Skyrocketing Insurance Rates Have School Districts Worried

All last year, David Kanthak watched with apprehension as the number of liability claims against the Duarte Unified School District mounted. Kanthak expected bad news when the district’s insurance policy came up for renewal. And bad news was what he got.

Duarte’s premium for liability and property coverage shot up from $29,472 to $116,935, a fourfold increase in one year.

“We knew it was coming,” said Kanthak, an assistant superintendent who handles the district’s business affairs. “We keep track of the losses.”

In 1984, the Duarte district was the target of three lawsuits, Kanthak said. “Right now I have 29 (lawsuits or damage claims) that I’m working on.”

Along with the rate hike, the Duarte district faces a paradox shared by nearly all of the other 27 school districts in the San Gabriel Valley.

Most of its claims were below the $5,000 deductible limit of its liability coverage and did not contribute directly to the premium increases. But the district’s growing number of claims is part of a trend that insurance industry officials say is a fundamental reason for soaring premiums: the nationwide explosion in litigation--particularly against public agencies-- and the concern carriers have about the rise in large judgments.

Between 1962 and 1984, the number of $1-million-plus liability judgments against carriers rose from 1 to 360, according to statistics supplied by the New York-based Insurance Information Institute. Consequently, fewer companies are writing insurance for school districts and other government agencies, and those that still do are writing it for smaller amounts, said John McCann, regional vice president of the institute.

Rates also are going up because companies are trying to recover losses suffered during an industrywide price war waged from 1979 to 1984, McCann said. Even though claims were rising, interest rates were so high that companies could afford to offer policies at a loss to attract investment capital, he said. Investment income surpassed claims losses and kept most companies in the black until 1984, when the industry had net losses of $3.8 billion, its worst year ever, McCann said.

“Some districts have a poorer history than others,” Kanthak said, “but we’re all affected if the general trend is that way because the insurance companies are hedging their losses.”

In the past year, school districts in the San Gabriel Valley have experienced liability and/or property insurance rate increases ranging from 101% to 433%.

Baldwin Park Unified School District has had a good claims record, Business Manager Phillip R. Sexton said, but its liability premium rose from $19,236 in the 1984-85 fiscal year to $102,551 this year, an increase of 433%.

“I don’t think we’ve ever collected a dollar from the insurance company,” Sexton said.

Neighboring Bassett Unified School District was hit with a 403% increase as its liability insurance premium climbed from $7,328 to $36,853.

Risk management specialists say San Gabriel Valley school districts have fared relatively well because most have joined insurance consortiums, called joint-powers authorities, which pool the resources of several systems to provide less expensive coverage than most districts can get on the open market.

The authorities generally offer cheaper rates because part of each member’s insurance payment goes to a reserve to provide what essentially is a layer of group self-insurance. That layer covers districts from their individual deductible limits up to $1 million or so, depending on the specific terms. The authorities then buy what is called excess insurance, or re-insurance, from carriers to cover larger losses.

At the end of the year, unused reserves may be refunded, left in to increase the size of the self-insurance pool or used to offset rate increases for excess insurance policies.

The largest school authority in Southern California is the Alliance of Schools for Cooperative Insurance Programs (ASCIP), which serves 46 districts in Los Angeles and Orange counties, including nine in the San Gabriel Valley.

Its members essentially are self-insured from the deductible limit to $1 million for liability claims and up to $250,000 for property damage claims. Liability losses from $1 million up to $10 million and property damage claims from $250,000 to $70 million are covered by excess insurance insurance policies.

Types of Coverage

Liability insurance covers claims for damages from accidents and other mishaps involving district employees or property. Property policies cover damage to district property from fires and other disasters.

Alliance districts in the San Gabriel Valley are Alhambra City and High School and Bonita Unified, Charter Oak Unified, Claremont Unified, Covina-Valley Unified, El Monte Union High School, Pasadena Unified, San Gabriel and Walnut Valley Unified.

Other districts in the area have established two other joint-powers authorities.

Nine districts formed the West San Gabriel Valley Liability and Property Self-insurance Authority. They are Arcadia Unified, Duarte, El Monte City, Garvey, Mt. View, Rosemead, San Marino Unified, Temple City Unified and Valle Lindo.

The seven-member San Gabriel Joint-Powers Authority, which offers only liability insurance coverage, includes the unified school districts of Azusa, Baldwin Park, Bassett, Glendora, Monrovia, Rowland, and West Covina.

