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Home My WebLink About11/16/2005 - STAFF REPORTS (19) RESOLUTION NO. OF THE CITY COUNCIL OF THE CITY OF PALM SPRINGS, CALIFORNIA, APPROVING THE CITY'S EXCESS EARTHQUAKE/FLOOD (DIFFERENCE IN CONDITION) INSURANCE RENEWALS. WHEREAS, the City of Palm Springs is located in the vicinity of several known active and potentially active earthquake faults including the San Andreas, the San Jacinto and the Elsinore faults; and WHEREAS, the topography of the City makes it prone to flooding especially during times of heavy rainfall; and WHEREAS, each year the City purchases a primary earthquake and flood insurance policy; and WHEREAS, the City supplements its primary insurance policy with excess coverage to properly protect its public facilities from catastrophic loss from earthquake or flood; and WHEREAS, the City's property schedule is estimated at $281,374,878; and WHEREAS, this is an increase of $81,393,419 over the prior year; and WHEREAS, the City Council desires to provide insurance coverage in an amount that wily properly protect public property from earthquake and flood damage. NOW THEREFORE BE IT RESOLVED by the City Council of the City of Palm Springs, California approves the following excess insurance coverage renewal: Earthquake/Flood Difference in Condition Premium 11/20/05 through 11/20/06 Excess of$2,500,000 Primary Net of Commission First Layer Excess of$5 Million $159,999 Insurance Company Great American/Greenwich Bests Rating A XII Limit of Coverage $7,500,000 Second Layer Excess of$5 Million $107,239 Insurance Company Lloyds of London Best's Rating NA Limit of Coverage $12,500,000 Third Layer Excess of$5 Million $68,243 Insurance Company Lloyds of London Best's Rating N/A Limit of Coverage $17,500,000 Fourth Layer Excess of$5 Million $53,619 Insurance Company Lloyds of London Bests Rating N/A Limit of Coverage $22,500,000 Total $389,100 {� ADOPTED this 161h day of November, 2005. AYES: NOES: ABSENT: ATTEST: CITY OF PALM SPRINGS, CALIFORNIA By City Clerk City Manager REVIEWED & APPROVED AS TO FORM F PA U4 SA? iy G1 V �n k C M1 % °R�OIATEP`�s cg4�FORN�P* City Council Staff Report DATE: November 16, 2005 Consent Calendar SUBJECT: Excess Earthquake/Flood Insurance Coverage -- Renewal FROM: David H. Ready, City Manager BY: Director of Human Resources SUMMARY On July 1, 2005, the City purchased a primary layer of coverage for earthquake/flood (DIC) in the amount of $2.5 Million. In addition to the primary layer of coverage, the City normally purchases excess coverage. Last year, the City Council authorized the purchase of an additional $30 Million in excess insurance coverage for a total of $32.5 Million in coverage. The excess insurance coverage is set to expire on November 20th. In the aftermath of Hurricanes Katrina and Rita, insurance premiums have skyrocketed to the point where $30 Million in excess coverage is no longer affordable. The requested action would authorize staff to acquire an additional $20 Million in excess insurance coverage for a combined total of$22.5 Million in earthquake and flood insurance protection. RECOMMENDATION: 1. Adopt Resolution No. Approving Excess Earthquake/Flood Insurance Coverage in the amount of$20 Million Dollar at a cost not-to-exceed $389,700. 2. Adopt Resolution No. "A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALM SPRINGS, CALIFORNIA AMENDING THE BUDGET FOR THE 2005-06 FISCAL YEAR 3. Authorize the City Manager to Execute all Documents Necessary. STAFF ANALYSIS: Difference in Coverage (DIC) insurance provides coverage designed to close specific gaps in standard insurance policies and is usually available only for larger industrial or commercial risks. It allows coverage to be customized to extend to such exposures as water damage, flood, collapse, earthquake, landslide, etc., according to the insured's needs. DIC coverage may be provided by means of a separate insurance policy or it may be added by endorsement to the basic policy. Item No. 2. N . City Council Staff Report November 16, 2005-- Page 2 Earthquake/Flood Insurance DIC Renewal In June, the City Council approved $2.5 Million in primary earthquake/flood (DIC) coverage at a cost of$118,113. This renewal was $9,997 less than the prior year's premium for the same coverage amount. With the major insured losses of 2004 and pending losses of 2005 this has proven to be a very prudent purchase. Last year was a record