TO: HONORABLE MAYOR FROM: Rick Bruneau
AND CITY COUNCIL
SUBJECT: APPROVAL OF CITYWIDE DATE: September 5, 2023
INSURANCE RENEWALS
Approved Date
9/14/23
RECOMMENDATION
Adopt a resolution authorizing the Director of Finance or designee to:
(a) Select and purchase City property, liability, and executive risk insurance policies for the period of October 1, 2023 to October 1, 2024, at a total cost not-to-exceed $3,919,533 as well as an 18% contingency for additional property or assets scheduled, subject to the appropriation of funds, with the following insurance carriers:
(1) Factory Mutual Insurance Company for Property Insurance, including Boiler and Machinery and Terrorism Risk Insurance Act Coverage;
(2) Beazley Syndicate 2623/623 at Lloyd’s for Terrorism Insurance; (3) The Princeton Excess and Surplus Lines Insurance Company and Arch Specialty Insurance Company for $15 million in Excess Flood Insurance on a 50/50 quota share basis;
(4) Gemini Insurance Company for Auto Liability Insurance for the vehicle fleets at the San José Mineta International Airport and San José – Santa Clara Regional Wastewater Facility;
(5) Hanover Insurance Company for Auto Physical Damage for the Airport shuttle buses;
(6) Lexington Insurance Company for Secondary Employment Law Enforcement Professional Liability;
(7) Arch Insurance Company for Accidental Death, Accidental Dismemberment, and Paralysis Policy for the Police Air Support Unit;
(8) Great American Insurance Company for Government Fidelity/Crime Coverage; and
(9) AGCS Marine Insurance Company for Auto Physical Damage for the Police Department grant-funded vehicles and equipment.
(b) Select and purchase Additional Liability Insurance for the period October 22, 2023 to October 22, 2024, at a cost ranging from $500,000 to $1,250,000, subject to the appropriation of funds.
COUNCIL AGENDA: 9/26/23
FILE: 23-1280
ITEM: 3.5
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
SUMMARY AND OUTCOME
Commercial insurance policyholders continue to face challenging market conditions as global commercial insurance prices rose 8.9% in the second quarter of 2023, the twenty-third consecutive quarter in which composite pricing rose. Commercial property rates led the market at an average of 18.3% increase in the second quarter of 2023
1. The City of San José (City) exposure to natural catastrophe events (i.e., flood) and loss history continues to contribute to negative/unfavorable changes in the renewal pricing and terms for its property and auto liability insurance. Appendix A reflects the best value coverage and insurance carriers presented for Fiscal Year (FY) 2023-2024. Appendix B provides a comparison of insurance premiums by fund and type of insurance based on estimated not-to-exceed values for the outstanding proposals.
Approval of this recommendation will ensure the City maintains appropriate insurance coverage to provide financial protection from certain types of catastrophic or financial loss.
BACKGROUND
Each year, the City purchases insurance to protect the City against a catastrophic event or specified perils. The City is self-insured for workers’ compensation, general liability, and auto liability with limited exceptions described in this memorandum. The decision on whether to purchase insurance is based on many factors including, but not limited to, when the frequency of events cannot be predicted, when the severity of potential loss could seriously hamper operations, and when the cost of the insurance policy is not prohibitive.
To secure policies, the Finance Department annually reviews the City’s insurance coverage and needs with the City’s insurance broker, Alliant Insurance Services (Alliant). This includes analyzing the City’s risk exposures, trends in the insurance markets, insurance product line availability, and the City’s historical philosophy to insuring for losses. Alliant presents the City’s risk portfolio to insurance carriers to obtain the best value insurance coverage, solicits competitive quotations from major insurance companies for all recommended insurance product lines, and presents the results to the Finance Department for consideration.
Staff compares and evaluates the quotes based on scope of coverage, cost, the insurer’s financial strength and reputation for claims payment, and the insurer’s availability of resources to provide services such as property appraisals, safety training, and loss prevention engineering services.
Based on the information and analysis, the Finance Department determines the appropriate insurance coverage and recommends the most advantageous insurance policies to the City Council.
1 'Rate-fatigued' commercial insurance buyers see average 8.9% increase in Q2: CIAB
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
Historically, the Citywide insurance renewals included the purchase of San José Mineta International Airport (Airport) Owners and Operators Liability and Police Aircraft Hull and Liability insurance coverages. Last year, The Finance Department recommended these two policies be secured through insurance programs that renew on June 30, 2023. The renewal policies for Airport Owners and Operators Liability and Police Aircraft Hull and Liability have been renewed under the City Manager’s contract authority at a total annual cost of $63,109 and $61,759, respectively.
ANALYSIS
The Finance Department completed the annual insurance renewal process for FY 2023-2024 with Alliant and recommends the insurance coverage described below.
