HomeMy WebLinkAbout11/14/2007 - STAFF REPORTS - 2.F. �OF p A LM S'p
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^c441FOR��Px City Council Staff Report
DATE: November 14, 2007 Consent Calendar
SUBJECT: Renewal of Excess Earthquake/Flood Insurance Coverage Through Davis
& Graeber Insurance Services, Inc.
FROM: David H. Ready, City Manager
BY. Assistant City Manager—Administrative Services
SUMMARY
On July 1, 2007, 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 $20 Million in excess insurance coverage
for a total of $22.5 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.
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 DAVIS & ORABER INSURANCE SERVICES
INCORPORATED IN AN AMOUNT NOT-TO-EXCEED $541,407 FOR POLICY
YEAR 2007-2008.
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.
Recent assessments by catastrophe modeling firms indicate that the d��ctio co'
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caused by a massive California earthquake is of the same order of a sl
City Council Staff Report
November 14, 2007-- Page 2
Earthquake/Flood Insurance DIC Renewal
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, that
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 insure 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. The following schedule
is a summary of earthquake/flood insurance purchased over the last ten years and the City's
properly schedule valuation for the same period:
Year Property Schedule Insurance Limit Deductible
1995 $141,071,896 $20,000,000 10%
1996 $142,521,871 $20,000,000 10%
1997 $144,302,534 $86A3,070 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 $22,500,000 5%
2006 $335,842,805 $22,500,000 5%
The City's insurance broker, Davis & Graeber, has solicited insurance proposals for DIC coverage
from 20 different insurance companies. Of the 20 companies that were solicited, only 3 submitted
insurance quotes. A sheet summarizing these quotes is attached. This year, the City has an
opportunity to purchase a single policy of$22.5 Million from Lloyds of London for$541, 407 instead
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City Council Staff Report
November 14, 2007-- Page 3
Earthquake/Flood Insurance DIC Renewal
of purchasing multiple layers of insurance at a much higher cost. This policy, combined with the
$2.5 Million in primary coverage the City has already purchased, will give the City a total of $25
Million in earthquake/flood insurance coverage. The City's insurance broker has assessed the
coverage limits and the cost per million of insurance for each company that submitted a quote and
is recommending that the City purchase a DIC policy from Lloyds of London.
The significant increase in insurance costs has 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 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 give the City a combined total of $25 Million in earthquake/flood coverage, which is
slightly more coverage than normal, at a cost that is $116,821 less than what the City spent last
year for less coverage.
FISCAL IMPACT:
The City budgeted $975,000 for earthquake insurance in the current fiscal year. Of this amount
$98,284 has already been spent to acquire the primary level of earthquake insurance coverage.
This leaves a remaining balance of $876,706 to purchase the additional layer of earthquake
insurance that will be needed to raise the City's cumulative insurance coverage to $25 Million.
There are sufficient funds in the Risk Management program to cover this expense_
iae
utzlaff, sit nt City Manager David H. Ready, City M
nts:
1. 2007 DIC Insurance Quotes
2. Resolution Approving Excess Earthquake/Flood Insurance Coverage for the period of
November 20, 2007 through November 20, 2008
� ._ 60103
City of Palm Springs - DIC Insurance Quotes 2007- 2008
Company Limit Primary Premium Rate per$Mil 2006
20U6 Cumulative
Premium
1 Arch $5,000,000 $2.5 Mil $182,331.25 $36,506 $184,537.25
Westchester $2,500,000 $7.5 Mil $77,343.75 S30,938 $261,881-00
Lloyds $15,000,000 $10 Mil $299,062.30 $19,938 S560,943.50
Total Limit $25 Mil $24,931 S560,943.50
Or
2 Arch $5,000,000 S2.5 Mil $182,531.25 $36,506 $182,331.25
Westchester $15,000,000 $7.5 Mil $371,250.00 $24,750 $553,781.25
Total Limit $22.5 Mil $27,689 $553,781.25
Or
3 Arch $5,000,000 $2.5 Mil $182,531.25 $36,506 $182,531,25
Lloyds $15,000,000 $7.5 Mil $335,156.25 $22,344 $517,687.50
Total Limit $22.5 Mil $25,884 $517,68750
Or
4 Arch $5,000,000 $2.5 Mil $182,531,25 $36,506 $182,531.25
Lloyds S17,500,000 $7.5 Mil $378,984.38 $21,656 $561,315.63
Total Limit $25 Mil $24,956 $561,515.63
Or
5 Lloyds $22,500,000 $2.5 mil $541,406.25 S24,063 S541,406.25
Total Limit $25 Mil $24,063 S.541,406.25
SHADING,DENOTES BROILER'S RECOMMENDATION
RESOLUTION NO.
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 DAVIS & GRABER
INSURANCE SERVICES INCORPORATED IN AN AMOUNT
NOT-TO-EXCEED $541,407 FOR POLICY YEAR 2007-2008.
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 Davis & Graeber
Insurance Services, Incorporated for policy year 2007-2008:
Earthquake/Flood (Difference in Condition) Premium 11/20/07 through 11/20/08
Excess of$2,500,000 Primary Net of Commission
First Layer Excess Coverage: $22.5 Million $541,407
Insurance Company: Lloyds of London
Best's Rating: N/A
ADOPTED this 14th day of November, 2007.
AYES:
NOES:
ABSENT:
ATTEST: CITY OF PALM SPRINGS, CALIFORNIA
By
City Clerk City Manager
REVIEWED & APPROVED AS TO FORM q