Capital Improvements Pay the Price : Cities’ Liability Insurance Rates Soar
Reeling from a string of multimillion-dollar jury awards and a ruinous six-year nationwide price war, insurance companies have increased the cost of basic liability policies for cities in the Long Beach and Southeast areas by as much as 650%.
In Montebello, where premiums have soared from $62,700 to $472,000 in one year, the city received just one bid this spring from an industry elbowing its way out of the municipal insurance business.
In Whittier, where the cost of accident coverage now represents 4% of the city’s total budget, a $400,000 premium increase meant the loss of a new park.
And in Long Beach, where liability insurance now costs $637,000, six times that of 1984, the price spiral has bureaucrats scrambling for new ways to protect themselves from a lawsuit-happy public.
Have to Have Insurance
“We’re starting to look at our options,” said James Hurst, budget manager in Long Beach, “but the bottom line is that we have to have insurance. Anything may happen out in the streets, and somebody will say the city was responsible.”
Throughout the nation, “somebodies” have been suing and winning--often in cases where cities have been only marginally liable for an accident, but where their “deep pockets” have paid 100% of the damage award.
The big victories have not come in Long Beach or Whittier or Montebello or in most of the other 21 cities in southeast Los Angeles County, officials said. But large jury awards against many cities, counties and other government agencies are increasingly common.
Insurers Dropping Out
Those decisions and the high legal costs that accompany even unsuccessful claims have prompted most insurers to simply leave the field of municipal insurance, said John McCann, a spokesman for the Insurance Information Institute, a national organization that represents 320 insurance companies.
“When you only have a limited number of premiums you can write, you don’t write them in a game with as much risk as municipal liability,” McCann said. “You prioritize, and you don’t put them in municipal liability under any circumstances, period.”
Actually, a handful of the 30 to 40 companies that actively sought city policies in California until last fall are still in the business, but they have been forced to increase premiums a minimum of 300% just to cover costs, McCann said.
Locally the increases have often been much more severe, and some agencies have considered themselves lucky to get insurance at any price. “Everybody was scrambling for insurance at the very same time,” said Long Beach’s Hurst.
Large Cities Have Reserves
Large cities and counties, such as Los Angeles and San Diego, can put away millions of dollars in reserve to pay lawsuit settlements. But many local cities are too small for that and have been forced to pay the steep going rate for insurance.
Premiums for the 15 area cities that belong to the 45-member Southern California Joint Powers Insurance Authority, the state’s largest municipal insurance pool, increased 500% from last year’s, up from $282,000 to $1,695,000. Even with that increase, the amount of coverage per accident was reduced from $35 million to $10 million.
But because premiums are only a fraction of the ongoing costs of the insurance authority (legal fees are a large expense), payments by many of those cities increased by just one-third this year. In Lakewood, for example, the payment went from $141,000 to $207,000. Other cities in the authority include Artesia, Bellflower, Bell Gardens, Cerritos, Commerce, Cudahy, Hawaiian Gardens, La Mirada, Maywood, Norwalk, Paramount, Pico Rivera, Santa Fe Springs and Signal Hill.
In the nine other area cities, total premiums are up fourfold from $577,645 to $2,522,125. These independent cities--Bell, Compton, Downey, Huntington Park, Long Beach, Lynwood, Montebello, South Gate and Whittier--had no insurance authority to buffer the impact.
And in most cases, despite soaring premiums, coverage decreased. In Montebello, where premiums are up 650%, coverage dropped from $15 million to $10 million and the deductible the city must pay before insurance coverage begins was increased from $100,000 to $500,000.
“One of our big problems was that we have a (45-bus) transit system,” said Ron Chan, Montebello’s risk management officer. “We were able to get just one insurance carrier to bid. And in the past 9 1/2 years we have never had a loss that exceeded our deductible.”
500% in Long Beach
In Long Beach, the stiff 500% increase also came even though city losses have not exceeded the deductible for at least seven years, said Hurst, and despite a $1-million deductible.