A. Insurance Coverage Recommended
1. All Risk Property including Boiler and Machinery Insurance
All Risk property insurance provides coverage for City-owned and leased real and personal property, including buildings, contents, business interruption, boiler and machinery, electronic data processing equipment, fine arts, loss of rents, expediting costs, off-premises services interruption, unnamed locations, transit, animals, accounts receivable, valuable papers, data, rebuild with green upgrades, and other coverage as detailed in the policy forms subject to sub-limits as defined in the policy. This includes one property (the Billy DeFrank Community Center) currently owned by the Successor Agency to the Redevelopment Agency (SARA).
Policyholders renewing their property programs continue to face a challenging market environment. While Hurricane Ian’s record high $68 billion in insured losses had minimal impact on the commercial retail insurance market, it did have a profound impact on the reinsurers. Beginning in October 2022, reinsurers proclaimed a hard market; January 1, 2023 subsequently brought higher premiums, bigger retentions, and limited capacity for natural catastrophe coverage
2. Rating agency A.M. Best recently described
the reinsurance market as one of the hardest experienced in decades3.
Double-digit rate increases are the current norm for policyholders with good risk profiles and in desirable industry classes. Policyholders with significant loss activity or that have a significant amount of natural catastrophe exposure are experiencing rate increases ranging from 25 to 40%
4. 2 Willis Towers Watson Insurance Marketplace Realities (2023 Spring Update) 3 What's behind the hardest reinsurance market in decades? 4 Willis Towers Watson Insurance Marketplace Realities (2023 Spring Update)
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
Valuation of assets continues to be the marquee issue for property insurance buyers as carriers believe that property valuations submitted by policyholders may be off by as
much as 30%5. Insurers are fully focused on ensuring valuations are correct to demonstrate to their reinsurers that their portfolio data is robust6. Policyholders must have a plan to justify replacement cost values submitted for insurance renewals.
To address the valuation of assets issue, the City conducted six property appraisals to update the replacement cost values of its property portfolio and used the property appraisals to establish a current cost per square foot for similar occupancies. Four of the property appraisals focused on valuation of locations within the City’s 30 largest insured locations as measured by total insured values, including the SAP Center and the Airport.
Additionally, staff applied a 7.5% inflation factor to existing buildings not subject to a property appraisal. The inflation factor reflected a mid-point between the May 2023 Engineering News Record Construction Cost Index for San Francisco of 1.8%7 and insurer expectations of 11.0%.
Citywide, property values increased by $997.2 million to $6.48 billion, or an 18.17% increase relative to property values provided for the FY 2022-2023 renewal. Increases were driven primarily by:
• A 267.45% increase in the replacement cost valuation of the SAP Center’s building and contents, which saw its total insured values increase by $347.8 million from $130.0 million to $477.8 million following the March 2023 property appraisal; and
• A 27.07% increase in the replacement cost valuation of the Airport’s buildings, which saw its total insured values for buildings increase by $435.4 million from $1.17 billion to $1.61 billion following the June 2023 property appraisal.
Incumbent property insurer Factory Mutual Insurance Company (FM) has provided a proposal for the renewal term. The property insurance limit quoted by FM is $1.0 billion each occurrence with a $500,000 minimum deductible per occurrence
8. FM proposal for
flood coverage includes annual aggregate limits of $10 million with a $500,000 per location deductible, with certain exceptions
9. Coverage terms and conditions are
consistent with the current program.
5 Public Agency Risk Management Association State of the Market Presentation (February 8, 2023) 6 Willis Towers Watson Insurance Marketplace Realities (2023 Spring Update) 7 The Engineering News Record Construction Cost Index for San Francisco was used by the Public Works Department to adjust (a) the Major Public Works Contract threshold for FY 2023 -2024; (b) the Micro Contract threshold for FY 2023-2024; and (c) the Director’s award authority threshold for FY 2023-2024. 8 Effective October 1, 2022, the City increased its minimum deductible per occurrence from $100,000 to $500,000 for a premium credit of $303,209.
9 The Airport and McEnery Convention Center are subject to a $10 million per location flood deductible and the Regional Wastewater Facility is subject to a $5 million per location flood deductible.
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
The FM proposal contemplates a 3% rate increase superimposed on the 18.17% increase in insurable values, offset by a one-time membership credit in the amount of $270,678. In April 2023, FM announced approximately $800 million in membership credits to eligible
policyholders who renewed their property insurance policies between June 30, 2023 and June 29, 2024. The membership credit provided to eligible policyholders is based on their expiring premium and tenure with FM, and applied as an offset against premium at a renewal or anniversary date
10. FM’s quote also provides another one-time resilience credit in the amount of $135,339.
The City also received a competitive quote from
Employers Insurance Company of
Wausau (Liberty Mutual). Coverage terms and conditions in the Liberty Mutual quote are consistent with the FM quote except the Liberty Mutual proposal:
Limits coverage at the Family Camp location in Groveland to $5 million (the City reported $12.1 million in total insured values) due to the wildfire exposure. Limits coverage for the Alum Rock Park and Fire Station #28 locations to the reported insurable values due to the wildfire exposure. Incorporates builder’s risk insurance coverage for City projects in the course of construction. The FM proposal does not include builder’s risk insurance coverage. Historically, for projects where builder’s risk insurance coverage is necessary, the City has either (a) required the contractor to maintain the builder’s risk insurance or (b) implemented an Owner-Controlled Insurance Program if the construction values warranted it and the project schedule accommodated an Owner-Controlled Insurance Program implementation.
