HomeMy WebLinkAbout13.F.1. 2009/2010 City Insurance Renewals
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CITY OF SHAKOPEE
Memorandum
TO: Mayor and Council
Mark McNeill, City Administrator
FROM: Gregg Voxland, Finance Director
SUBJ: 2009/10 Insurance Renewal Topics
DATE: June 11, 2009
Introduction
Staff is seeking Council direction on several insurance policy issues.
Background
A. Employee Bonding
The City has a bond for faithful performance covering all employees
including SPUC and Fire Relief. The amount of that bond is $100,000
and the premium for the 2008/09 policy is $1,762.
The City Treasurer and City Clerk have a bond in the amount of $250,000
and the premium for the 2008/09 policy is $888.
The Relief Association has a bond covering the President, Secretary and
Treasurer in the amount of $375,000 with a premium of $1,602. The
Relief Treasurer needs a bond that is at least 10% of their assets but
not required to be more than $500,000.
In addition to the bond coverage, there is crime coverage in the amount
of $250,000 covering forgery and alteration.
The League of Cities references The Government Finance Officers
Association chart regarding recommendations on how much the treasurer's
bond should be. According to that chart, the City Treasurer's bond
would be $1,250,000 to $1,500,000. Previous Council decided not to
follow that chart and went with $250,000 instead.
Compared to an unofficial survey of nearby cities, bonding for Shakopee
employees is low. An average of 5 cities shows an average bonded
amount of $600,000.
Recommendation
Increase the blanket bond to $400,000 and discontinue the other
separate bonds. The new premium may not be much different from the
cost of the three separate policies now in place.
B. Automobile insurance
If the City drops comprehensive and collision insurance on low value
vehicle and trailers, the saving would be about $3,000. This would
apply to vehicles that are estimated to be worth less than $10,000.
The insurance policy has a $2,500 deductable. Replacement vehicles are
paid for by the Internal Service Fund. If one of those items is
damaged without comprehensive and collision coverage and not totaled,
repairs costing more $2,500 would pose an additional cost to the budget
of the operating division. The City would be self insuring for the
replacement of those low value assets.
Recommendation
Drop comprehensive and collision coverage on trailers and vehicles
worth $10,000 and under.
c. Property insurance
If the City would drop property insurance on low value assets such as
park shelters and property in the open (fencing, play equipment), it
would save 2 to 3 thousand dollars annually. Value would be set at
$25,000 and under.
The insurance policy has a $2,500 deductable. Claims under this
coverage are not likely but there is always a chance of wide spread
damage from a large severe storm. The operating budget would absorb
the repair cost. If items are to be replaced instead of repaired, the
new Park Asset Fund could be used to pay for replacements. The City
would be self insuring for the replacement of those low value assets.
Recommendation
Consider dropping property coverage on assets worth about $25,000 or
less.
D. No-fault sewer Backup coverage
See attached League memo for explanation of the coverage. Currently,
if a sewer backup is not the fault of the city through failure to
regularly inspect and clean the sewer main, insurance does not pay
because the city is not liable. If the property owner wants to pursue
a claim, the next step would be to go to court. Some owners may
approach City Council to seek reimbursement for damages or cleanup.
If the city's insurance denies the claim and the city then pays the
claim or part of the claim, it is a violation of the insurance contract
between the city and the League.
It is sometimes difficult for Council to deny an owners request. This
coverage would help mitigate the situation but depending on the limits
selected, may not cover all the costs incurred.
The current premium for $10,000 limit is $17,483, for $25,000 limit is
$20,568 and $40,000 limit is $25,710. The Sewer Fund would pay the
premium. According to League information, in November 2007, there were
about 12 cities in the metro area that have the coverage.
Sewer back up coverage is generally available under home owner's
policies. Cost is probably in the range of $10 to $60 annually. Home
owner's policies would provide primary coverage with the city's policy
after that.
Recommendation
Monetarily, if the city isn't liable, it should not be paying for those
claims or for the insurance. The city has policies and procedures in
place to properly maintain the sewer system. There have not been many
backup's occurring and there may be more paid out in insurance premium
than costs incurred.
