2004-25575 Reso
RESOLUTION NO. 2004-25575
A RESOLUTION OF THE MAYOR AND CITY COMMISSION
OF THE CITY OF MIAMI BEACH, FLORIDA, APPROVING
THE PURCHASE OF FLOOD INSURANCE, ALL RISK
PROPERTY INSURANCE (INCLUDING WINDSTORM), AND
BOILER/MACHINERY INSURANCE FOR CITY BUILDINGS
AND CONTENTS (INCLUDING NEW CONSTRUCTION), FOR
A COMBINED ESTIMATED ANNUAL PREMIUM OF
$1,703,813.00 (NET OF BROKER COMMISSIONS), FOR A
ONE-YEAR PERIOD AS PROPOSED BY ARTHUR J.
GALLAGHER & CO., THE CITY'S BROKER OF RECORD.
WHEREAS, as proposed by Arthur J. Gallagher and Co., the City's broker of record,
the Administration has recommended the purchase of Flood Insurance with the National
Flood Insurance Program, for a total annual premium of $170,000; All Risk property
Insurance (including a Windstorm sub-limit of $25 million) with Lexington Insurance
Company, for a total annual premium of $1 ,41 0,445.00; Boiler/Machinery Insurance with
Hartford Steam Boiler, for a total annual premium of $23,368,00; and an additional
estimated insurance premium for new construction of $100,000.00, all for a combined
estimated annual premium of $1 ,703,813.00; and
WHEREAS, funding is available from the Self Insurance Fund Number
540.1792.000378; and
NOW, THEREFORE, BE IT DULY RESOLVED BY THE MAYOR AND CITY
COMMISSION OF THE CITY OF MIAMI BEACH, FLORIDA, that the Mayor and City
Commission hereby approve the purchase of Flood Insurance, All Risk Property Insurance
(including a Windstorm sub-limit of $25 million), and Boiler/Machinery Insurance for all
City-owned buildings and contents (including new construction), for a combined estimated
annual premium of $1,703,813,00, for a one-year period, as proposed by Arthur J,
Gallagher & Co., the City's broker of record.
PASSED AND ADOPTED this 26th day of
May
I;L~ p~~
ty Clerk
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CITY OF MIAMI BEACH
COMMISSION ITEM SUMMARY
~
Condensed Title:
Resolution authorizing the purchase of Flood, All Risk Property Insurance (including windstorm) and Boiler
Machinery Insurance for an annual premium of $1 ,703,813.00 as proposed by Arthur J. Gallagher and Co.,
the Citv's Broker of Record.
Issue:
Property insurance is necessary to protect the financial interest of the City. To qualify for FEMA aid, the
City is required to purchase maximum reasonable insurance available.
Item Summary/Recommendation:
Approve the purchase of Flood Insurance, All Risk Property Insurance (including windstorm) and Boiler
Machinery Insurance.
Advisory Board Recommendation:
I Not Applicable
Financial Information:
Amount to be expended:
~1
540.1792.000378 Property
Insurance Self-Insurance Fund
Source of
Funds:
AGENDA ITEM
DATE
R7E
S~ 210-0<{
CITY OF MIAMI BEACH
CITY HALL 1700 CONVENTION CENTER DRIVE MIAMI BEACH, FLORIDA 33139
hltp:\\ci .miami-beach .fl.U5
COMMISSION MEMORANDUM
TO:
Mayor David Dermer and
Members of the City Commission
DATE: May 26,2004
FROM:
Jorge M. Gonzalez C)
City Manager rJ ~
SUBJECT:
A RESOLUTION OF THE MAYOR AND CITY COMMISSION OF THE CITY
OF MIAMI BEACH, FLORIDA, APPROVING THE PURCHASE OF FLOOD
INSURANCE, ALL RISK PROPERTY INSURANCE (INCLUDING
WINDSTORM) AND BOILER/MACHINERY INSURANCE FOR CITY
BUILDINGS AND CONTENTS (INCLUDING NEW CONSTRUCTION), FOR
A COMBINED ESTIMATED ANNUAL PREMIUM OF $1,703,813.00 (NET
OF BROKER COMMISSIONS), FOR A ONE-YEAR PERIOD AS
PROPOSED BY ARTHUR J. GALLAGHER & CO., THE CITY'S BROKER
OF RECORD.