As Liberty Mutual’s proposal is less advantageous for the City, staff recommends FM Global for the All Risk Property including Boiler and Machinery line of insurance.
Line Item FM Global Liberty Mutual
Property Premium $3,142,199 $2,840,225
Membership Credit (10%) ($270,678) $0
Resilience Credit (5%) ($135,339) $0
Terrorism Risk Insurance Act (TRIA) Premiums $179,734 $86,477 Property and TRIA Premiums Subtotal $2,915,916 $2,926,702
10 Record US$800 million membership credit for FM Global’s client-owners | FM Global Newsroom
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
Insurance Carrier: FM
Policy Period 2023-2024 2022-2023
Annual Premium (Net)11 $3,142,199 $2,886,301
Membership Credit12 ($270,678) ($119,532)
Resilience Credit ($135,339) ($119,532)
Credit for Increasing Deductible from
$100,000 to $500,000 $0 ($303,209)
Broker Fees13 $55,185 $55,270
Total Annual Costs $2,791,367 $2,399,298
The City will continue conducting property appraisals to update the replacement cost valuations of the City’s property portfolio and will target eight of its 30 largest insured locations by total insured values in FY 2023-2024, including most notably the San José McEnery Convention Center, the California Theater, and the Central Service Yard. In addition to the insurance products procured last year, the City utilized risk engineering services to evaluate five City-owned properties over the last 12 months. Risk engineering services help identify common risks resulting in damage or destruction of property such as fire, flood, or other operational risks, and are geared to finding solutions aimed to reduce property loss or disruption of use. Based on FM’s recommendations, the City initiated and completed projects to install seismic gas shut-off valves at 25 City locations, including the Airport.
2. Terrorism Risk Insurance Act of 2002 (TRIA) and Terrorism Insurance
TRIA coverage provides an insurance mechanism, shared by private insurance carriers and the federal government, for losses arising from acts of terrorism as certified by the United States Secretary of the Treasury, in consultation with the Secretary of Homeland Security and Attorney General, and defined by the TRIA. It does not cover liability losses. TRIA has been extended and is set to expire on December 31, 2027. Coverage is currently provided through a federal program for 85% of total aggregate loss up to $100 billion in aggregate losses with total losses being no less than $5 million. FM has provided a quote for TRIA coverage for an incremental premium of $179,734, a $56,044 or 45.31% increase over the expiring premium. Drivers for the increase include the increase in insurable values and increases in reinsurance costs as FM purchases facultative reinsurance for the TRIA coverage.
11 Net refers to gross premiums less broker commissions as broker compensation is provided through a fee agreement between the City and Alliant.
12 The 2022-2023 Membership Credit was based on 5% of the eligible in-force premium while the 2023-2024 Membership Credit on the FM Global proposal is based on 10% of the eligible in-force premium. 13 Broker fees include fees allocated for TRIA, Stand-alone Terrorism, and Excess Flood coverages.
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
Insurance Carrier: FM
Policy Period 2023-2024 2022-2023
Annual Premium (Net) $179,734 $123,690
The City began purchasing stand-alone terrorism insurance in 2019. Stand-alone terrorism insurance provides a broader definition of terrorism than TRIA and includes third party liability coverage. Staff recommends continuation of a combined property and liability terrorism policy. Incumbent insurer Beazley Syndicate, a member of Lloyd’s of London, provided a renewal quote for $10 million in aggregate limits for premium and fees of $28,725, a $4,384 or 18.01% increase over the expiring premium.
Insurance Carrier: Beazley Syndicate 2623/623 at Lloyd’s
Policy Period 2023-2024 2022-2023
Annual Premium (Net) $27,840 $23,575
Surplus Lines Tax and Fees $885 $766
Total Annual Premiums $28,725 $24,341
3. Excess Flood
To mitigate the impact of reduction to the base flood coverage from $25,000,000 to $10,000,000 from the 2019 renewal14, the City obtained an excess policy that provides $15,000,000 in limits excess of the primary property policy on a 50/50 quota share basis, where the City and excess insurers share the financing of losses on a 50/50 basis.
Insurance Carriers: The Princeton Excess and Surplus Lines Insurance Company and Arch Specialty Insurance Company
Policy Period 2023-2024 2022-2023
Annual Premium (Net) $323,333 $239,619
Surplus Lines Tax $10,282 $7,788
Total Annual Premiums $333,615 $247,407
4. Automobile Liability for Airport Fleet and Shuttle Bus Fleet Physical Damage
Automobile liability insurance provides coverage for bodily injury, property damage, and personal injury for claims arising out of Airport vehicle operations. Airport shuttle bus physical damage insurance provides comprehensive physical damage (i.e., fire, theft, vandalism, malicious mischief) coverage for the owned and leased Airport shuttle buses, including the 10 high-value zero emissions shuttle buses purchased from Proterra in 2019.