However, it is a policy decision for Council considering customer
relations, public purpose for facilitating rapid cleanup of the problem
and avoiding litigation.
Alternatively, Council could put the coverage in place but self insure
instead of paying a premium for the benefit_
Gr~OXland
Finance Director
H: \Finance \insure \
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LEAGUE OF CONNECTING & INNOVATING
MINNESOTA SINCE 1913
CITIES
RISK MANAGEMENT INFORMATION
OPTIONAL "NO-FAULT"
SEWER BACK-UP COVERAGE
LMCIT offers property/casualty member cities "no-fault" sewer back-up coverage. This optional
coverage will reimburse a property owner for clean-up costs and damages caused by a sewer back-
up, irrespective of whether the city was negligent or legally liable for those damages.
This coverage option is intended to do several things:
. To reduce health hazards by encouraging property owners to get back-ups cleaned up as
quickly as possible.
. To reduce the frequency and severity of sewer back-up lawsuits. I.e., property owners may be
less inclined to sue ifthey receive conciliatory treatment at the time ofthe back-up.
. To give cities a way to address the sticky political problems that can arise when a property
owner learns that the city and LMCIT won't reimburse him for his sewer back-up damages
because the city wasn't negligent and is therefore not legally liable.
Many cities and their citizens may find this new coverage option to be a helpful tool. However,
it's also important to realize that it's not a complete solution to sewer back-up problems, and that
not every possible back-up will be covered.
What sewer back-ups would be covered by the new coverage?
The no-fault coverage would reimburse the property owner for sewer back-up damages, regardless
of whether the city was legally liable, if the following conditions are met:
. The back-up must have resulted from a condition in the city's sewer system or lines. A back-
up caused by a clog or other problem in the property owner's own line would not be covered.
. It's not one of the situations that's specifically excluded in the coverage.
. The coverage limit has not been exceeded.
This material is provided as general information and is not a substitute for legal advice.
Consult your attorney for advice concerning specific situations.
LEAGUE OF MINNESOTA CITIES 145 UNIVERSITY AVE. WEST PHONE: (651) 281-1200 FAX: (65l) 281-1298
INSURANCE TRUST ST. PAUL. MN 5S103-2044 TOLL FREE: (800) 925-1122 WEB: WWW.lMC.ORG
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Which situations are excluded?
The no-fault coverage will not apply in several "catastrophic" type situations. Specifically, these
are:
. Any event, weather-related or otherwise, for which FEMA assistance is available;
. Any interruption in the electric power supply to the city's sewer system or to any city sewer lift
station which continues for more than 72 hours; or
. Rainfall or precipitation that exceeds the amount determined by the National Weather Service
to constitute a 100-year storm event.
What costs would be covered?
The no-fault sewer back-up coverage would reimburse the property owner for the cost of cleaning
up the back-up, and for any damage to the property, up to the coverage limit. For purposes of the
city's deductibles, claims under the no-fault coverage are treated as liability claims, so the same
per-occurrence and/or annual deductibles will apply.
However, there are certain costs that would not be reimbursed under the no-fault coverage:
. Any costs which have been or are eligible to be covered under the property owner's own
homeowner's or other property insurance; and
. Any costs that would be eligible to be reimbursed under an NFIP flood insurance policy,
whether or not the property owner actually has NFIP coverage.
What is the coverage limit?
The basic limit is $10,000 per building per year. The city also has options to purchase additional
limits of $25,000 or $40,000 per building. For purposes of the limit, a structure or group of
structures that is served by a single connection to the city's sewer system will be considered a
single building.
Only true "no-fault" claims are counted toward the limit. Claims for damages caused by city
negligence, for which the city would be legally liable in any case, are not charged against that
limit.
What does it cost?
The premium charge for the optional no-fault sewer back-up coverage is a percentage
of the city's municipal liability premium: 8.5% for the $10,000 limit; 10.0% for the $25,000
limit; or 12.5% for the $40,000 limit. The LMCIT Board's intent is that this coverage option be
self-supporting, so we'll continue to monitor and if necessary adjust these charges in the future.
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Is every city automatically eligible?
No. To be eligible, the city must meet these underwriting criteria:
. The city must have a policy and practice of inspecting and cleaning its sewer lines on a
reasonable schedule.