Buy Independently

Three other unified districts--Hacienda La Puente, Pomona and South Pasadena--buy insurance independently. Officials from those districts said they secured coverage at rates comparable to those charged by the authorities primarily because they reported fewer or smaller than the industry average.

Most districts are coping with the premium increases by tapping their reserves in the authorities or by dipping into district contingency funds. Spokesmen for all three authorities said they had anticipated cost increases, but did not expect them to be so large.

“We did not budget for the full impact,” said Jerry Buchanan, who is treasurer of the West San Gabriel Valley Liability and Property Self-Insurance Authority. “We were blind-sided.”

School officials said they did not know of any district that had to cut programs this year to pay insurance premiums. But, as Pomona risk management director Lori Milhiser put it, “I definitely can say that the money could have been spent in another fashion.”

Went to Reserves

Said Sexton of the Baldwin Park district: “In good years, much of the money went to (insurance authority) reserves. Now, it just goes through to premiums.”

Industry observers and some school officials agree that much of their insurance trouble stems from the so-called “deep pockets” legal theory, under which a defendant who is only 1% liable but who has substantial assets can be forced to pay 100% of a claim. This has made school districts and other government agencies prime targets for liability lawsuits.

“We have one right now,” said Kanthak of Duarte. “The city was making some changes to the street in front of a school and the contractor parked a bulldozer on the street. Someone drove by and hit it and since it was parked in front of the school, we got sued. This deep pockets thing is just ridiculous. Who do they sue? The ones who have the money.”

The El Monte City School District is among several defendants named in a $500,000 lawsuit filed in 1982 by the parents of a boy who was struck by a car while walking on the sidewalk outside a school fence, according to Buchanan, assistant superintendent for business services. “The guy who hit him had no insurance and we’re being sued because they claim we shouldn’t have had the gate he (the student) was headed for located where it was,” Buchanan said.

Not Only Headache

Liability coverage is not the only insurance headache districts are having. Property damage coverage also has become a problem for some.

Insurance premiums for Bassett Unified, for example, were hiked from $18,000 to $25,000 last year before its carrier canceled the policy after the district had four fires totaling $600,000 in damage. The district is member of the San Gabriel Joint-Powers Authority, which does not offer property coverage.

“We’ve been turned down by a dozen companies, but we’re still shopping,” said Lowell Shira, the Bassett assistant superintendent for business.

The situation has sparked the anger of many district risk management officers who contend that the insurance industry is fleecing the nation’s school systems.

Rates ‘Not Justified’

The high rates “are justified in terms of catch-up,” said Milhiser of Pomona. “But in terms of reality, they’re not justified. The insurance industry is trying to recoup from bad underwriting. Most public agency administrators feel bitter and gouged.”

McCann, the insurance industry spokesman, acknowledged that the industry is trying to recover from a slump and that “there is a need to return to cost-based pricing,” but he asserted that premiums have risen significantly because of increasing litigation.

“We live in a very litigious society,” McCann said. “That is the problem we’ve got. In the United States, 14% of all government entities faced lawsuits in 1982. In 1985, 28% face lawsuits.”

School officials say they are working on two major fronts to try to bring their insurance costs under control.

Statewide Pool

A statewide liability insurance pool--Schools Excess Liability Fund--is being formed, said Cheryl Delio, risk management coordinator for the county superintendent of schools and executive director of ASCIP. The aim of the statewide fund is to provide another layer of self-insurance to replace expensive excess insurance policies that joint-powers authorities now must buy from private carriers.

Delio and other risk management professionals said they also are lobbying in Sacramento for legislation to limit the so-called “deep pockets” legal practice.

Nevertheless, several school officials say they are particularly worried about next year when they expect another major increase in premiums and will not have as much money in reserve to cover the extra cost.

“I’m not optimistic that next year is going to run any more smoothly,” Milhiser said. “I’m just glad I have another year to worry about it. We didn’t suffer the full blow. I know the other shoe is out there waiting to fall.”