14 http://sanjose.legistar.com/gateway.aspx?M=F&ID=900243f1-bcb3-4649-a2df-49f2bdc7921a.pdf
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
There is a limited commercial insurance marketplace for stand-alone auto liability and auto physical damage coverage, and the pricing environment in the auto liability market remains challenging as automobile liability remains an unprofitable insurance product line with a combined ratio over 100%. Claim costs have continued to rise, with distracted driving remaining a significant issue15. In addition, a large loss from 2019 continues to have an adverse impact on the pricing of the Airport auto liability program. Airport premiums and fees for auto liability and auto physical damage coverage increased by $23,827, which is an increase of 10.32% relative to the expiring program.
Insurance Carrier: Gemini Insurance Company (Auto Liability)
Policy Period 2023-2024 2022-2023
Annual Premium (Net) $182,727 $163,816
Surplus Lines Tax $5,811 $5,324
Total Annual Premiums $188,538 $169,140
Broker Fees $3,407 $3,333
Total Annual Costs $191,945 $172,473
Insurance Carrier: Hanover Insurance Company (Auto Physical Damage)
Policy Period 2023-2024 2022-2023
Annual Premium (Net) $59,654 $55,314
TRIA Coverage $1,878 $1,521
Total Annual Premiums $61,532 $56,835
Broker Fees $1,145 $1,487
Total Annual Costs $62,677 $58,322
Total Annual Costs for
Airport Auto Liability and
Auto Physical Damage
$254,622 $230,795
5. Automobile Liability for Regional Wastewater Facility Fleet
Automobile liability provides coverage for bodily injury, property damage, and personal injury for claims arising out of Regional Wastewater Facility vehicle operations. Total costs increased by $18,871 or 12.69% over the expiring program. Like the Airport, a large loss from 2017 continues to have a negative impact on the pricing of the Regional Wastewater Facility auto liability program.
15 Willis Towers Watson Insurance Marketplace Realities (2023 Spring Update)
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
Insurance Carrier: Gemini Insurance Company (Auto Liability)
Policy Period 2023-2024 2022-2023
Annual Premium (Net) $159,523 $141,185
Surplus Lines Tax $5,073 $4,588
Total Annual Premiums $164,596 $145,773
Broker Fees $2,937 $2,889
Total Annual Costs $167,533 $148,662
6. Life/Accidental Death and Dismemberment Policy for Police Air Support Unit
The Life/Accidental Death and Dismemberment program provides an accidental death, accidental dismemberment, and paralysis benefit of $250,000 per person for accident or injury of any member of the Police Air Support Unit as defined in Section 5.6.8 of the San José Police Officer’s Association Memorandum of Agreement subject to an aggregate limit of $1,250,000 per accident. The City added this insurance product line to its portfolio in 2016.
In 2022, the City placed the Life/Accidental Death and Dismemberment policy with Arch Insurance Company with a three-year rate guarantee that expires on October 1, 2025, at an annual premium of $7,157. Alliant has confirmed the Arch Insurance Company policy remains the best available pricing and coverage.
Insurance Carrier: Arch Insurance Company
Policy Period 2023-2024 2022-2023
Annual Premium (Net)16 $7,157 $7,157
Broker Fees $144 $197
Total Annual Costs $7,301 $7,354
7. Secondary Employment Law Enforcement Professional Liability
The Secondary Employment Law Enforcement Professional Liability program provides coverage for an actual or alleged error or omission, negligent act, or breach of duty that results in bodily injury, property damage, or personal injury by City police officers who have been approved to participate in the Secondary Employment program (Participating Officers) while conducting law enforcement activities on behalf of approved third-party secondary employers. The incumbent carrier QBE Specialty Insurance Company advised the City in July that it would not be renewing the Secondary Employment Law
16 The recommended policy contains a rate guarantee through September 30, 2025, with an annual installment premium, and the policy is subject to termination based on annual appropriation of funds and the City having the ongoing obligation to procure coverage per Section 5.6.8 of the San José Police Officer’s Association Memorandum of Agreement.
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
Enforcement Liability policy that expires on October 1, 2023, as the insurer has made the decision to exit the Secondary Employment Law Enforcement Professional Liability product line.
Alliant secured a quote from an alternate carrier, Lexington Insurance Company, that reflects a 6.03% or $6,912 increase over the expiring program. Coverage terms and conditions are consistent with the expiring policy. Despite the cost increase relative to the expiring program, Alliant believes the renewal program presents a good result for the City as Alliant has been seeing 10% to 30% rate increases for California municipality clients.
The projected number of Participating Officers decreased by 1.85% from 703 to 690 officers. The City’s renewal rate is $176.07 per Participating Officer 17, who contribute
$110 per year to obtain coverage.