year for hurricanes in the United States with the combined total of more than $22.9 billion in insured losses. According to a new report prepared by the Ceres Investor Coalition, insured and total property losses are rising faster than premiums, population or economic growth globally in the United States. Even after correcting for inflation, weather-related catastrophe losses in the United States property/casualty sector have grown from a few billion dollars per year in the 1970s to an average of $15 billion per year in the past decade, punctuated by three peaks of more than $25 billion per year and a record high in 2004 that included $30 billion in hurricane losses. The following lists show the top 10 hurricane and catastrophes by insured loss: Top 10 Hurricanes and Estimated Insured Loss (adjusted to 2004 dollars): Year Event Insured Loss 1992 Andrew $20.8 billion 2004 Charley $7.5 billion 2004 Ivan $7.1 billion 1989 Hugo $6.4 billion 2004 Frances $4.6 billion 2004 Jeanne $3.7 billion 1998 Georges $3.4 billion 1965 Betsy $3.1 billion 1995 Opal $2.6 billion 1999 Floyd $2.2 billion Top 10 Catastrophes and Estimated Insured Loss (adjusted to 2004 dollars) Hurricane Andrew Aug. 1992 $20.8 billion Terrorist Attack (NY and VA.) Sept. 2001 $20.0 billion Northridge Earthquake Jan. 1994 $15.9 billion Hurricane Charley Aug. 2004 $ 7.5 billion Hurricane Ivan Sept. 2004 $ 7.1 billion Hurricane Hugo Sept. 1989 $ 6.4 billion Hurricane Frances Sept. 2004 $ 4.6 billion Hurricane Jeanne Sept. 2004 $ 3.7 billion Hurricane George Sept. 1998 $ 3.4 billion Midwest Tornado Outbreak May 2003 $ 3.3 billion City Council Staff Report November 16, 2005 -- Page 3 Earthquake/Flood Insurance DIC Renewal According to insurance industry estimates, 2005 will likely be the worst year on record in the history of world catastrophes with over $60 billion in insured losses. This has already had a negative affect on the insurance industry resulting in higher premiums. Specifically, the price of an insurance policy reflects the costs of paying claims covered by that policy, as well as an insurance company's costs. Since an insurance company's ability to underwrite insurance policies is tied to its capital and the risk of the properties it insures, insurance costs are likely to trend upwards over the foreseeable future. Part of this trend is due to the current reinsurance market. For example, the terrorist attacks on the World Trade Center and Pentagon is costing re-insurers more than $20 billion, putting this type of coverage in short supply and at higher rates for high-risk areas of the country. The losses experienced this year by the insurance industry have negatively impacted the marketing of the City's excess coverage. The table below represents the premium cost for each excess layer of coverage that can be purchased. The City Council has the option of purchasing the first layer and any additional layer(s) of coverage. It should be noted that these insurance proposals do not include terrorism coverage or premiums for same. Excess levels of insurance over primary coverage of$2.5 million Earthquake/Flood Placement Cumulative Premium for Cumulative Insurance each Level Cost of Coverage Insurance First layer = $5 million $7.5 million $175,222 $175,222 Second layer= $5 million $12.5 million $107,239 $282,461 Third layer= $5 million $17.5 million $68,243 $350,704 Fourth layer = $5 million $22.5 Million $38,996 $389,700 Fifth layer = $5 million $27.5 million $53,671 $443,341 Following is a summary of earthquake/flood insurance purchased over the last ten years and the City's property schedule valuation for the same period: Year Property Insurance Deductible Schedule Limit 1995 $141,071,896 $20,000,000 10% 1996 $142,521,871 $20,000,000 10% 1997 $144,302,534 $86,803,070 5% 1998 $147,823,510 $86,803,070 5% 1999 $149,650,839 $86,803,070 5% 2000 $152,729,810 $50,000,000 5% 2001 $175,042,804 $50,000,000 5% 2002 $182,071,385 $73,500,000 5% 2003 $195,186,338 $82,500,000 5% 2004 $199,981,459 $32,500,000 5% 2005 $281,374,878 N/A 5% City Council Staff Report November 16, 2005-- Page 4 Earthquake/Flood Insurance DIC Renewal As indicated in the above chart, the City's property schedule has increased by over $81 Million over last year's valuation. This increase is largely due to the expansion of the Convention Center. In light of the significant increase in property valuation, staff is recommending that the City Council