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CR 06-025 Authorize Waiver of Statutory Tort Liability on LMC Ins Trust Policy February 9, 2006 Council Report 2006-025 AUTHORIZE WAIVER OF STATUTORY TORT LIABILITY ON THE LEAGUE OF MINNESOTA CITIES INSURANCE TRUST POLICY Proposed Action Staff recommends adoption of the following: Move to waive the statutory tort liabilitv limits to the extent ofthe coverage purchased. Adoption of this motion will result in staff notifYing LMCIT of this action so that our insurance coverage is accurately written. The recommendation to waive the statutory tort liability limits is based on past council action and discussions from council work sessions Overview The statutory municipal tort liability limits continue to be $300,000 per claimant, $1,000,000 per occurrence. The statutory tort liability limit of$I,OOO,OOO is the same as previous years. The $300,000 per claimant liability is currently waived. The city council must annually make the decision to waive or not waive the tort liability limit. As stated previously the council has in the past wiaved the tort liability and has as a result of discussions at council work sessions has indicated a preference for continuing to waive the tort liability. As you are aware this results in increased potential liability exposure by the city. In addition, electing to waive the tort limits adds about 3% or $2,800 to the insurance premium. Primarv Issues to Consider . Election of waiver of tort limits for liability . Liability exposure if we elect to waive the tort limits for liability Staff Recommendation Finance recommends based on past council action and discussions at council work sessions, to waive the monetary limits on the tort liability established by Minnesota Statutes 466.04, to the extent of the limits of the liability coverage obtained from LMCIT Supportinl! Information . LMCITWaiverForm . LMCIT Resource document on liability coverage options . LMCIT Memo - "Court decision -liability under joint powers agreements" ~~ Christine Harkess, CPA, CGFM Finance Director financial Impact: (approximatelv) $2.800 Budgeted: Yes Source: All funds LMCIT LIABIL TIY 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 wQuld apply regardless.ofwhether or not th.e 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 of the number of claimants. > 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 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 Hookins accepts liability coverage limits of $ from the League of Minnesota Cities Insurance Trust (LMCIT). LOOO.OOO 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 of the limits of the liability coverage obtained from LMCIT. Date of city council meeting Signature Position finlZn~ JJ/ra..-fc.r Return this completed from to LMCIT, 145 University Ave. w., St. Paul MN 551 03-2044 LMCIT(I1/00)(Rev. 11/03) Page I of I League of Minnesota Cities Insurance Trust 145 Universrty Avenue West, St Paul, MN 55103-2044 (651) 281-1200 . (800) 925-1122 Fax: (651) 281-1298 . TDD: (651) 281-1290 www.lmnc.org LMC L-gru: 0/ Minnesota em"elI C_""'"""""'......n...~ RISK MANAGEMENT INFORMATION LMCIT LIABILITY COVERAGE OPTIONS tiability-Ixmi:ts;-eoverage timits, 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 $1,000,000 per occurrence. These limits apply whether the claim is against the city, against the individual officer or employee, or against both. What are the coverage limits for LMCIT's basic primary liability coverage? LMCIT's liability coverage provides a limit of$I,OOO,OOO per occurrence, matching the per- occurrence part of the statutory rnunicipal 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: $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 linlit applies to both damages and defense costs. ** Coverage is on a sliding scale percentage basis, and applies to both damages and litigation costs. If the statute limits our liability to $1,000,000 per occurreuce, why would the city purchase 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 indenmify 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 condenmation" 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 not automatically apply to liquor liability unless the city specifically requests it. 3. The city may be reqnired 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 clairns 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 c1aim'were maa~rtl:iar-' involved both the city and the EDA, theoretically the claimant might be able to recover up to $1;00'0;000 from the City ana anotner$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 ofliability 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 uninsuredlunderinsured 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 rnotorist (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 UMIUIM 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 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 driver should have had. Keep in mind that in the case of city vehicles, an injury to the driver while operating a city n ,.. , -vehicle.would-in most cases-be'covered by workers'-compensation:-The amounts the-individcral would be able to recover from UM/UIM would be in addition to the medical, indemnity, and oilier benehts palO under work cornp. 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 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 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 clainlant 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 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.-~----- - .-------- '___m__________ - How would the waiver atlect 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. 