Cities Consider Dropping Insurance as Premiums Soar

Faced with insurance premiums up to four times larger than last year, officials in some of Orange County’s cities said Monday they will consider dropping their insurance policies and “going bare.”

Orange City Manager Bill Little said he would present the self-insurance option to the City Council at this afternoon’s meeting. “Do we want to continue this? Is it, perhaps, given the cost and terms of insurance, worth going without insurance? That’s a public policy decision that only the council can make.”

Orange’s deductible is being increased from $100,000 to $400,000 for next year, and its premium will be about $650,000, Little said.

Insurance premiums for the Orange County Cities Risk Management Authority, a pool of 11 cities, will total about $3.2 million next year, more than three times the approximately $1 million the group paid for a more extensive policy this year, said Dave Barrett, assistant city manager of Cypress and president of the group.

This year’s policy provided $26 million of coverage per claim, while next year’s policy, also written by the Pennsylvania-based Planet Insurance Co., provides only $5 million per claim.

Deductibles for each city, which were $100,000 or $250,000 this year, will jump to $250,000 and $400,000, Barrett said.

Attempts to contact the insurance company were unsuccessful. Sharon Nash, the group’s broker at Robert F. Driver Co. in Newport Beach, said she could not comment on the policy.

The group was notified of next year’s rates last Thursday. The current policy expires Wednesday.

Officials in most of the cities said they have little choice but to insure themselves, called “going bare.”

“Nobody else is willing to write it (the policy),’ ” said Ken Frank, city manager of Laguna Beach, where the premium has now increased nearly tenfold in two years. “Last year, we at least had three bids, but this year I think they are the only company writing for cities in California.”

Two other companies are writing insurance policies for California cities, Barrett said, but they will write renewals only, not new policies.

Laguna Beach, which will pay $323,000 for insurance next year, should consider the option of self-insurance, Frank said. But he probably will not recommend that to the City Council at its special meeting on the problem tonight, he said, because: “I’m not sure I want to be the city manager to recommend it if we lose a big lawsuit. I want to be able to sleep sometimes at night.”

In Tustin, however, where the premium jumped from $80,000 to $270,000, Finance Director Ron Nault said the city would “kick the idea around” until Wednesday. “We have adequate reserves (to pay the insurance), but you never like to go to that kind of a premium.”

Irvine’s deductible will be quadrupled to $400,000, and its premium will jump 288% to about $490,000. But Wally Kreutzen, director of administrative services, said the city has sufficient money set aside and has not considered going bare because “it just wouldn’t be appropriate given our size and potential exposure.”

Westminster City Manager Chris Christiansen said he, too, would not recommend self-insurance to the City Council.

The other authority members are Cypress, La Palma, Los Alamitos, San Clemente, Stanton and Yorba Linda.

High jury awards and the doctrine known as “deep pocket,” which allows a plaintiff to collect all or most of an award from any one of the defendants, regardless of the degree of fault, are responsible for skyrocketing insurance costs, Frank said. The 1978 Gonzales decision that effectively made cities liable for injuries resulting from natural conditions such as dangerous riptides or shifting sands has made coastal cities even poorer risks for insurance companies, he said.

“The juries are giving everything away, and the Legislature won’t correct it,” Frank said.

Laguna Beach lost a case last summer involving a drunk-driving accident and was ordered to pay a $2-million award, even though it was found to be only 35% negligent. Several cities in Orange County are participating in a petition drive to place an initiative on a statewide ballot to reduce a defendant’s liability in such cases.

Officials in the cities contacted said the money to pay for increased premiums would come from general fund reserves. “It might mean that a project or program for next year will go by the wayside, but it won’t raise taxes,” Tustin City Manager William Huston said.

Authority members also are concerned about a clause in the new policy that would allow the insurance company to decide to settle a claim against the city even if the claim is for an amount less than the deductible, Barrett said, “and bill you afterwards. They’d be settling with your money, even if you didn’t want to settle.” An insurance company might do that to avoid a large jury award if it thinks the city will contest the claim and force a trial, he said.

Lawyers for the group have drawn up alternative language for the clause and have asked that it be put into the policy, but the insurance company will not respond until after Wednesday’s deadline, Barrett said. “They’ve got a gun to your head,” he said.