purchase a minimum of four layers of excess insurance coverage for a cumulative total of $22.5 million. The total cost of this coverage is $389,700. This is an increase of over $30,000 from last year ($358,225) for even less insurance coverage. While staff believes the higher insurance coverage is advisable in view of our increased property valuation, the cost of the additional layers of coverage is far too expensive and our insurance broker has essentially advised against it. !f FISCAL IMPACT: Director Review: The City budgeted $410,000 for earthquake insura ce in the current fiscal year. Of this amount $119,123 has already been spent to acquire a primary level of insurance coverage. This leaves a remaining balance of $290,877 in the earthquake insurance fund. If the City Council elects to accept the four layers of excess insurance coverage as recommended, then a budget amendment will be needed to cover the additional $98,923 in coverage cost. The City Council has the option of taking these funds from Fund Balance or the Risk Management Reserve Fund. There is approximately $3.6 Million in the Risk Management Reserve Fund. Since this constitutes a risk related expense, staff recommends that the Council use the Risk Management Reserve Fund to cover the additional coverage cost. S ' an Mills; e for o Human Resources David H. Ready, City Manager Attahments: 1. Resolution Approving Excess Earthquake/Flood Insurance Coverage for the period of November 20, 2005 through November 20, 2006 2. Resolution Amending the Budget for Fiscal Year 2005-06 RESOLUTION NO. OF THE CITY COUNCIL OF THE CITY OF PALM SPRINGS, CALIFORNIA, APPROVING THE CITY'S EXCESS EARTHQUAKE/FLOOD (DIFFERENCE IN CONDITION) INSURANCE RENEWALS. WHEREAS, the City of Palm Springs is located in the vicinity of several known active and potentially active earthquake faults including the San Andreas, the San Jacinto and the Elsinore faults; and WHEREAS, the topography of the City makes it prone to flooding especially during times of heavy rainfall; and WHEREAS, each year the City purchases a primary earthquake and flood insurance policy; and WHEREAS, the City supplements its primary insurance policy with excess coverage to properly protect its public facilities from catastrophic loss from earthquake or flood; and WHEREAS, the City's property schedule is estimated at $281,374,878; and WHEREAS, this is an increase of$81,393,419 over the prior year; and WHEREAS, the City Council desires to provide insurance coverage in an amount that will properly protect public property from earthquake and flood damage. NOW THEREFORE BE IT RESOLVED by the City Council of the City of Palm Springs, California approves the following excess insurance coverage renewal: Earthquake/Flood(Difference in Condition) Premium 11/20/05 through 11/20/06 Excess of$2,500,000 Primary Net of Commission First Layer Excess of$5 Million $175,222 Insurance Company Great American/Greenwich Best's Rating A XI I Limit of Coverage $7,500,000 Second Layer Excess of$5 Million $107,239 Insurance Company Lloyds of London Best's Rating NA Limit of Coverage $12,500,000 Third Layer Excess of$5 Million $68,243 Insurance Company Lloyds of London Best's Rating N/A Limit of Coverage $17,500,000 Fourth Layer Excess of$5 Million $38,996 Insurance Company Lloyds of London Best's Rating N/A Limit of Coverage $22,500,000 Total $389,700 ADOPTED this 161h day of November, 2005. AYES: NOES: ABSENT: ATTEST: CITY OF PALM SPRINGS, CALIFORNIA By City Clerk City Manager REVIEWED & APPROVED AS TO FORM RESOLUTION NO. A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALM SPRINGS, CALIFORNIA,AMENDING THE BUDGET FOR THE 2005-06 FISCAL YEAR. WHEREAS Resolution approving the budget for the fiscal year2005-06was adopted on 2005; and WHEREAS the City Manager has recommended, and the City Council desires to approve, certain amendments to said budget; NOW THEREFORE BE IT RESOLVED that the Director of Finance is authorized to record inter-fund cash transfers as required in accordance with this Resolution,and that Resolution adopting the budget for the 2005-06 fiscal year is hereby amended as follows: SECTION 1. ADDITIONS Fund Activity Account Amount 001 Earthquake 5905-48655 $98,923 Insurance Purpose SECTION 2. SOURCE Fund Activity Account Amount 540 Risk Fund Reserve 29325 ($98,923) Adopted this dayof 12005. AYES: NOES: ABSENT: David H. Ready, City Manager ATTEST: James Thompson, City Clerk