At other Long Beach agencies it has been much the same story. The Port of Long Beach could not get a serious bid for the first $1 million of its coverage, so it now insures itself up to $1 million. Last year its policy had only a $10,000 deductible. At Long Beach Transit the cost of accident insurance rose from $59,726 to $535,222 while coverage decreased from $20 million with a $100,000 deductible to $16 million with $500,000 deductible.
Similar experiences by other officials in other cities have led to cries of outrage.
‘This Is Outrageous’
“This is outrageous, absolutely outrageous,” said George Anast, manager of the Joint Powers Insurance Authority. “You cannot equate having a 25% loss (by insurance companies) with increasing your charges by five, six, seven, 800%, coupled with a 66% decrease in coverage. There is no rational basis for it.”
Anast conceded that last year was a bad one for insurance companies, but said that was “primarily the result of the predatory pricing practices of the companies. They kept undercutting each other simply on the basis of wanting to get the business without any regard to how good that business was.”
Insurance industry spokesman McCann said critics would be hard-pressed to prove claims of price gouging. “All we know for certain is that past prices have been much too low,” he said.
Earlier Competition Blamed
McCann said, however, that the industry did contribute to its troubles through unprofitable competition. Of the nation’s top 100 insurance groups, 50 lost money in 1984, he said. Seventeen companies went out of business, the most since 1974, he said.
But the blame must also be shared by the country’s civil court system, McCann said. Under a legal doctrine known as joint-and-several liability, a person who wins a verdict can collect damages from any co-defendant who is able to pay. Cities often are able to pay more--they have, in effect, deeper pockets--than individuals. Therefore, a government entity that is only 1% responsible in a case may be forced to pay 100% of the damages.
Juries have carried the principal so far “that it appears the court system has become an alternative to a direct taxation method for taking care of people who have been injured, rather than putting them on welfare,” said McCann.
Practice Defended
Similar arguments, forwarded in the Legislature since 1979, have been successfully countered by the California Trial Lawyers Assn., which claims a change would leave innocent accident victims without care or assistance. Juries have not found cities liable without good reason, the attorneys have insisted.
But government agencies, now aligned with insurance companies, are arguing again during this legislative session that California should join five other states that have replaced joint-and-several liability with a law that says cities should pay only for their share of fault in an accident.
The League of California Cities reported in March that a survey of 16 cities, a third of the state’s total, showed payments of $19.1 million in deep-pocket judgments in 1983-84.
Little Fault, Big Cost
The league defined such judgments as those where cities bear only a small percentage of responsibility for an accident but must pay the majority of the court award. Pay-outs totaled $18.2 million in 1982-83 and just $5.1 million in 1981-82. In addition, cities paid $15.8 million in legal fees over the same three years, the league reported.
Similarly, the Southern California Joint Powers Insurance Authority, formed in 1977 at the peak of a previous surge of premium increases, paid just $65,435 in claims in 1979, contrasted with $3.5 million in 1983 and $2.4 million in 1984.
The insurance authority’s Anast insisted that juries are “completely out of touch with reality,” and pointed to a 1983 Signal Hill award as evidence.
Signal Hill the Loser
In that case, Signal Hill was directed to pay nearly $1.4 million to a former police officer who was severely and permanently injured when an auto swerved into his motorcycle, forcing him into another vehicle. Insurance companies for the two automobile drivers settled before the trial for a combined $115,000, leaving the city as the sole defendant.
The injured man’s attorneys argued in court that the city was partly to blame because its traffic lanes were so narrow that they were a hazard. The accident would not have occurred if the lanes were a foot wider, they said. The city acknowledged the lanes were narrower than most but said they were still legal. The jury unanimously found the city partly responsible, all that was necessary for the award.
Guilty Party Uninsured
In a second area lawsuit, a jury brought in a $500,000 judgment against Compton, which was found liable for back injuries to a man whose car was struck from behind by a police car. Both the police car and the crash victim were stopped at a red light when a third car skidded about 50 feet and slammed into the city vehicle, said Charles Evans, city risk manager.