. If there are any existing problems in the city's system which have caused back-ups in the past
or are likely to cause back-ups, the city must have and be implementing a plan to address those
problems.
. The city must have a system and the ability to respond promptly to back-ups or other sewer
problems at any time of the day or week.
. The city must have in place an appropriate program to minimize storm water inflow and
infiltration.
. The city must have in place a system to maintain records of routine sewer cleaning and
maintenance, and of any reported problems and responses.
We'd stress that in making the underwriting evaluation we're trying to focus on reasonableness,
rather than on creating very specific standards. That is, the intent isn't to set an arbitrary
requirement that sewers be inspected and cleaned every six months or every three years or
whatever. What makes sense in one city with some older and sometimes sagging clay lines
probably wouldn't make sense in a city with newer plastic lines, and vice versa. From the
underwriting standpoint, the real concern is that the city has considered its own situation and
developed polices, practices, and schedules that make sense for its own situation.
How would the no-fault coverage work if we had a sewer back-up that was caused
by city negligence, and where the city was legally liable for the resulting damages?
If the situation isn't one where the no-fault coverage applies, the city's LMCIT liability coverage
would respond just as it does now. That is, LMCIT would investigate and if necessary defend the
claim on the city's behalf, and would pay the resulting damages if in fact the city is legally liable
for those damages.
The same would be true for damages that exceed the $10,000 no-fault limit, or for a subrogation
claim against the city by the homeowner's insurance company. The city's existing LMCIT
liability would respond just as it does now.
What's the legal basis for this coverage? Wouldn't it be a gift of public funds to
pay damages that the city isn't legally liable for?
First, as noted earlier, one goal is to help reduce health hazards by encouraging prompt clean-ups.
That's clearly a public purpose and in the public interest.
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Second, the law and facts surrounding most sewer back-up claims are rarely so clear that the
liability issue is entirely black and white. There's virtually always a way that a claimant's attorney
can make some type of argument for city liability. Having this coverage in place should help
eliminate the need to spend public funds on litigation costs in many of these cases.
Finally, part ofthe process for putting the coverage in place is for the city council to pass a formal
resolution that makes this no-fault sewer back-up protection part of the agreement between the city
and the sewer customer. The idea is that by paying his sewer bill, the sewer user is purchasing not
just sewer service but also the right to be reimbursed for certain specified sewer back-up costs and
damages. In other words, the basis for the no-fault payments to the property owner would be the
contract between the city and the sewer user.
How do we put coverage in place?
Contact your LMCIT underwriter for an application. If the city qualifies for coverage, we'll send
the city a formal quote, along with a model resolution. To put coverage in place, the city council
must formally pass that resolution, and send a copy to LMCIT.
If the city decides to add this coverage, it will also be important to make sure the citizens know
about it. LMCIT can also provide models for a press release, newsletter article, utility bill insert,
etc.
Who can we contact with questions or comments?
Contact your LMCIT underwriter.
We're also interested in hearing cities' reactions to this coverage option, especially ifthere are
changes you'd like to see.
Pete Tritz 01/08
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COMPREHENSIVE MUNICIPAL COVERAGE
No-Fault Sewer Back-up Coverage Endorsement
1. Section I, Coverage A, Municipal Liability Coverage, is amended to include no-fault sewer back-up
coverage as outlined below.
2. No-fault sewer back-up coverage
a. If all of the following four conditions are met, LMCIT will pay for claims presented by the city for
sewer back-up damage to property of others which were not caused by city negligence:
(I) The sewer back-up resulted from a condition in the city's sewer system;
(2) The sewer back-up was not the result of an obstruction or other condition in sewer pipes or
lines which are not part of the city's sewer system or which are not owned or maintained by the
city; and
(3) The sewer back-up was not caused by or related to a catastrophic incident.
(4) The date of the occurrence giving rise to the claim for damages must be on or after the
retroactive date shown on this endorsement.
b. However, LMCITwilI not pay for any damages or expenses:
(1) Which are or would be covered under a National Flood Insurance Program flood insurance
policy, whether or not such insurance is in effect; or
(2) For which the property owner has been reimbursed or is eligible to be reimbursed by any
homeowners' or other property insurance.