Insurance Carrier: Lexington Insurance Company
Policy Period 2023-2024 2022-2023
Annual Premium (Net) $115,549 $108,863
Surplus Lines Tax $3,674 $3,538
Total Annual Premiums $119,223 $112,401
Broker Fees $2,264 $2,174
Total Annual Costs $121,487 $114,575
Estimated Officer Contribution: $75,900
Estimated City Contribution: $45,587
8. Government Crime Insurance
Government Crime insurance provides coverage to the City for financial losses arising from employee theft, forgery or alteration, robbery or safe burglary, computer fraud, funds transfer fraud, or money orders and counterfeit money fraud. Section 905 (Official Bonds) of the City Charter provides that all officers and employees having custody or control of public funds are required to be bonded. The City Council authorized the purchase of Government Crime Insurance as meeting the Official Bonds requirement via
Resolution No. 80683 adopted by the City Council on September 20, 202218, as a Government Crime policy affords equal or greater scope of coverage than a bond and has the added benefit of not having to continually remove and add employees as would be required by a bond.
17 Participating Officers include Sworn Officers and Reserve Officers 18 City Council Meeting Minutes for September 20, 2022
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
The City obtained a renewal quote from incumbent carrier Great American Insurance Company at a $2,299 or 10.02% cost increase over the expiring policy. Coverage terms and conditions are consistent with the expiring policy.
Insurance Carrier: Great American Insurance Company
Policy Period 2023-2024 2022-2023
Annual Premium (Net) $24,778 $22,525
Broker Fees $454 $408
Total Annual Costs $25,232 $22,933
9. Automobile Physical Damage for Police Department Grant-Funded Vehicles
Automobile Physical Damage insurance provides all risk physical damage coverage for the Police Department’s schedule of grant-funded vehicles and equipment with insurable values of $1.45 million. The Police Department identified this insurance product line as a need to support its grants program. The City obtained a competitive quote with two options for Automobile Physical Damage coverage from AGCS Marine Insurance Company, the carrier providing automobile physical damage coverage for the Alliant Mobile Vehicle Program, a group purchasing program open to public entities and managed by Alliant. The program is proprietary to Alliant and available to the City so long as Alliant remains the City’s insurance broker.
Item Option A Option B
Limit of Liability $1,446,204 $1,446,204
Deductible for Vehicles
and Equipment with
Insurable Value Under
$300K
$2,000 $5,000
Deductible for Vehicles
and Equipment with
Insurable Value of $300K
and Over
$10,000 $10,000
Gross Premiums19 $9,917 $8,559
Number of Vehicles and
Equipment 34 34
Number of Vehicles and
Equipment with Insurable
Values of $300K and Over
1 1
19 Gross premiums include a 16% broker commissions. Finance will negotiate future broker compensation for this new insurance product line through an amendment to the agreement between the City and Alliant.
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
The options are identical except that vehicles with insurable values under $300,000 are subject to a $2,000 deductible under Option A and a $5,000 deductible under Option B.
Staff recommends Option A for a gross premium of $9,917 as the $1,358 premium reduction for Option B is an insufficient trade-off for the incremental risk. The AGS Marine Insurance Company program contemplates renewal of the program every July 1, so the first year of coverage contemplates a nine-month policy period for a pro-rata premium estimated at $7,425.
B. Insurance Coverage Not Recommended
The insurance coverage listed below was reviewed by staff with the assistance of Alliant.
The market conditions remain consistent with last year’s renewal decisions. Staff does not recommend purchasing additional coverage now. The recommendation is based on multiple factors including, but not limited, to the products being cost prohibitive, the scope of coverage being too narrow considering the City’s risk exposure, or the coverage was unavailable, limits too low, or excessive in cost due to the nature of the risk. Staff, in consultation with Alliant, will continue to review the market on an annual basis and make the appropriate recommendations to City Council should circumstances change.
1. Earthquake
Earthquake coverage is provided through a separate insurance product line. Coverage is limited to direct damages caused by earth movement, which is excluded on the All Risk property coverage policy. Coverage for sprinkler damage and fire resulting from an earthquake is covered by the All Risk property policy. In previous years, staff has inquired into the total cost of earthquake insurance for the entire property schedule and found coverage to be cost prohibitive.
Alliant confirmed rates have not improved for FY 2023-2024 and estimated that a $100 million earthquake limit would cost approximately $8.0 million and be subject to a minimum deductible of five percent of the values at risk. Staff also conducted due diligence on parametric insurance
20 options for the earthquake exposure and determine
that the standard parametric insurance product would not need an exception to the City’s Debt Management Policy that requires the Director of Finance to approve derivative instruments on a case-by-case basis. Preliminary diligence indicates that premiums for a parametric policy assuming a coverage trigger for an event like the 1989 Loma Prieta earthquake would be approximately $1.0 million for $10.0 million to $25.0 million in coverage. The pricing levels, the minimum deductible of five percent of the values at risk, the relatively low limits of coverage available, and potential concerns about solvency (ability to pay) of the insurers continue to make it uneconomical to purchase
20 Parametric insurance describes a type of insurance contract that insures a policyholder against the occurrence of a specific event by paying a set amount based on the magnitude of the event, as opposed to the magnitude of the losses in a traditional indemnity policy.