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. -- ----~Pm-confused;-Is,there-a-simple-way'to-summarize-the-options? It's not necessanly 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 Grundhoefer, Bill Everett, Doug Gronli, or any ofLMCIT's property/casualty underwriters will be glad to talk with you. 6 ~ \ , Leog- 0/ Mmnualtt CmOfrll Citk8 promoting e:u:Jtmctl League of Minnesota Cities Insurance Trust 145 University Avenue Wes~ St Paul, MN 55103-2044 (651) 281-1200 . (800) 925-1122 Fax: (651) 281-1298 . TDD: (651) 281-1290 www.lmnc.org September 27, 2005 To: LMCIT members, attorneys, and agents From: Pete Tritz Re: Court decision -liability uuder joint powers agreements The federal Eighth Circuit Court of Appeals recently issued a very problematic decision affecting liability and liability limits in joint powers arrangements. In Reimer v. City of Crookston, No. 04-3233 (8th Cir., Aug. 30,2005) the court ruled that in at least some joint powers situations, a participating political subdivision can be held vicariously liable for the actions of another subdivision; and that in these situations, a claimant can stack the statutory tort limits of the participating political subdivisions. This memo outlines some problems this decision creates, and possible strategies to address them. Background The case arose from a boiler explosion in a swinnning pool that the city of Crookston and the school district operated cooperatively. The claimant, a boiler inspector and a North Dakota resident, was very severely injured by the explosion. (This case was brought in federal court rather than state court because it involved a citizen of another state.) The jury awarded damages of over $12 million. The trial court ruled that under the joint powers agreement, the school district was responsible for maintaining and operating the boiler, and that the city was therefore not liable. The court then applied the statutory liability limit to the school district's liability and reduced the award to $300,000. On appeal, the Court of Appeals ruled that the pool operations were a 'joint venture" of the city and the school district; that the city was therefore vicariously liable for the darnages, even though the city was not "negligent or in any rnanner directly responsible" for the injuries; and that the claimant therefore was entitled to recover $300,000 from the city in addition to the $300,000 to be paid by the school district. Problems this ruling creates The Court has enunciated a new and troublesome principle in this decision: If the combined efforts of governmental entities constitute a "joint venture", then each political subdivision that's part of that joint venture can be held liable up to its statutory tort limit for the actions of the joint venture itself; or for the actions of any other political subdivision that's a member of the joint venture that are in furtherance of the joint venture's purpose. This creates several problems: . It's a disincentive to inter-local cooperation. In any inter-local cooperative effort that could be considered a "joint venture", the potential total liability exposure is apparently now equal AN EQUAL OPPORTYNITY jAFFIRMATIVE ACTION EMPLOYER to the statutory tort limit times the number of participating political subdivisions. In other words, the total liability exposure that the cooperating political subdivisions must plan for and fund is now significantly greater. . . It creates uneven results for claimants. E.g., if you have the misfortune to be run over by an Metro Transit bus, you could recover up to $300,000; if you're run over by a bus operated by a six-member joint powers entity, you could recover up to $1.8 rnillion. . Although the court didn't define "joint venture" precisely, one section of the opinion describes it as a "mutual undertaking for a common purpose." This language is troubling because it's so broad. It seems pretty clear that any agreement that creates a joint powers entity - i.e., a joint board with the power to receive and expend funds, enter contracts, hire employees, or own property - will be considered a "joint venture". But it's possible that other types of intergovernmental cooperative arrangements will be affected as well. Even providing assistance to a neighboring city under a mutual aid agreement arguably might constitute a "mutual undertaking for a common purpose," and therefore a 'joint venture" in which all the members are vicariously liable for each others' actions. . It increases the risk that a joint powers entity's coverage limits could turn out not to be enough. When LMCIT issues coverage for a joint powers entity, that coverage protects all of the constituent political subdivisions as well for liability arising from the joint entity's activities. In turn, coverage for the joint powers entity's activities is excluded under the individual city's own coverage. The goal is to be able to provide a single unified defense for all of the parties, rather than having multiple attorneys defending each city separately. But because ofthe "limit stacking" implication of the court's ruling, there's now a greater risk that the joint entity's coverage limit might not be enough. I Coverage issues for joint powers agreements Mutual aid agreements, service contracts, and similar joint powers agreements The Reimer ruling doesn't create any new coverage issues for most joint powers agreements, including mutual aid agreements, agreements under which a city purchases service frorn or provides service to another political subdivision, and so on. The ruling does increase the city's liability exposure under these contracts, since there's now a risk that a city could be held liable for its partner's actions under the Reimer ruling's 'joint venture" theory. But the city's LMCIT liability coverage would cover the city's potential vicarious liability for another political subdivision's actions if this type of agreement were deemed by the court to be a "joint venture". Since the city's vicarious liability is subject to the statutory limit just as the city's direct liability is, the city's existing coverage limit should be sufficient to cover the city's exposure.2 I Of course there's always some risk that the coverage limit will turn out to be inadequate, whether it's ajoint powers situ~tion or an individual city, because some claims aren't capped by the statutory limit. Federal civil rights claims are an example. 