ADMINISTRATION RECOMMENDATION:
Adopt the resolution.
FUNDING:
Funds are available from the Self-Insurance Fund Number 540.1792.000378,
ANALYSIS:
The City's property insurance needs are covered primarily by three policies: Flood, All Risk
(fire, explosion, lightning) and Boiler/Machinery (equipment breakdown), The predominant
peril to City-owned facilities is storm related loss due to flood and/or windstorm damage,
The City relies on FEMA to provide financial assistance for expenses and damages related
to flood and/or windstorm that are not covered by insurance. Eligibility for FEMA
reimbursement is Federally governed by the Stafford Act.
The Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act)
authorizes the President (FEMA per Executive Order) to provide financial and otherforms
of assistance to State and local governments, certain private nonprofit organizations and
individuals to support response, recovery and mitigation efforts following Presidentially
declared major disasters and emergencies. The Stafford Act describes generally the
declaration process, the types and extent of assistance that provided and fundamental
eligibility requirements.
To qualify for aid in case of loss due to flood, the Act requires that we purchase the
maximum insurance available. The City has complied with that mandate in the past by
purchasing coverage from the only available source, Leo, the National Flood Insurance
Program. Limits are $500,000 for buildings and $500,000 for building contents. There is a
$5,000 deductible per location, The City purchases a separate Flood policy for each
location within the City. The individual policies renew from July 2004 through December
2004 for one year. The total annual premium for 2003-04 was $170,000. We do not
anticipate any premium increase for 2004-05.
The second coverage, All Risk, can be purchased with or without Windstorm coverage,
With regard to FEMA's eligibility requirements to qualify for reimbursement for losses due
to windstorm, insurance need not have been purchased if the City has not been the
recipient of past FEMA monies in excess of $5,000 for damage to buildings. Miami Beach
meets that criterion, Hence, the City can choose how much risk assumption it wants to
take on, Le" self-insure and rely on FEMA aid or purchase Windstorm coverage.
Industry models indicate that the Probable Maximum Loss (PML) would range from
$77,000,000 to $190,000,000 in the event of direct hit by a category 2 or stronger
hurricane to the City, Historically, the marketplace has reacted to the potential of this type
of loss by increasing annual premium and adding coverage reductions (decreased limits).
However, due to improvements in both the Domestic Primary Market and the Worldwide
Re-Insurance Market and current economic conditions (decreased investment income, low
interest rates, decreased spending etc,), the marketplace has offered renewal property
insurance premiums at a lower rate than the current level.
The City currently purchases All Risk property insurance (this is a Primary/Excess layered
program) with a Windstorm sublimit of $25,000,000 for an annual premium of
$1,585,209,000. Lexington Insurance is the Primary carrier in this program with Excess
layers provided by Zurich Insurance Co" Nutmeg Insurance Co., Arch Specialty Ins. Co"
Lloyd's of London/Glencoe, and Allianz Insurance Co.
The City's broker, Arthur J. Gallagher Co. (Gallagher), following our directions, has
identified a replacement program which is All Risk including Windstorm protection for both
named and non-named storms. Lexington Insurance Company is the only insurance
company out of eighteen (18) contacted that is willing to provide a quote for primary
coverage. Excess layers are provided by Landmark American Ins. Co., Axis Surplus Lines
Ins. Co., Nutmeg Insurance Co" Arch Specialty Ins, Co" Lloyd's of London, and Allianz
Insurance Co. The new program, which would be effective on June 1, 2004, provides for
identical coverage with the only change being an increase in coverage from $1,000,000 to
$10,000,000 for the Demolition and Construction Cost sub-limit. The total renewal
premium has reduced from $1,585,117to $1,410,445 resulting in a savings to the City
of $174,464.
The third coverage, Boiler/Machinery provides coverage for property built to operate under
a vacuum or pressure, or used for the generation, transmission or utilization of energy
(water pumps, A.C. units, generators). The City purchases this insurance due to the many
locations that house this type of machinery/equipment. Damage sustained by
machinery/equipment for breakdown is not currently reimbursable under any type of State
or Federal program. The premium for 2003-04 was $23,368. Hartford Steam Boiler
Inspection and Insurance Company has offered renewal of the policy with no
increase.
