutory limit applies to the particular claim, LMCIT and the city would be able to use that limit as a defense. Beside the overall coverage limit of$I,OOO,OOO 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: $1,000,000 annuall $1 ,000,000 annuall $1,500,000 annuall $1,000,000 annuall $200,000 annuall $1,500,000 annuall $1,000,000 annuall $1,000,000 annuall * 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. Ifthe statute limits our liability to $1,000,000 per occurrence, why would the city pnrchase higher coverage limits than that? There are several different reasons why cities should strongly consider carrying higher limits of liability coverage. I. The statutory tort limits either do not or may not apply to several types of claims. Some examples include: . Claims under federal civil rights laws. These include Section 1983, the Americans with Disabilities Act, etc. . Claims for tort liability that the city has assumed by contract. This occurs when a city agrees in a contract to defend and indemnify a private party. . Claims for actions in another state. This 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. . 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 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 I 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 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 risks that are subject to aggregate limits: . The excess coverage does not apply to four risks: lead and asbestos;failure 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 IlOt automatically apply to liquor liability unless the city specifically requests it. 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 limits. Carrying excess coverage is a way to meet these requirements. (There's also another 2 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 itselfa 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 jnst a small city. Isn't excess liability coverage really just sometbing 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 srnall 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 uninsuredlunderinsnred 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. 3 The UM/UIM coverages are intended to assure that an injured driver will be compensated if slhe 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 driver should have had. Keep in mind that in the case of city vehicles, an injury to the driver while operating a city 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 compo 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' compensation henefits 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 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 statntory 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 tbe 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 is to the injured party. The statutory liability limit only comes into play in a case where 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 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 4 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 onr 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 siugle 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. 5 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 the effect would be of the various coverage structure options in different circumstances. I'm still confused. Who can I talk to? Give us a call at the League office. Pete Tritz, Tom Gmndhoefer, Bill Everett, Doug Gronli, or any ofLMCIT's property/casualty underwriters will he glad to talk with you. 6 LMCIT Liability Coverage options On a liability claim to which the statutory limits do not apply 'Ihis is the maximum amount of damages which LMCI'I would pay on the city's behalf for a single occurrence, regardless ofthe number of claimants. On a liability claim to which the statutory limits apply This is the maximum total amount that all claimants could recover on a single occurrence. 'Ihis is the maximum amount a single claimant could recover on an occurrence. Coverage structure If the city $1,000,000 $\,000,000 $\,000,000 $300,000 Does not have exceSS coverage & Does not waive the statuto\)' limits $2.,000,000 $\,000,000 $1,000,000 Does not have excess coverage & Waives the statuto\)' limits $2.,000,000 $\,000,000 $300,000 Bas $1,000,000 of eli-ceSS coverage & Does not waive the statuto\)' limits $2.,000,000 $2.,000,000 Bas $1,000,000 of excess coverage & Waives the statuto\)' limits pST \ 2104