3. Definitions
For purposes of this endorsement, the following definitions apply.
a. Catastrophic incident means any of the following:
(1) Any weather-related or other event for which FEMA (Federal Emergency Management
Administration) assistance is available;
(2) Any interruption in the electric power supply to the city's sewer system or to any city sewer lift
station which continues for more than 72 hours; or
(3) Rainfall of precipitation which exceeds the amount determined by the National Weather
Service to constitute a IOO-year storm event.
b. Sewer back-up damage means
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(I) Damage to property; and
(2) Removal and clean-up costs.
4. Annual limit
LMCIT will not pay more than $10,000. for sewer back-up damage to any building under this
endorsement, regardless of the number of occurrences or the number of claimants. For purposes of this
limit, a structure or group of structures served by a single connection to the city's sewer system is
considered a single building.
5. Deductibles
The amount LMCIT pays for sewer back-up damages under this endorsement is subject to the
Municipal Liability Deductible shown in the Municipal Liability Declarations or the General Annual
Aggregate Deductible if any shown in the Common Coverage Declarations.
For purposes of the Municipal Liability Deductible, all claims for sewer back-up damages which are
covered under this endorsement, which occur within a 72 hour period, and which result from or are
related to the same condition or conditions in the city's sewer system are deemed to be a single
occurrence.
6. Retroactive Date
The retroactive date for this endorsement is -
All other terms and conditions remain unchanged.
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Gregg Voxland
From: Sue Sichmeller [ssichmeller@qwest.net]
Sent: Wednesday, June 10, 20092:07 PM
To: Gregg Voxland
Subject: [Fwd: RE: no-fault sewer coverage]
Gregg - It appears Bruce Loney went directly to the League for this information. I wanted to be sure you were kept in
the loop as this is my first notice, as well.
Sue Sichmeller
-------- Original Message --------
Subject:RE: no-fault sewer coverage
Date:Wed, 10 Jun 2009 13:34:26 -0500
I=rom:Mingee, Pat <PMingee@lmc.org>
To:Honeck, Laura <lhoneck@lmc.org>, <bloney@cLshakopee.mn.us>
CC:Sue Sichmeller <ssichme!ler@qwest.net>
References:<353A 7D6D280AA0408 F8AA217 436F3 30606EE6B3 2@exchange.internal.lmnc.org>
Bruce, as promised, here is the breakdown in cost per limit of coverage:
$10,000.-8.5%-$17,483.
$25,000.-10%-$20,568.
$40,000.-12.5%-$25,710.
Please feel free to contact me if I can be of further assistance.
Patricia M. Mingee CPCU, CIC I Senior Underwriter
Tel: (651) 215-40811 Fax: (651) 281-1298
pmingee@>-lmc.org I www.lmc.org
League of Minnesota Cities
145 University Ave.West I St. Paul, MN 55103
From: Honeck, Laura
Sent: Wednesday, June 10, 2009 1:15 PM
To: bloney@cLshakopee.mn.us
Cc: Mingee, Pat
Subject: no-fault sewer coverage
Bruce,
Attached is the memo on no-fault sewer backup coverage. Pat Mingee is your underwriter - 651-281-4081. If you have
further questions about price, coverage, etc, please feel free to give her a call.
Thanks!
Laura Honeck I Program Assistant
Tel: (651) 281-1280 I Fax: (651) 215-4155
Ihoneck@>-lmc.org I www.lmc.org
League of Minnesota Cities
145 University Ave. West I St. Paul, MN 55103
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CONNECTING & INNOVATING
SINCE 1913
RISK MANAGEMENT INFORMATION
LMCIT BOND COVERAGE
LMCIT offers public employee bond coverage as part of the overall package of coverage for cities.
LMCIT's bond program is designed to make available all of the bond coverage and limits that
cities and city officials need, and to coordinate the bond coverage with the city's other coverages to
avoid gaps, overlaps, and inconsistencies. Nearly 700 cities now obtain their bond coverage
through LMCIT.
All LMCIT bond coverage is now written on a blanket faithful performance basis. The fidelity-
only coverage options were little-used by LMCIT members and were discontinued in 2007.
