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DATE: November 5, 2008 Consent Calendar
SUBJECT: Renewal of Excess Earthquake/Flood Insurance Coverage
FROM: David H. Ready, City Manager
BY: Douglas Holland, City Attorney
SUMMARY
On July 1, 2008, the City purchased a primary layer of coverage for earthquake/Flood
insurance in the amount of $2.5 Million. In addition to the primary layer of coverage, the
City normally purchases excess coverage, also known as Differences in Coverage (DIC),
insurance. Last year, the City Council authorized the purchase of an additional $22.5
Million in excess insurance coverage for a total of $25 Million in coverage. The current
excess insurance policy is set to expire on November 20th. The requested action would
authorize staff to purchase an additional $22.5 Million in excess insurance coverage, for a
combined total of$25 Million, in earthquake and Flood insurance protection through July 1,
2009.
RECOMMENDATION:
1. Adopt Resolution No. "A RESOLUTION OF THE CITY COUNCIL OF THE
CITY OF PALM SPRINGS, CALIFORNIA, APPROVING THE PURCHASE OF
$22.5 MILLION IN EXCESS EARTHQUAKE/FLOOD (DIFFERENCE IN
CONDITION) INSURANCE FROM LLOYDS OF LONDON IN AN AMOUNT
NOT-TO-EXCEED $330,799.21 FOR POLICY YEAR 2008-2009.
2. Authorize the City Manager to execute all documents necessary.
STAFF ANALYSIS:
Hurricane Katrina, which caused nearly $50 billion in insured losses, was the single
most destructive natural catastrophe in U.S. history. The massive loss in both lives and
property caused by this disaster has led insurers, rating agencies and catastrophe
modeling firms to reconsider all prior assumptions concerning disaster risks. As a
result, insurance premiums have increased significantly making property insurance
almost unaffordable for some public agencies. In addition, the insurance market that
writes catastrophic coverage (flood, wind, and earthquake) has reduced available
insurance capacity further increasing costs. �,
City Council Staff Report
November 5, 2008 -- Page 2
Earthquake/Flood Insurance DIC Renewal
Recent assessments by catastrophe modeling firms indicate that the destruction that
could be caused by a massive California earthquake is of the same order of magnitude
as the worst hurricane scenarios — a Category 5 storm striking Miami and moving up the
Florida coast, or a Category 5 storm raking the New Jersey coastline before crashing
into New York City. The USGS predicts that there is a 62% probability of at least one
magnitude 6.7 or greater quake, capable of causing widespread damage, striking the
San Francisco Bay region before 2032. While making no specific timeframe
projections, a recent, widely reported study by Yuri Fialko of Scripps Institute of
Oceanography at the University of California, San Diego, indicates that, as a result of
300 years of unrelieved, steadily building tension, a segment of the San Andreas fault
running through Palm Springs and a number of other cities in San Bernardino, Riverside
and Imperial counties "could rupture at any moment," possibly producing a M7+ quake.
One catastrophe modeling company estimates that a rupture along this segment of the
San Andreas Fault in Southern California could result in as much as $300 billion in
property damage.
The City is self-insured and purchases various lines of insurance each year for
additional protection. Flood and earthquake is almost always excluded from
commercial property policies and must be purchased separately. In July, the City
Council approved the purchase of an "All Risk Property" insurance policy, which included
$2.5 Million in primary earthquake/flood coverage.
The City's property schedule has a present net replacement cost of $335 Million (2006).
While it is highly unlikely that the City would have to replace every single facility in the
event of an earthquake, there are several facilities, such as the Airport and Wastewater
Treatment Plant, which are considered critical to the continued operations of the City.
These two facilities alone have an estimated replacement cost of over $120 Million. In
reality, the actual cost is probably in excess of $200 Million, if both facilities were totally
destroyed.