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
earthquake coverage Citywide, either through a traditional earthquake policy or a parametric insurance solution.
EVALUATION AND FOLLOW-UP
The memorandum will not require any follow-up from staff.
COST SUMMARY/IMPLICATIONS
The estimated funding to pay for various insurance premiums in FY 2023-2024 was included in the FY 2023-2024 Adopted Operating Budget approved by the City Council on June 13, 2023 and adopted on June 20, 2023. Accordingly, the Administration will recommend future budget adjustments to the Convention Center Fund appropriation in the amount of $2,000 as part of the FY 2022-2023 Annual Report scheduled for City Council review and approval on October 17, 2023. The recommended action also includes authorization for an additional 18% contingency to schedule additional property or assets as required, subject to the appropriation of funds.
BUDGET REFERENCE
The table below details the fund and appropriations recommended to fund the insurance premiums identified. In addition, costs associated with insuring the remaining SARA asset is estimated to be $737 in FY 2023-2024. The anticipated payment of these costs associated with asset management for the SARA is reflected on line 85 of the Recognized Obligation Payment Schedule as an enforceable obligation to maintain and protect the assets of the SARA allowed under the dissolution law.
Fund
#
Appn
# Appn. Name Total Appn.
Recommended
Amount for
Premium and
Broker Fees a
2023-2024
Proposed
Budget
Page b
Last Budget
Action
(Date, Ord. No.)
001 2001 Insurance Premiums $2,704,526 $2,523,579 812 06/20/2023 30933
001 0502 Non-Personal/Equipment (Police
Department)
$39,110,796 $9,917 684 06/20/2023
30933
001 2864 Police Officers’ Professional Liability
Insurance
$128,378 $121,487 812 06/20/2023
30933
523 0802 Non-Personal/Equipment (Airport
Department)
$54,811,767 $1,164,271 846 06/20/2023
30933
536 3405 Insurance Expenses (Convention
Center) c
$450,000 $450,783 877 06/20/2023
30933
533 0512 Non-Personal/Equipment
(Department of Transportation)
$7,555,053 $134,221 892 06/20/2023
30933
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
Fund
#
Appn
# Appn. Name Total Appn.
Recommended
Amount for
Premium and
Broker Fees a
2023-2024
Proposed
Budget
Page b
Last Budget
Action
(Date, Ord. No.)
513 0762 Non-Personal/Equipment
(Environmental Services Department)
$39,329,545 $615,609 934 06/20/2023
30933
515 0762 Non-Personal/Equipment
(Environmental Services Department)
$45,566,632 $2,897 947 06/20/2023
30933
423 0762 Non-Personal/Equipment
(Environmental Services Department)
$4,803,239 $9,833 902 06/20/2023
30933
346 0109 Asset Management Services (Housing
Department)
$1,750,000 $34,407 904 06/20/2023
30933
a The amount for premium is subject to change up until the beginning date of the new insurance policy. SARA is billed separately for its share of broker fees and premium costs. b The FY 2023-2024 Adopted Operating Budget was approved by City Council on June 13, 2023 and the Annual Appropriation Ordinance and Funding Sources Resolution implementing the FY 2023-2024 Operating and Capital Budgets was adopted on June 20, 2023.
c Administration will recommend an increase to the Convention Center Fund Insurance Expenses appropriation.
COORDINATION
This memorandum has been coordinated with the Airport Department, City Attorney’s Office, City Manager’s Budget Office, City Manager’s Office of Economic Development and Cultural Affairs, Department of Transportation, Environmental Services Department, Housing Department, Police Department, and Public Works Department.
PUBLIC OUTREACH
This memorandum will be posted on the City’s Council Agenda website for the September 26, 2023 City Council meeting.
COMMISSION RECOMMENDATION AND INPUT
The insurance renewals for the San José-Santa Clara Regional Wastewater Facility are scheduled to be heard at the September 14, 2023 Treatment Plant Advisory Committee meeting. A supplemental memorandum with the Treatment Plant Advisory Committee’s recommendation will be included in the September 26, 2023 City Council meeting agenda.
CEQA
Not a Project, File No. PP17-003, Agreements/Contracts (New or Amended) resulting in no changes to the physical environment.
HONORABLE MAYOR AND CITY COUNCIL
September 5, 2023
Subject: Approval of Citywide Insurance Renewals
PUBLIC SUBSIDY REPORTING
This item does not include a public subsidy as defined in section 53083 or 53083.1 of the California Government Code or the City’s Open Government Resolution.
/s/
RICK BRUNEAU
Director of Finance
For questions, please contact Miguel Bernal, Risk Manager, at [email protected] or (408) 975-1438.