The minimum bond coverage available is $50,000 and limits up to $1,000,000 are available. The
bond coverage is part of the overall property and liability coverage program, and is therefore
subject to the same per-occurrence or aggregate deductibles as the rest of the city's coverages. In
addition, LMCIT provides an automatic $250,000 of crime protection as part of each city's
property coverage.
What are the advantages of LMCIT bond coverage?
The LMCIT bond coverage forms are specifically designed to meet the needs and requirements of
Minnesota cities. Where outside parties such as the Farmers Home Administration or the State
Lottery Board require specialized bond forms, these can be incorporated into the basic bond
coverage by endorsement, generally for no charge. Coverage for city relief associations is
included as a standard feature of the city's bond coverage. Other city-related organizations such as
EDAs, port authorities, HRAs, etc. can also can be included under the city's bond coverage as well
if the city wishes.
Here are some other points to note:
1. The city's bond coverage should be coordinated with the city's other crime coverages, to make
sure there are neither gaps nor overlaps of coverage. With faithful performance bond coverage,
there's a potential overlap with the city's liability coverage as well. The LMCIT bond, crime,
and liability coverages are designed to fit together to meet city needs.
2. If different carriers provide the bond and the crime coverages, it can be a problem for the city
at claim time. The city has to be able to show whether the theft was by a city employee, which
is the bond's responsibility; or by an outsider, which falls under the crime coverage. If it's not
clear who stole the money, the city can be left in the middle of a finger-pointing contest
This material is provided as general information and is not a substitute for legal advice.
Consult your attorney for advice concerning speCific situations.
<t4'5"\j14tM~ll.$I:f1f:'AV;E:!MnJST
between the two carriers. When LMCIT is providing both coverages, it eliminates that
potential problem.
3. In many cases the bond coverage forms commercial carriers use don't really seem to provide
what the statutes require. This is particularly true with faithful performance bonds.
4. Under most private bond forms, it's the city's responsibility to prove that there's been a covered
loss and to determine and document the amount of that loss. If it' s necessary to hire an outside
auditor to do so, the city would have to bear that cost. Unlike private bond forms, the LMCIT
bond coverage includes coverage for reasonable audit and accounting costs to document the
city's claim.
What's the difference between a fidelity bond and a faithful performance bond?
There are a couple important differences. First, the typical fidelity bond covers only the risk of
employee dishonesty - the risk that the employee will steal the city's money. The LMCIT faithful
performance bond covers that risk as well as the risk that a city officer or employee might steal
someone else's money.
Second, besides covering dishonesty the faithful performance bond also covers losses that result
from other ways that an employee might fail to faithfully perform his/her duties. In other words,
the faithful performance bond also protects the city and members of the public against losses
caused by other types of employee malfeasance as well.
What are some examples of what a faithful performance bond would cover that a
fidelity bond would not?
Here are a few examples of situations where the faithful performance bond's broader coverage
could come into play:
. A treasurer knowingly and intentionally invests city or relief association funds in an
investment that's not permitted by statute. That investment loses money. A faithful
performance bond would cover that loss.
. A city employee fails to send the FICA withholding to the IRS, and instead steals the money.
The city incurs penalties and interest for not remitting those funds on time. A fidelity bond
would only cover what the employee actually stole. The faithful performance bond would also
cover the penalties and interest the city incurred because of the employee's malfeasance.
. The city accepts credit card payments for city services. A city employee with access to a
citizen's credit card information uses that information to make fraudulent charges. A fidelity
bond wouldn't cover the citizen's loss; the faithful performance bond would.
. A city employee acting within the scope of his/her duties does something that harms a member
of the public, and the employee's action is clearly a case of intentional wrongdoing that
constitutes "malfeasance, willful neglect of duty, or bad faith". The LMCIT liability coverage
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therefore does not cover the damages awarded against the employee because it's a case of
malfeasance. (The liability coverage would cover the employee's defense costs, along with
any damages awarded against the city.) The city similarly isn't required to pay the damages
awarded against the employee. In this case, the faithful performance bond would cover those
damages if the injured party was not able to recover them from the guilty employee.