2 Provided, of course, that the claim is of a type that's subject to the statutory limit in the first place; e.g., it's not a civil rights claim, etc. 2 One circumstance in which the court's ruling could create a coverage limits problem with mutual aid and contract for service agreements is if the agreement contains defense and inderrmification provisions. LMCIT generally recommends that mutual aid and contract for service agreements include provisions for the party in charge to defend and inderrmify the other party. The goal is to eliminate conflicts among defendants and make it possible to present a single unified defense. But under the court's ruling, that could result in the city having to pay not only for its own liability up to the statutory limit, but also to indemnify the other city for that city's vicarious liability. 'f!1at could add.llR to more than the city's coverage limit. LMCIT's model mutual aid agreement incorporates "limited indemnification" language that's designed to avoid creating this problem. The model agreement is available on the web at htto:llwww.lmnc.org/pdfs/mutualaidmodel.pdf. Agreements creating a joint powers entity As noted earlier, any 'joint powers entity" as defined in the LMCIT liability coverage is pretty clearly going to be considered to be a "joint venture". Under the Reimer ruling, in a liability claim arising from the joint powers entity's activities the claimant or claimants potentially can now apparently recover up to the statutory liability limit from each of the participating political subdivisions. The result is that the effective limits on liability arising from a joint powers entity's activities are now equal to $,300,000 times the number of members for each claimant; and $1,000,000 times the number of members for each occurrence. Essentially, this stacking of vicarious liability represents another way in which the liability exposure for a joint powers entity could turn out to be greater than the basic $1,000,000 limit of coverage which LMCIT provides. Of course, there are and always have been other ways in which a city or a joint powers entity could end up with liability exceeding its coverage limit - federal civil rights claims, contractually assumed liability, etc, Suggested strategies for cities For mutual aid and contract for service joint powers agreements . If the agreement includes defense and indemnification provisions, make sure that those provisions limit the city's duty to indemnify to an amount no greater than its coverage limit. Suggested language can be found in the LMCIT model mutual aid agreement at hlto:llwww.lmnc.org/pdfs/mutualaidmodel.pdf. 3 For agreements that create a ''joint powers entity" I. Consider incorporating the joint powers entity. M.S. 465.717, subd. 2, which was passed in 2000, authorizes any joint powers entity to incorporate itself as a Chapter 317 A non-profit corporation. On its face, this would seem to eliminate the member cities' vicarious liability exposure, since M.S. 317 A.407 specifies that members of a non-profit corporation are not liable- for the corporation's acts or liabilities. We'd caution though that there's been little experience with incorporating joint powers entities in this way. We don't know for sure what a court might actually do with regard to liability of an incorporated joint powers entity - e.g., whether and how governmental immunities and defenses would be available, etc. There may also be some disadvantages to being a non-profit corporation, such as additional reporting and filing requirernents, and so on. Incorporating a joint powers entity as a non-profit corporation is stepping into new and untested legal ground, and cities considering it should weigh the potential advantages and disadvantages carefully with their legal counsel. 2. Consider carrying higher liability coverage limits. Obviously, the higher the joint powers entity's coverage limits, the more likely it is to be adequate. But regardless of what the coverage limit is, you can never be absolutely assured that it will be adequate. Even with a coverage limit equal to the number of members times $1,000,000, there's still the risk of claims that the statutory limits don't apply to. And with larger joint powers entities - those with ten or twenty or thirty members - carrying a coverage limit that high may not be practical or economical. For all cities . Support a legislative fvc. The League will be pursuing legislation to address this problem. City officials need to be talking with legislators about the problems and inequities the court's ruling creates. A key point to discuss with legislators is the disincentive for inter-local . cooperation which this court ruling creates. A final comment The federal Eighth Circuit Court of Appeals' ruling in Reimer V. Crookston creates potential problems for cities. Given the potential seriousness of those problems, cities should consider adopting the strategies outlined above. However, it's important also to keep in mind that this ruling is not necessarily the final word on the issue. Two points to be aware of: . We have petitioned the Eighth Circuit Court to reconsider its ruling, in light of the ruling's potentially far-reaching consequences. We don't yet know when the court will decide if they'll rehear the case. . This interpretation of state law by the federal court is not necessarily a binding precedent for the state courts, though it will certainly have some persuasive weight. If these issues should 4 arise in a case in state court, we'd expect to litigate them vigorously through the state appellate courts. Questions, comments, or suggestions? If you have questions, comments, or suggestions about this, please contact any of the following: . Pete Tritz, LMCIT Administrator: (651} 281-1265 or ptritz\aJ.lmnc.org . Bill Everett, LMCIT Associate Administrator: (651) 281-1216 or beverett@lmnc.org . Tom Grundboefer, General Counsel: (651) 281-1266 or t~rundho@lmnc_org . Ellen Longfellow, Loss Control Attorney: (651) 281-1269 or elongfelrQ),lmnc.ol'g PST - 9/27/05 5