The driver of the third car had no insurance and paid nothing. But the jury found that a large spool in the police car’s trunk might have partly obscured its taillight and contributed to the accident, Evans said.
“The jury found that the man could no longer work, and they decided somebody should pay,” said Evans. “We were there, so we paid. It’s a typical deep pockets case.”
Traffic Light Blamed
Still pending in Montebello is a case where an auto ran a red light and fatally struck a 15-year-old pedestrian, whose family now claims the city was responsible because its traffic lights were poorly timed.
The effects of such claims can be seen clearly in a city like Whittier, where the $478,240 paid for liability insurance is 4% of its total budget of $12 million.
“What this is taking away from is major capital improvements, like acquiring new park land,” said City Controller Irwin Bornstein. “In future years it will prohibit the City Council from meeting some of its high-priority items.”
McCann, of the Insurance Information Institute, said liability costs to both government and private corporations have increased substantially across the country since last fall and will remain high “probably well into the future.”
“What we’re seeing now is some price catch-up,” he said, “and that’ll probably continue well into 1986.”
RISING COST OF CITY INSURANCE Multimillion-dollar jury awards and a dwindling number of insurers have increased the cost of basic liability policies for cities in the Long Beach and Southeast areas by as much as 700%. The spiraling cost of municipal insurance premiums has cities scrambling for new ways to protect themselves.
City Insurance Premium Coverage/Deductible 1984-85 1985-86 1984-85 Artesia $18,066 $25,066 $35 million Bell $19,000 $52,075 $5 mil./$100,000 Bellflower $98,940 $127,857 $35 million Bell Gardens $123,126 $156,567 $35 million Cerritos $137,912 $201,162 $35 million Commerce $98,970 $135,115 $35 million Compton $60,000 $270,000 $10 mil./$100,000 Cudahy $9,394 $17,829 $35 million Downey $26,652 $149,556 $10 mil./$500,000 Hawaiian Gardens $38,500 $44,750 $35 million Huntington Park $29,956 $121,324 $10 mil./$125,000 Lakewood $141,000 $207,000 $35 million La Mirada $60,450 $94,711 $35 million Long Beach $107,000 $636,930 $100 mil./$1 mil. Lynwood $43,700 $122,000 $10 mil./$50,000 Maywood $104,000 $125,000 $35 million Montebello $62,700 $472,000 $15 mil./$100,000 Norwalk $70,000 $140,000 $35 million Paramount $53,378 $105,850 $35 million Pico Rivera $123,581 $176,907 $35 million Santa Fe Springs $171,265 $286,256 $35 million Signal Hill $113,000 $135,000 $35 million South Gate $43,613 $154,312 $20 mil./$100,000 Whittier $70,000 $478,240 $20 mil./$100,000
City ($10,000 unless noted) 1985-86 Artesia $10 million Bell $10 mil./$250,000 Bellflower $10 million Bell Gardens $10 million Cerritos $10 million Commerce $10 million Compton $10 mil./$150,000 Cudahy $10 million Downey $10 mil./$500,000 Hawaiian Gardens $10 million Huntington Park $10 mil./$250,000 Lakewood $10 million La Mirada $10 million Long Beach $100 mil./$1 mil. Lynwood $5 mil./$100,000 Maywood $10 million Montebello $10 mil./$500,000 Norwalk $10 million Paramount $10 million Pico Rivera $10 million Santa Fe Springs $10 million Signal Hill $10 million South Gate $20 mil./$250,000 Whittier $20 mil./$250,000
Artesia, Bellflower, Bell Gardens, Cerritos, Commerce, Cudahy, Hawaiian Gardens, Lakewood, La Mirada, Maywood, Norwalk, Paramount, Pico Rivera, Santa Fe Springs and Signal Hill are among the 45 members of the Southern California Joint Powers Insurance Authority. Each member city pays a $10,000 deductible for each claim. The members share in the loss if the amount is between $10,000 and $500,000. Losses over $500,000 are covered by insurance.