The following table illustrates the current property program and renewal:
June 2003 Coveraae
June 2004 Coveraae
1. National Flood Insurance Program (NFIP)
1. National Flood Insurance Program (NFIP)
Limits:
$ 500,000 Building
$ 500,000 Contents
Limits:
$ 500,000 Building
$ 500,000 Contents
Deductible: $ 5,000
Per Location
Deductible: $ 5,000
Per Location
Premium
$170,000.00
Premium
$170,000.00
2. Lexington Insurance Company
(Best's Rating A VIII)
(Primary Coverage)
2. Lexington Insurance Company
(Best's Rating A VIII)
(Primary Coverage)
Limits: $ 170,000,000 All Risk Peril
Limits: $ 170,000,000 All Risk Peril
Sublimits: $ 25,000,000 Named-Wind
Sublimits: $ 25,000,000 Named-Wind
Deductibles: $
100,000 All Risk Peril
5% Named-Wind
Deductibles: $
100,000 All Risk Peril
5% Named-Wind
Premium: $1,585,209.00
Premium: $1,410,445.00
3. Hartford Steam Boiler Inspection &
Insurance Co. (Best's Rating A+X)
3. Hartford Steam Boiler Inspection &
Insurance Co. (Best's Rating A+X)
Limits:
$ 100,000,000
Limits:
$ 100,000,000
Deductibles $
5,000
Deductibles: $
5,000
Premium $ 23,368,00 Premium: $ 23,368.00
TOTAL PREMIUM $1.778.577.00 TOTAL PREMIUM $1.603.813.00
In addition to the above, the renewal offers the following options:
. Terrorism Coverage (subject to the Terrorism Risk Insurance Act 2002)
. Allianz (one of the carriers) has indicated that they could provide an additional
$25,000,000 in wind coverage for a minimum premium of $350,000.
Motivated by the events of September 11,2001 the Terrorism Risk Insurance Act of 2002
(TRIA) was enacted by the U.S, Congress in November 2002, The TRIA provides a
Federal backstop for terrorism losses through a program whereby the Federal Govemment
assumes most of the risk of terrorism attack while the insurance industry provides
mandated coverage through a retention and co-payment. The TRIA further nullifies all
conflicting terrorism exclusions and requires insurers to offer terrorism coverage under
similar terms as other property and casualty coverage as an option.
An "Act of Terrorism" is defined as:
. A violent act that is dangerous to human life, property, or infrastructure;
. To have resulted in damage within the United States, or damage to a U.S. air
carrier, U.S, flagged vessel, certain U.S. based vessels, or a U.S, Mission; and
. To have been committed by an individual or individuals acting on behalf of any
foreign person or foreign interest, as part of an effort to coerce the civilian
population of the U,S. or to influence the policy or affect the conduct of the U.S,
Government through coercion.
. An Act of Terrorism does not include an act committed in the course of war declared
by Congress or an act resulting in losses that do not exceed $5,000,000.
The following concerns/problems have been expressed regarding the definition:
. The definition does not appear to encompass purely domestic terrorism (e.g.
Oklahoma). It is unclear how coverage would apply if an "Act of Terrorism" were to
be carried out by a U.S. cell of a foreign network.
. Losses resulting from an act of War are not covered.
. It is unclear whether a cyber attack would be covered.
. The Federal government solely decides on interpretation.
The annual additional premium for this coverage is $203,289. The policy deductible of
$100,000 would apply per occurrence. Coverage is capped at the policy limit of
$170,000,000.
While the All Risk policy premium is a considerable sum of money, we must recognize that
aid from FEMA is not "contractual" and that the amount of assistance varies depending
upon the extent of a declared disaster. It is important to understand that FEMA is not an
insurance company. Its policies, procedures, and administration are effected by political
and bureaucratic factors that can retard responsiveness and/or reduce anticipated financial
aid, Insurance companies, presumably, respond to claims pursuant to the contractual
obligations imposed by the Policy. That distinction has increased relevance when disasters
occur, recoveries are sought, and speed is important. In order for the City to be in the
position to make a prompt recovery should we be struck by a major storm, we believe that
the purchase of this coverage is required.
While the Administration would prefer the City purchase all offered insurance, sound fiscal
responsibility dictates that recommendations be based on "cost versus risk", Since storm
related loss is the predominant peril (not terrorism) to City-owned facilities, the
Administration does not recommend the purchase of Terrorism coverage, With regard to
the purchase of additional Wind limits, the Administration recommends that the matter
along with the purchase of Terrorism coverage be revisited at the next policy renewal.