RISING SCHOOL INSURANCE COSTS

Liability and property damage insurance for school districts in the San Gabriel Valley have spiraled:

1984-85 1985-86 Premium $83,824 $328,123 Coverage Limit $20 million $10 million Deductibles(Liability/Prop.) $1,000/$10,000 $25,000/$25,000 ARCADIA UNIFIED Premium $62,981 $233,050 Coverage Limit (Liability/Prop.) $10/$15 million $10/$5 million Deductibles $5,000/$1,000 $10,000/$10,000 AZUSA UNIFIED Premium $13,740 $63,347 Coverage Limit $20 million $6 million Deductibles $5,000/$5,000 $5,000/$5,000 BALDWIN PARK UNIFIED Premium $19,236 $102,551 Coverage Limit $20 million $6 million Deductibles $5,000/$5,000 $5,000/$5,000 BASSETT UNIFIED Premium $7,328 $36,853 Coverage Limit $20 million $6 million Deductibles $5,000/$5,000 $5,000/$5,000 BONITA UNIFIED Premium $48,552 $167,696 Coverage Limit $20 million $10 million Deductibles $1,000/$10,000 $10,000/$10,000 CHARTER OAK UNIFIED Premium $27,986 $118,196 Coverage Limit $20 million $10 million Deductibles $1,000/$10,000 $10,000/$10,000 CLAREMONT UNIFIED Premium $22,848 $107,673 Coverage Limit $20 million $10 million Deductibles $1,000/$10,000 $5,000/$5,000 COVINA-VALLEY UNIFIED Premium $66,344 $257,961 Coverage Limit $20 million $10 million Deductibles $25,000/$10,000 $25,000/$25,000 DUARTE UNIFIED Premium $29,472 $116,935 Coverage Limit (Liability/Prop.) $10/$15 million $10/$5 million Deductibles $5,000/$1,000 $10,000/$10,000 EL MONTE CITY Premium $66,527 $281,978 Coverage Limit (Liability/Prop.) $10/$15 million $10/$5 million Deductibles $5,000/$1,000 $10,000/$10,000 EL MONTE UNION HIGH SCHOOL Premium $40,160 Coverage Limit $20 million $10 million Deductibles $1,000/$5,000 $10,000/$10,000 GARVEY Premium $51,991 $178,658 Coverage Limit (Liability/Prop.) $10/$15 million $10/$5 million Deductibles $5,000/$1,000 $10,000/$10,000 GLENDORA UNIFIED Premium $8,244 $37,041 Coverage Limit $20 million $6 million Deductibles $5,000/$5,000 $5,000/$5,000 HACIENDA LA PUENTE UNIFIED Premium $191,667 $385,539 Coverage Limit (Liability/Prop.) $18/$15 million $10/$15 million Deductibles $25,000/$50,000 $25,000/$50,000 LA CANADA UNIFIED Premium $26,280 $71,166 Coverage Limits $20 million $10 million Deductibles $1,000/$5,000 $5,000/$5,000 MONROVIA UNIFIED Premium $7,328 $36,119 Coverage Limits $20 million $6 million Deductibles $5,000/$5,000 $5,000/$5,000 MT. VIEW Premium $42,399 $169,044 Coverage Limits (Liability/Prop.) $10/$15 million $10/$5 million Deductibles $5,000/$1,000 $10,000/$10,000 PASADENA UNIFIED Premium $109,751 $440,155 Coverage Limits $20 million $10 million Deductibles $1,000/$10,000 $25,000/$25,000 POMONA UNIFIED Premium $135,171 $453,609 Coverage Limits $10 million $10 million Deductibles $0/$10,000 $25,000/$25,000 ROSEMEAD Premium $15,489 $62,531 Coverage Limits (Liability/Prop.) $10/$15 million $10/$5 million Deductibles $5,000/$1,000 $10,000/$10,000 ROWLAND UNIFIED Premium $24,732 $108,830 Coverage Limits $20 million $6 million Deductibles $5,000/$5,000 $5,000/$5,000 SAN GABRIEL Premium $14,520 $43,520 Coverage Limits $20 million $10 million Deductibles $1,000/$1,000 $5,000/$5,000 SAN MARINO UNIFIED Premium $29,751 $101,781 Coverage Limits $10/$15 million $10/$5 million Deductibles $5,000/$1,000 $10,000/$10,000 SOUTH PASADENA UNIFIED Premium $47,000 $76,000 Coverage Limits $6 million $6 million Deductibles $10,000/$10,000 $10,000/$10,000 TEMPLE CITY UNIFIED Premium $60,000 $131,231 Coverage Limits $10/$15 million $10/$5 million Deductibles $5,000/$1,000 $10,000/$10,000 VALLE LINDO Premium $10,422 $24,221 Coverage Limits $10/$15 million $10/$5 million Deductibles $5,000/$1,000 $10,000/$10,000 WALNUT VALLEY UNIFIED Premium $44,576 $246,550 Coverage Limits $20 million $10 million Deductibles $5,000/$10,000 $10,000/$10,000 WEST COVINA UNIFIED Premium $10,992 $51,997 Coverage Limits $20 million $6 million Deductibles $5,000/$5,000 $5,000/$5,000