Attachments: Appendix A
Appendix B
A – 1
APPENDIX A
1. ALL RISK PROPERTY BOILER AND MACHINERY INSURANCE
CURRENT PROGRAM RENEWAL PROGRAM
10/01/2022-10/01/2023 10/01/2023-10/01/2024
Carrier Factory Mutual Insurance Company
(FM)
Factory Mutual Insurance Company (FM)
Total Insurable
Values
$5,487,362,678 $6,484,535,488
Limit of Liability $1,000,000,000 Property Damage and
$300,000,000 Business Interruption
subject to a $500,000 Deductible per
Occurrence
$1,000,000,000 Property Damage and
$300,000,000 Business Interruption
subject to a $500,000 Deductible per
Occurrence
Boiler and
Machinery
Included Included
Earthquake Excluded. Relatively low limits available
5% deductible, high premium-not
recommended.
Excluded. Relatively low limits available
5% deductible, high premium-not
recommended.
Flood $10,000,000 for all locations. Deductible
is $500,000 per location for all locations
except the Airport, Convention Center,
and Regional Wastewater Facility are
given a flat $10,000,000 (Airport and
Convention Center) and $5,000,000
(Regional Wastewater Facility) per
location flood deductible.
$10,000,000 for all locations. Deductible
is $500,000 per location for all locations
except the Airport, Convention Center,
and Regional Wastewater Facility are
given a flat $10,000,000 (Airport and
Convention Center) and $5,000,000
(Regional Wastewater Facility) per
location flood deductible.
Other Sub-limits Other sub-limits as outlined in the
insurance policy on file in Risk
Management
Other sub-limits as outlined in the
insurance policy on file in Risk
Management
Terrorism and
Non-Certified
Act of Terrorism
Included for additional premium Included for additional premium Engineering
Services Included in coverage Included in coverage
Multiyear Not Available Not Available
A – 2
2. AUTOMOBILE LIABILITY FOR THE AIRPORT FLEET AND AIRPORT SHUTTLE BUS FLEET
PHYSICAL DAMAGE
CURRENT PROGRAM
10/01/2022-10/01/2023
RENEWAL PROGRAM
10/01/2023-10/01/2024
Carriers Gemini Insurance Company (Auto Liability)
Hanover Insurance Company (Physical
Damage)
Gemini Insurance Company (Auto Liability)
Hanover Insurance Company (Physical Damage)
Coverage and
Deductibles
Auto Liability-Fleet Only
$1,000,000 Combined Single Limit (Any Auto)
Retention $250,000 each Accident
Physical Damage-Buses Only Per Schedule
Subject to $10,000 Comp/$10,000 Coll. except
New Flyer Buses $5,000 Com/$5,000 Coll.
Auto Liability-Fleet Only
$1,000,000 Combined Single Limit (Any Auto)
Retention $250,000 each Accident
Physical Damage-Buses Only Per Schedule
Subject to $10,000 Comp/$10,000 Coll. except
New Flyer Buses $5,000 Com/$5,000 Coll.
Exposure Number of Vehicles: 86 Number of Vehicles: 86
3. AUTOMOBILE
LIABILITY-REGIONAL WASTEWATER FACILITY FLEET
CURRENT PROGRAM
10/01/2022-10/01/2023
RENEWAL PROGRAM
10/01/2023-10/01/2024
Carrier Gemini Insurance Company (Auto Liability) Gemini Insurance Company (Auto Liability) Coverage and
Deductibles
Auto Liability-Fleet Only
$1,000,000 Combined Single Limit (Any Auto)
Retention $250,000 each Accident
Auto Liability-Fleet Only
$1,000,000 Combined Single Limit (Any Auto)
Retention $250,000 each Accident
Exposure Number of Units: 55 Number of Units: 59
4. LIFE AND ACCIDENTAL DEATH AND DISMEMBERMENT
CURRENT PROGRAM
10/01/2022-10/01/2023
RENEWAL PROGRAM
10/01/2023-10/01/2024
Carrier Arch Insurance Company Arch Insurance Company
Limits of
Insurance and
Deductibles
Blanket Accident and Health Policy (Accident
Only; Injury Only)
Principal Sum (loss of Life): $250,000; subject
to an aggregate limit of $1,250,000 per accident
Blanket Accident and Health Policy (Accident
Only; Injury Only)
Principal Sum (loss of Life): $250,000; subject
to an aggregate limit of $1,250,000 per accident
A – 3
5. SECONDARY EMPLOYMENT LAW ENFORCEMENT PROFESSIONAL LIABILITY
CURRENT PROGRAM
10/01/2022-10/01/2023
RENEWAL PROGRAM
10/01/2023-10/01/2024
Carrier QBE Specialty Insurance Co. Lexington Insurance Company (AIG)
Limits of
Insurance and
Deductibles
$2,000,000 Each Occurrence
$2,000,000 Annual Aggregate
$200,000 Annual Aggregate Line of Duty
Death Coverage
Subject to a $100,000 Deductible including
Loss Adjustment Expense21
$2,000,000 Each Occurrence
$2,000,000 Annual Aggregate
$100,000 Annual Aggregate Line of Duty Death
Coverage
Subject to a $100,000 Deductible including Loss
Adjustment Expense
22 Average Rate per
Officer
$162.98 (703 Participating Officers estimated
at policy inception)
$176.07 (690 Participating Officers estimated at
policy inception)
6. GOVERNMENT CRIME
CURRENT PROGRAM
10/01/2022-10/01/2023
RENEWAL PROGRAM
10/01/2023-10/01/2024
Carrier Great American Insurance Company Great American Insurance Company Limits of
Insurance and
Deductibles
Employee Theft, Forgery, or Alteration and
Inside the Premises-Theft of Money and
Securities-$5,000,000 per occurrence subject
to a $250,000 deductible per occurrence.
