San Gabriel Valley cities are struggling to cope with liability insurance rate increases of up to 730% being levied by insurance companies trying to recoup losses from mounting claims.
The cities are shopping around among a dwindling number of carriers for basic liability policies, paying more money for less coverage and, in some cases, doing without.
In Glendora, premiums zoomed from $40,000 to $332,000, more than a sevenfold increase in one year, and Finance Director Samuel Shwetz said the city was lucky to find coverage at any price. "We couldn't get coverage," Shwetz said. "We were actually uninsured for four days."
El Monte spent months shopping around for coverage and wound up paying 555% more for a policy that provides substantially less protection. Rates jumped from $37,000 for fiscal 1984-85 to $242,591 for 1985-86.
Pasadena, whose policy has been canceled effective Oct. 15, is contemplating going to a self-insured program. "We're seriously considering going bare," claims coordinator Bob Hays said. "We're big enough that we can afford some losses."
Dilemma for Small Cities
Larger cities such as Pasadena can afford to be self-insured, and most other cities will be able to absorb the higher premiums. The insurance crisis, however, poses a serious dilemma for some cities.
Tiny Bradbury's insurance woes could threaten its financial stability, City Manager Dolly Vollaire said. Bradbury, which has only 873 residents, paid $2,000 for its policy last year. This year, it has been quoted rates as high as $100,000, nearly half the city's budget, forcing Bradbury to go without insurance until it can find affordable coverage. "We're in limbo," Vollaire said.
Bradbury, which contracts with the county for high-risk services such as police and fire protection and has not paid a claim since incorporating 25 years ago, is considering the idea of creating its own self-insurance fund with money it had allocated for premiums. But Vollaire acknowledged that a small self-insured city could face bankruptcy in the event of a major lawsuit. "We couldn't survive," she said.
City and insurance industry officials attribute the rate hikes primarily to the increasing number and size of lawsuits being filed against cities. As a result, all but a handful of companies have stopped writing liability policies for cities and other government agencies. General liability policies cover claims for damages from accidents and other mishaps involving city employees or property.
John McCann, regional vice president of the New York-based Insurance Information Institute, said another reason for the suddenness of the increase was a price war from 1979 through 1984, when rates were kept artificially low as insurers competed for premium revenue that could be invested at a hefty profit. But declining interest rates and rising claims changed all that. Consequently, 17 companies went out of business last year, the most since 1974, McCann said.
'We Took a Bloodbath'
"The prices were understated 300% to 700%," said McCann, whose organization represents 320 insurance companies nationwide. "They should have increased as long as a year ago. The industry has had to turn around and once again start charting price relative to the loss picture. An insurance company can only insure so much. You're going to do business where you have less risk and municipal liability is really close to the top. We took a bloodbath in municipal liability."
For the 13 cities in the San Gabriel Valley holding private insurance coverage, total premiums increased 228%, from $679,532 in fiscal 1984-85 to $2,229,296 this fiscal year. In this group are Alhambra, Arcadia, Azusa, Baldwin Park, El Monte, Glendora, Industry, Monrovia, Monterey Park, Pomona, San Gabriel, Walnut and West Covina.
Ten other cities belong to the Southern California Joint Powers Insurance Authority, a group of 45 cities that have pooled their resources to operate a self-insurance program. The cities are Claremont, Duarte, La Puente, La Verne, Rosemead, San Marino, San Dimas, South El Monte, South Pasadena and Temple City. Their premiums increased a relatively modest 47.6%, from $605,003 in fiscal 1984-85 to $893,507 this fiscal year. However, coverage was reduced to $10 million per accident from $35 million.
Covina and Sierra Madre have not had to seek insurance yet because their policies have not expired.
Big Hikes 'Not Justified'
George Anast, manager of the Southern California Joint Powers Insurance Authority, acknowledged that insurance companies had suffered some losses, but insisted that the sizes of the rate increases "were not justified by any stretch of the imagination."
Anast and others agreed, however, that cities have become a favorite target of lawsuits because they have "deep pockets." Under the "joint and several liability" legal guidelines followed in California, a defendant who is only 1% liable but has substantial assets can be forced to pay 100% of the damages.