Why would we want to protect an employee from the consequences of his/her
own intentional wrongdoing?
The faithful performance bond does not protect the employee. It protects the city and the public.
It's extremely important to understand that whenever LMCIT pays any loss under the bond
coverage, LMCIT is entitled to attempt to recover that loss from the employee who caused it.
That's true regardless of what the basis ofthe claim is, and regardless of whether the claim is by
the city or by a member of the public. The bond doesn't relieve the employee ofthe duty to make
the payment; it relieves the city and/or the injured citizen ofthe hassle and uncertainty of trying to
collect it from him/her.
A member of the public can't collect under an employee's faithful performance bond unless s/he
has a valid claim against the employee, and has first tried and failed to collect directly from the
employee. M.S.574.25 says that when a member of the public has a claim against a public
employee covered by a faithful performance bond, the claim is to be paid first "...out of the
property of the principal, if sufficient can be found, and, ifnot, out of the property of the surety."
With regard to claims by the city, it's very important to remember that the employee will
ultimately be financially responsible for that claim. In other words, if the city makes a claim under
the faithful performance bond, the city is saying that the employee failed to faithfully perform
his/her duties and that the employee him/herself should therefore repay the city for the loss s/he
caused.
In short, the bond pays only if the employee has a duty to do so; and if the employee has a duty to
pay, the bond carrier is entitled to recover from the employee anything it pays on the employee's
behalf.
So the employee is completely on his/her own if sjhe's accused of intentional
wrongdoing?
No, not if s/he's only accused of intentional wrongdoing. But s/he is on his/her own to pay the
damages if the court determines s/he actually did it.
Remember, the LMCIT liability coverage will pay for the employee's defense on a liability claim,
even if the claim accuses him/her of intentional wrongdoing. But if the court determines that the
employee actually was guilty of malfeasance, intentional neglect of duty, or bad faith, the LMCIT
liability coverage won't pay for any damages the employee is ordered to pay. In that situation, the
claimant could look to the employee's faithful performance bond if s/he can't collect directly from
the employee. The bond would then pay the claimant (subject to the bond limits, of course), and in
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turn LMCIT would attempt to recover from the employee whose intentional wrongdoing caused
the damage.
Doesn't a faithful performance bond overlap with the city's liability coverage for
other kinds of tort claims against the city?
No. Remember, a third-party claimant can only make a claim against a bond after first trying and
failing to collect from the employee. Where the liability coverage applies, the claimant would
already have been paid under the liability coverage.
Does the bond come into play in cases of simple negligence of a city employee,
that don't involve malfeasance, willful neglect of duty, or bad faith?
Probably not in any meaningful way, though the statutes are confusing on this point. M.S. 574.24
arguably may require the faithful performance bond to cover losses caused by the bonded
employee's ordinary negligence as well. In order to be sure it meets the strictest reading of this
statute, the LMCIT faithful performance bond coverage provides a small amount of coverage for
claims caused by an employee's ordinary negligence. This is limited to 10% of the bond amount.
But whether that has any real practical effect is questionable, either for claims by the city or for
claims by a member of the public.
With regard to a claim for ordinary negligence by a member of the public, here are some key
points:
. Most third-party negligence claims will be covered by LMCIT's liability coverage, so there's
rarely any reason to even worry about how the bond coverage might apply.
. Before someone other than the city can make a claim under the faithful performance bond, they
must first have tried and failed to collect from the employee him/herself.
. When someone makes an ordinary negligence claim against a city employee and it's not
covered by the liability coverage, the city is still required by statute to defend and pay damages
on behalf of the employee.
. If the bond were ever to pay on an ordinary negligence claim against a city employee, LMCIT
would in turn seek reimbursement from the employee. The statute would require the city to
indemnifY the employee for that claim as well.
In other words, an ordinary negligence claim by a member ofthe public against a city employee
ends up one way or the other being the city's responsibility if it's not covered by the city's liability
coverage. The bond doesn't change that.
