Huge Liability Risks Make Policy Renewal Nearly Impossible : Insurance Squeeze Leaving Cities Out in the Cold

Officials in four Westside cities have been searching in vain for insurance protection against large liability lawsuits.

Policies in Beverly Hills and Culver City expired in the last two weeks. Santa Monica’s policy runs out at the end of the month and West Hollywood’s is scheduled to expire at the end of the year.

Thirty-one cities in the state have not been able to find insurance at any price this year. And that number increases every week as insurers flee the public insurance field, leaving cities to pay liability awards from their own treasuries.

As a result, taxpayers are picking up the tabs for their city’s liability insurance, according to Westside municipal officials. Tax money that might otherwise go toward senior citizen housing or new parks might have to be diverted to pay damages to, say, a motorist who crashes after driving over a pothole that the city should have fixed.

The staff in the city of West Hollywood, for example, has recommended that $3.5 million be placed in an insurance reserve because its liability insurance policy, purchased for $89,000, expires on Dec. 29.

‘Roll of the Dice’

And in Culver City, City Atty. Bert Glennon Jr. said, “In effect, for the city of Culver City, it has become a roll of the dice as to whether a guy rolls his car over on one side of Venice Boulevard or another. If he rolls on one side, the city of Los Angeles and the taxpayers there could be liable. If he rolls on the other, it could be Culver City’s responsibility.”

Insurers and city officials blame the situation on the legal doctrine known as joint-and-several liability. Under the doctrine wealthy defendants--particularly cities with “deep pockets”--often must pay damages out of proportion to their degree of fault. For example, a city held 1% responsible for an accident can be ordered to pay 100% of an award if co-defendants in the case cannot afford to pay their share.

According to the League of California Cities, the doctrine led 134 of the state’s cities to pay injured people more than $15.5 million in settlements and judgments in the fiscal year that ended June 30. The previous year the amount was $13.2 million, and it was $4.5 million the year before that, according to the league.

Officials in all four Westside cities said they have not had huge claims but worry that one catastrophic accident could seriously dent city treasuries.

Santa Monica purchasing agent Ed Barnes cited a case in Newport Beach last year, in which a young man who became a quadriplegic after hitting his head on the ocean bottom sued the city and won a $6-million judgment.

Insurance company officials say they tried to cover their increased risk with higher premiums, but in the last year most have been unwilling to sell cities liability insurance at any price.

Two Carriers

Only two companies will write liability insurance for California cities, according to D. Michael Enfield, a managing director with Marsh & McClennan Inc., a large insurance brokerage house with headquarters in New York.

Enfield, who specializes in municipal liability insurance and testified on the subject last week before the state Assembly Committee on Finance and Insurance, said the two firms will only renew limited policies for cities they already insure.

A year ago, 25 companies sold such insurance, Enfield said. Now, although police departments, bus lines and other operations can still buy separate policies--although often at higher prices--cities have been left vulnerable principally for traffic accidents and other problems not involving city employees.

The city and county of Los Angeles both use a combination of outside coverage and self-insurance.

The state Legislature is considering a law to limit joint-and-several liability and remove some of the burden from insurers and cities. Meanwhile, cities are on their own.

Although Culver City has insurance for the municipal bus line and some other operations, its general liability coverage expired Nov. 1. The city finds itself in the precarious position of having to pay claims from its treasury.

Culver City had paid $110,000 for the policy, more than three times what it paid in 1984. Under its terms, City Atty. Glennon said, the city was responsible for $300,000 in claims per fiscal year. Anything over that was handled by the insurance company.

“Now that we are self-insured,” he said, “the taxpayers will pay the first dollar to the last dollar on any judgments or claims against the city.”

Taking a Toll

Glennon said staff members will soon have to consider whether to take money from other programs and put it aside to pay potential claims.

Doing so takes a big toll, according to West Hollywood officials. “It takes a lot of money away from other public services,” said city spokeswoman Helen Goss.

West Hollywood City Council members said recently that they had envisioned using a projected $7.5-million surplus to help build a city hall, develop parks, provide parking and finance low-cost housing. Few relish the thought of placing nearly half of the money--about $3.5 million--in an insurance fund.

“We would love to be insured and have good news and be able to do something else with that money,” said Councilman Stephen Schulte, “but at the present time it looks pretty bleak.”

The amount to set aside for self-insurance is difficult to determine, said Jeri Chenelle, assistant city manager. “We have no idea what our expenses might be. It’s a complete unknown.”

Santa Monica’s insurance expires in three weeks. Barnes, the city’s finance director and purchasing agent, met throughout the past month with three insurance brokers and a consultant in an attempt to find a new insurer, but so far the prospects are dim.

“All I see is gloomy clouds,” said Barnes “I see no sunlight ahead. It’s caused a lot of concern because we (will be) lying out there without any coverage.”

Large Deductibles

The city had to struggle just to get its insurer to extend its coverage to the end of this month, Barnes said. It had to agree to pay the first $750,000 on any claim, rather than $500,000 as in the previous policy. And the two-month premium, on a pro-rated basis, increased to the equivalent of $115,000 a year, compared to the previous $50,000.

With its large deductibles, Barnes said, Santa Monica has not used its insurance to pay a claim in at least five years.

Don Jack, risk management consultant for Beverly Hills, said the city’s reputation makes it a popular target for claims. “The whole community is considered in the public eye to be very wealthy,” Jack said. “People look at it as a deep pocket for any claims they might wish to bring. . . . And everything seems to be worth more in Beverly Hills. If a car is damaged here, it is more likely to be a Mercedes or a Cadillac.”

The city paid claims of less than $500,000 per incident and its insurance company paid claims above that amount. But on Oct. 25 the coverage expired and the city has not been able to find another carrier, Jack said.

For the time being the city will pay all claims out of a self-insurance fund established 10 years ago, Jack said.

“The reserve covers all predicted estimated claims with a cushion for unknown claims,” Jack said, although he declined to divulge the amount in the fund.

But in the case of a major catastrophe, the city might have to dip into money budgeted for other uses, Jack said. “Ultimately it will get back to the public,” he said. “They will ultimately pay the bill and also suffer from less service.”