10-City Group Keeps Its Liability Insurance

A group of 10 cities in Orange County has decided to renew a liability insurance policy that expired Wednesday at a cost of $2.6 million, almost three times the old price.

The City of Orange dropped out of the group insurance pool late Tuesday, deciding to “go bare”--to carry no insurance and rely on its own reserves--rather than pay the sharply increased premiums. Orange is the first of the county’s 26 cities to become self-insured.

“Orange is the only one that didn’t renew,” said Tom Corbett, vice president of the Robert F. Driver Co., a Newport Beach insurance brokerage that buys coverage for the cities.

Reserve Fund Set Up

The Orange City Council voted unanimously to set aside $650,000 in a reserve fund rather than pay that amount for coverage up to $5 million, with a $400,000 deductible, per claim. The city’s old policy, which expired Wednesday, provided $26 million of coverage for $237,000, with only a $100,000 deductible.

“We have some trepidation about it; obviously when you decide to remove some level of protection you have to be concerned,” Orange City Manager William Little said. “But you weigh the coverage provided against the cost--it would have cost us $1 for every $7 of coverage, and that is awfully expensive protection.”

The city has never lost a claim for an amount over the $400,000 deductible it would have carried, Little said, and an indemnification clause in the new policy would have allowed the insurance company to settle any claim, even without the city’s consent. Thus, the company could have settled claims--with the city’s money--even if the city wanted to go to court, he said.

“You could end up spending a lot of money without the insurance company ever having to look at the policy,” Little said.

The other 10 members of the Orange County Cities Risk Management Authority--a group of cities that collectively purchases liability insurance--reluctantly renewed their policy with the Pennsylvania-based Planet Insurance Co. They are Cypress, Irvine, La Palma, Laguna Beach, Los Alamitos, San Clemente, Stanton, Tustin, Westminster and Yorba Linda.

The new policy, which takes effect today, provides $5 million of coverage per claim at a total cost of $2.6 million, with deductibles for each city at $250,000 or $400,000. The insurance market for cities is so bad that no other company would even offer the group a competing bid, said Dave Barrett, assistant city manager of Cypress and president of the Risk Management Authority.

‘Skyrocketing Premiums’

The past year’s $26-million-per-claim policy cost the 11-city group about $1 million, with deductibles at $100,000 or $250,000.

Cities and other public entities across the country are facing skyrocketing insurance premiums, but California’s “deep-pocket” principle, which effectively allows a plaintiff to collect a large award from a marginally negligent defendant, has hit the state’s municipalities especially hard.

At least 31 California cities are currently self-insured, including San Diego, Pasadena, Torrance and Oxnard, said Ross Oliver, risk manager for the Risk Management Authority. Orange’s departure from the insurance group would not cause a problem for the remaining cities because the company has agreed to write the policy as long as there are at least four cities left, Oliver said.

In council meetings and staff discussions earlier this week, the cities were having their own problems coming to grips with the terms of their new policy.

Funding Is Problem

“I’m depressed,” a glum Laguna Beach Councilman Robert Gentry said at a special meeting on the problem Tuesday night. “How can we afford to pay this premium--where does the money come from?”

Laguna Beach’s share of the group’s premium is $323,000, and its deductible is $400,000. City Manager Kenneth Frank told the council that the city was lucky to have insurance at all, since it had been the staff’s guess that the high-risk beach cities--Laguna Beach and San Clemente--and maybe one or two others would be dropped from the policy. The city had the money to pay the increased premium in its general fund reserves, Frank said, adding that it would take seven or eight years of investing an equivalent amount to create a self-insurance fund of $5 million.

“And that would only cover one big claim,” Frank said.

The council voted unanimously to renew the insurance but at the same time to look into self-insurance possibilities for next year. San Clemente City Manager James Hendrickson said his city would also ante up this year but begin looking for alternatives for the future.

More Competition Expected

Tustin Finance Director Ron Nault said the city staff considered going bare “for about two-tenths of a second” before realizing that the city would be taking on more exposure than it would be willing to bear. “My understanding is everything in insurance is cyclical--with these incredibly high premiums, other companies are going to want a piece of the pie and we will have more competition (and lower rates) in a couple of years,” Nault said.

But Oliver described that argument, which was also voiced by officials in other cities, as “wishful thinking, an optimist’s approach. The trend is still up. There is no evidence that the insurance rates will level off. They’re charging whatever they want to charge.

“The thing that would bring the whole situation to a head is if a significant number of significant municipalities are without insurance. At that point, lawmakers would have to think hard about what they are doing.”

The League of California Cities is backing an initiative sponsored by a Northern Californian group for the June, 1986, election that would limit the awards a plaintiff could collect under the deep-pocket doctrine, Orange County division executive director Robert Dunek said. “That won’t solve the whole problem, but it will help,” he said.