A similar kind of circularity would result if the city itself were to make a claim against a city
employee for losses to the city caused by the employee's negligence. Assuming the city could
even make that kind of claim, the statute would seem to require the city to indemnifY the employee
against the city's own claim. Or if the city made a claim under the bond for a loss caused by an
employee's ordinary negligence, and the bond were to pay that claim. LMCIT would in turn seek
reimbursement from the employee - again creating a claim against the employee which the statute
would require the city to defend and indemnifY.
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In short, the LMCIT faithful performance bond form specifically includes coverage for ordinary
negligence claims in order to make sure the bond complies with the strictest possible reading of
what the statutes require. But it's doubtful whether that feature of the LMCIT bond coverage
really has much if any practical effect in the real world.
How does the coverage for audit and accounting costs work?
The LMCIT bond coverage will reimburse the city for reasonable audit and accounting costs the
city incurs to establish the existence and amount of a loss. This reimbursement is subject to a limit
equal to 25% of the covered loss. This expense reimbursement is in addition to the bond coverage
limit.
Here are two examples to illustrate how this would work in practice:
. The city has a $100,000 bond. An employee steals $50,000 from the city. LMCIT would
reimburse the city for the full $50,000 loss, plus up to $12,500 for reasonable audit and
accounting costs.
. The city has a $100,000 bond. An employee steals $150,000 from the city. LMCIT would
reimburse the city for $100,000 of the loss, plus up to $25,000 for reasonable audit and
accounting costs.
The 25% limitation on reimbursement for audit and accounting costs is meant to assure some
proportionality between the loss and the amount the city spends trying to prove that loss. We've
seen instances where the city has retained an outside auditor to help document an employee
dishonesty loss, and the auditor's bills have actually been greater than the amount of the loss itself.
It's possible, of course, that there could be instances where a city incurs audit and accounting costs
greater than the 25% reimbursement limit. If so, those additional costs would be the city's
responsibility. But it's important to keep in mind that a conventional bond provides no coverage at
all for those costs; since it's the claimant's responsibility to prove that a loss has occurred and to
establish the amount of the loss, under a conventional bond any costs the city would incur to prove
its loss would be entirely the city's responsibility.
Finally, it's important to note that the LMCIT bond's expense reimbursement provisions apply
only when there is an actual loss. If the city suspects an employee dishonesty loss and incurs audit
costs investigating it but ultimately isn't able to show that a loss has occurred, those audit costs the
city incurred would not be reimbursed.
You said earlier that standard faithful performance bond forms may not meet
statutory requirements. What do you mean?
Various statutes require faithful performance bonds for specific officers. Some examples are
· M.S. 412.111 for statutory city clerks and treasurers
. M.S. 69.051 for relief association treasurers
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. M.S. 469.051 for port authority treasurers
· M.S. 469.096 for EDA treasurers.
M.S. 347.167 for gambling managers could also come into play for a relief association that
conducts charitable gambling. Another statute, M.S. 574.24, specifies that a public officer's bond
is security to any person who is injured by the officer's official misconduct or neglect.
Many public official bond forms we've seen include a "sole benefit" clause. This clause states that
the bond is only intended for the benefit ofthe public body itself and that no one else may make a
claim against the bond. This seems directly contrary to what M.S. 574.24 requires.
Public official bond forms from private insurers also very commonly incorporate exclusions for
torts or civil rights violations. Obviously this is one of the ways a public official could fail to
perform his duties.
Another common exclusion in conventional bond forms is for losses resulting from trading
securities or from other investment activities. A main reason why the statutes require a faithful
performance bond on positions such as a relief association treasurer is because of the treasurer's
investment responsibilities. It would seem to miss not only the letter but the intent of the law if the
bond excludes coverage for that exposure.
Why doesn't LMCIT give us the option to carry fidelity bonds only on certain
individuals or positions, or to carry smaller limits on some employees, as our city
has done in the past?
When you structure bond coverage in that way, you're in effect betting that you know who's going
to steal the money and how much they'll each be able to steal. From the standpoint of protecting
the public's funds, it seems better to simply cover all the possibilities, however remote.
LMCIT's experience with bond claims really reinforces that point. In the vast majority of cases,
the guilty parties have been in positions other than the ones for which the statutes require a bond.
A few of those cases have involved very substantial amounts - in the six-digit range.
How do we decide what bond limits to carry?