To ensure that there is sufficient coverage to repair and/or replace City facilities that could
be damaged in a flood or earthquake, the City has historically purchased Differences in
Coverage (DIC) insurance to augment its primary earthquake/flood insurance policy. Last
year the City Council purchased a single DIC policy of $22.5 Million from Lloyds of
London. Staff is proposing that the City continue with Lloyds and purchase a single policy
of $22.5 Million for the rest of the fiscal year in the amount of $330,799.21. Staff is
recommending that the policy should terminate on July 1, 2009, which is the date on which
all other City insurance policies expire. Our insurance consultant and broker believes that
the City will be better positioned, to negotiate favorable rates on the City's policies if the
terms of all policies are coterminous.
Last year staff observed that significant increases in insurance costs caused many
public agencies to reduce their limits or drop DIC coverage altogether. While the City
could purchase less insurance, or only maintain the primary level of earthquake/flood
insurance coverage, staff does not recommend this course of action based on recent
actions taken by the Federal Emergency Management Agency (FEMA). Normally, the
1 6079661 - 1�'2
City Council Staff Report
November 5, 2008-- Page 3
Earthquake/Flood Insurance DIC Renewal
federal government reimburses 75 percent of eligible costs incurred by local
governments and special districts in the event of a catastrophic disaster. The remaining
25 percent is generally funded by state and local governments. Following the aftermath
of Hurricane Katrina, FEMA is now reviewing whether the local government or special
district requesting federal disaster assistance has adequate insurance in place, or the
financial capacity to purchase such insurance prior to providing such assistance.
According to FEMA guidelines (44 CFR Part 206), local government agencies that fail to
maintain proper property insurance can be denied federal disaster assistance.
The current insurance market makes it financially cost prohibitive to purchase insurance
to cover the entire property schedule. However, based on the FEMA policy regarding
disaster assistance funding, staff believes that the City needs to maintain a reasonable
level of coverage to protect its interests and to demonstrate good faith compliance with
federal regulations concerning disaster assistance. Therefore, it is recommended that,
in addition to the primary coverage, the City Council authorize the purchase of an
additional $22.5 million in insurance. This will continue to provide the City with a
combined total of $25 Million in earthquake/flood coverage.
FISCAL IMPACT:
The City budgeted adequate funds to cover the cost of all insurance, including the DIC,
and there are sufficient funds in the Risk Management program to cover this expense-
A, � ;0 /� �
Dougl s Holland, City Attomby Qavid H. Ready, City Manager
Attachment:
Resolution Approving Excess Earthquake/Flood Insurance Coverage for the period
of November 20, 2008 through July 1, 2009
2 6079661
RESOLUTION NO.
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
PALM SPRINGS, CALIFORNIA, APPROVING EXCESS
EARTHQUAKE/FLOOD COVERAGE IN THE AMOUNT OF
$22.5 MILLION AT A COST NOT-TO-EXCEED $330,799.21
FOR POLICY YEAR 2008-09.
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 insurance broker has solicited proposals from various
insurance companies for excess insurance coverage and is recommending that
the City purchase a $22.5 Million policy from Lloyds of London; and
WHEREAS, the City Council desires to purchase excess insurance coverage to
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 purchase of excess insurance coverage from
Keenan & Associates for policy year 2008-09:
Earthquake/Flood (Difference in
Condition) Premium 11/20/08 through 07/01/09
Excess of$2,500,000 Primary Net of Commission
First Layer Excess Coverage: $22.5
Million $330,799.21
Insurance Company. Lloyds of London
Best's Rating: N/A
Resolution No
Page 2
ADOPTED THIS 5" day of November, 2008.
David H. Ready, City Manager
ATTEST:
James Thompson, City Clerk
CERTIFICATION
STATE OF CALIFORNIA )
COUNTY OF RIVERSIDE ) ss.
CITY OF PALM SPRINGS )
I, JAMES THOMPSON, City Clerk of the City of Palm Springs, hereby certify that
Resolution No. 22098 is a full, true and correct copy, and was duly adopted at an
adjourned meeting of the City Council of the City of Palm Springs on the 5t" day of
November, 2008, by the following vote:
AYES:
NOES:
ABSENT:
ABSTAIN:
James Thompson, City Clerk
City of Palm Springs, California