Employee Theft, Forgery, or Alteration and
Inside the Premises-Theft of Money and
Securities-$5,000,000 per occurrence subject
to a $250,000 deductible per occurrence.
Sublimits of
Insurance
Computer Fraud, Funds Transfer Fraud, and
Money Orders and Counterfeit Money-
$1,000,000 per occurrence subject to a
$250,000 deductible per occurrence.
Government Deception Fraud-$250,000 per
occurrence subject to a $250,000 deductible
per occurrence.
Computer Fraud, Funds Transfer Fraud, and
Money Orders and Counterfeit Money-
$1,000,000 per occurrence subject to a
$250,000 deductible per occurrence.
Government Deception Fraud-$250,000 per
occurrence subject to a $250,000 deductible
per occurrence.
7. POLICE DEPARTMENT AUTO PHYSICAL DAMAGE FOR GRANT-FUNDED VEHICLES
CURRENT PROGRAM
10/01/2022-10/01/2023
RENEWAL PROGRAM
10/01/2023-10/01/2024
Carriers N/A Gemini Insurance Company (Auto Liability)
Hanover Insurance Company (Physical Damage)
Coverage and
Deductibles
N/A Physical Damage-Vehicles Only Per Schedule
Subject to $2,000 Comp/$2,000 Coll. Deductible
Vehicles with Insured Values Over $300,000
Subject to $10,000 Comp/$10,000 Coll.
Deductible
Exposure N/A Number of Vehicles: 34
21 Loss Adjustment Expense includes costs for investigation and defense of claims. 22 Loss Adjustment Expense includes costs for investigation and defense of claims.
B – 1
APPENDIX B
Allocation of Insurance Premiums by Fund & Type of Insurance
2022-23
Premiums 2023-24
Premiums Est. Percentage
Increase /
Decrease
12 Month 12 Month
General Fund-Fund 001
Property Insurance 1 $1,106,601 $1,323,520 19.60% Government Crime 22,525 24,778 10.00%
Additional Liability 926,146 1,129,551 21.96%
Accident, Death & Dismemberment 7,157 7,157 0.00% Police Auto Physical Damage 0 9,917 N/A
Police Secondary 2 112,401 119,223 6.07%
Broker Fee 38,776 40,837 5.32%
Subtotal $2,213,606 $2,654,983 19.94%
Airport-Fund 523
Property Insurance $664,859 $892,601 34.25%
Auto Liability / Physical Damage 225,975 250,070 10.66% Broker Fee 19,582 21,600 10.31%
Subtotal $910,416 $1,164,271 27.88%
Environmental Services Department-Fund 513
(Regional Wastewater Facility)
Property Insurance $371,344 $442,762 19.23%
Auto Liability Insurance 145,773 164,596 12.91% Broker Fee 7,782 8,251 6.03%
Subtotal $524,899 $615,609 17.28%
Environmental Services Department-Fund 515
(Municipal Water)
Property Insurance $9,982 $2,664 -73.31%
Broker Fee 219 233 6.39%
Subtotal $10,201 $2,897 -71.60%
Environmental Services Department-Fund 423
Property Insurance $8,886 $9,629 8.36%
Broker Fee 193 204 5.70%
Subtotal $9,079 $9,833 8.30%
B – 2
Convention & Cultural Affairs-Fund 536
Property Insurance $425,232 $441,096 3.73%
Broker Fee 9,137 9,687 6.02%
Subtotal $434,369 $450,783 3.78%
General Purpose Parking-Fund 533
Property Insurance $120,521 $131,568 9.17%
Broker Fee 2,503 2,653 5.99%
Subtotal $123,024 $134,221 9.10%
Successor Agency (SARA)3
Property Insurance $665 $722 8.57%
Broker Fee 14 15 7.14%
Subtotal $679 $737 8.54%
Housing-Fund 346
Property Insurance $31,375 $33,695 7.39%
Broker Fees 672 712 5.95%
Subtotal $32,047 $34,407 7.36%
Total $4,258,320 $5,067,741 19.01%
1 TRIA/Terrorism and excess flood costs are included in the total costs in Appendix B 2 Each Police Officer participating in secondary employment program pays $110 towards the premium cost 3 Allocated premium will be directly invoiced by the City to the Successor Agency (SARA)