This is one of those "how high is up?" questions that there really isn't a single good answer to. The
lowest bond coverage limit LMCIT offers is $50,000 and limits up to $1,000,000 are available.
The statutes specify minimum bond limits for certain positions:
. A relief association treasurer's bond must be at least 10% of the relief association's assets or
$500,000, whichever is less. M.S. 69.051, subd. 2.
. A gambling manager's bond must be at least $10,000. M.S. 349.167, subd. 1.
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. An EDA or port authority's bond must equal at least "twice the amount of money likely to be
on hand at anyone time" or $300,000, whichever is less. M.S. 469.051, subd. 6; and M.S.
469.096, subd. 6.
Keep in mind that these are minimums, and the governing body could decide that higher bond
limits are appropriate. Some charters may also require specific bond amounts for some positions.
Generally though the statutes leave the amount of the bond to the council's judgment.
We still occasionally see cities that have very low bond limits - sometimes so low that the bond
doesn't really provide any significant financial protection to the city. Losses from employee
dishonesty in Minnesota cities have thankfully been rare. But they do occur, and occasionally
those losses can be very substantial. Even in smaller cities with limited budgets, there have been
examples of theft by a trusted long-term employee that extended over many years, and that in total
added up to six-digit amounts.
Keep in mind that the bond is triggered by when the loss is discovered - not by when the theft
occurred. You can't make a claim against last year's bond for a loss you discover this year, even if
the actual theft occurred last year. In other words, even if the city had a $5000 bond in place for
ten years and the employee stole $5000 in each of those ten years, the city will still recover only
$5000 from the bond carrier.
A number of years ago, the Municipal Finance Officers Association developed a formula for
determining suggested fidelity bond amounts for city officers. This formula uses an "exposure
index" equal to the sum of 10% of the city's annual revenues, plus the market value of negotiable
securities. A table then gives a recommended minimum bond limit range for the city's exposure
index. The table is shown on the following page.
Of course, there's nothing magic about this formula, and there's certainly no guarantee that the
bond amounts suggested in the table will be enough to cover any loss the city might suffer. But it
does provide a starting point for thinking about amounts of bond coverage.
Pete Tritz 2/08
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Suggested Minimum Amounts of Bond Coverage
Exposure Index* Bracket Suggested Bond Amount
$0 - $25,000 1 $ 15,000 - $25,000
25,000 - 125,000 2 25,000 - 50,000
125,000 - 250,000 3 50,000 - 75,000
250,000 - 500,000 4 75,000 - 100,000
500,000 - 750,000 5 100,000 - 125,000
750,000 - 1,000,000 6 125,000 - 150,000
1,000,000 - 1,375,000 7 150,000 - 175,000
1,375,000 - 1,750,000 8 175,000 - 200,000
1,750,000 - 2,125,000 9 200,000 - 225,000
2,125,000 - 2,500,000 10 225,000 - 250,000
2,500,000 - 3,325,000 11 250,000 - 300,000
3,325,000 - 4,175,000 12 300,000 - 350,000
4,175,000 - 5,000,000 13 350,000 - 400,000
5,000,000 - 6,075,000 14 400,000 - 450,000
6,075,000 - 7,150,000 15 450,000 - 500,000
7,150,000 - 9,275,000 16 500,000 - 600,000
9,275,000 - 11,425,000 17 600,000 - 700,000
11,425,000 - 15,000,000 18 700,000 - 800,000
15,000,000 - 20,000,000 19 800,000 - 900,000
20,000,000 - 25,000,000 20 900,000 - 1,000,000
25,000,000 - 50,000,000 21 1,000,000 - 1,250,000
50,000,000 - 87,500,000 22 1,250,000 - 1,500,000
87,500,000 - 125,000,000 23 1,500,000 - 1,750,000
125,000,000 - 187,500,000 24 1,750,000 - 2,000,000
187,500,000 - 250,000,000 25 2,000,000 - 2,250,000
250,000,000 - 333,250,000 26 2,250,000 - 2,500,000
333,325,000 - 500,000,000 27 2,500,000 - 3,000,000
*The city's "exposure index" equals 10% of the city's gross annual revenues, plus the market
value of any negotiable securities.
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