The Administration recognizes that during the upcoming policy year, certain CIP projects
will reach completion. At the time of completion, the City will need to add/increase
insurance coverage for the projects involved, We have reviewed the various projects with
CIP and the City's Broker and estimate the additional premium should not exceed
$100,000, We have added the estimated premium of$100,000 to the renewal premium of
$1,603,813 for a total of $1 ,703,813 to reflect anticipated expenditures.
In summary, the Administration recommends purchase of the following coverage:
Policy Coverage Limits Annual
Premium
National Flood Insurance $500,000 Bldg/$500,000 Contents $ 170,000
Proaram (maximum coveraae offered)
All Risk Property /Wind $170,000,000 All Risk (Wind $1,410,445
(Includes $5,000,000 additional sublimit of $25,000,000)
coveraae)
Boiler IMachinerv $100,000 $ 23,368
Additional Premium For New $40,000,000 $ 100,000
Construction
Total Annual Premium $1,703,813
Attachment: Broker Summary
F:\$alllrisk\c1iff\P-1 NS04.doc
G
City of Miami Beach
EXECUTIVE SUMMARY
THE STATE OF THE INSURANCE MARKET (APRIL 2004)
The general public is now more informed about the various insurance market
issues. The prior abrupt changes in capacity and pricing have moderated and in
some areas of coverage and some areas of geographic territories, cost and
availability have improved. An educated and informed buyer is understanding of
the ebbs and flows of market supply and demand.
On a aoina forward basis it is important to understand what's driving the market right now
as we work through your renewal negotiations.
The ebbs and flows of the insurance market are created by more than just the primary and
reinsurance markets. There are five (5) macro market factors that intermingle to create the
insurance market at any point in time:
FIVE MACRO MARKET FACTORS
1. Reinsurance Market Results
2. Primary Market Results
3. The Economy
4. Investment Income, Interest Rates, Investment Portfolio Contraction / Expansion
5. The Mood/Attitude of War, Terrorism, the Fear of the Unknown
CURRENTLY:
~ All Five (5) Market Factors are moving away from critical low points to various levels of
improvement.
~ Shake all five (5) up at the same time and the insurance market thinks and responds to
the pluses and minuses of each of the 5 market factors. All five (5) have some degree
of positive change versus historical low points.
~ Items 1 & 2 will respond together as combined ratios improve
~ Item 4 is very important to items 1 & 2 and will improve as the economy, item 3,
improves and mood and attitude in item 5 improves.
G
City of Miami Beach
OUR OPINION OF THE NEAR FUTURE OF THE FIVE (5) MACRO MARKET FACTORS:
~ The Worldwide Re-Insurance Market is improved, but far from being fixed. Reserve
adequacy and re-insurance recoverables have serious negative implications.
);0 Domestic Primary Market The Primary US market's position is much improved for
those companies who survived. That said, the solvency issue and rating downgrades
indicate the degree of serious long term financial solvency and reserve issues facing
the insurance industry. Rating agencies estimate the insurance industry is $30-$60
billion dollars under reserved.
Market solvency is a more important issue today than at any time in history.
Examoles:
Kemper Insurance - went from downgraded to out of business in early 2003.
Royal Sun Alliance - exited the entire U.S. market in early 2003
Coregis - exited market
St. Paul Merger with Traveler - and the capacity implications
Atlantic Mutual Ins. Co. - downgrade to B and struggling to survive
Many others downgraded
Reliance Ins. Co. surplus deficiency indicated as 3 billion dollars in 3/2/04 report.
);0 The Economy is better but not without serious issues. If it was a 1 in 2003 on a
scale from 1 to 5 it is now a 2,
~ Interest rates are still at a 20 to 30 year all time low. The industry cannot offset
poor combined ratios with investment returns. This area of interest income and
investment income is currently marginally better than 2003.
~ Mood I War I Terrorism I Fear of unknown is better, not because the terror
threat is behind us, rather it's more that we understand it, accept the reality of the
issues and acknowledge the long-term nature of the solution. The railroad bombings
in Madrid, Spain, March 10, 2004 demonstrate the ongoing and unpredictable reality
of world terrorism. The terrorism issue continues to negatively impact overall "mood"
and negatively impact the economy.
G
City of Miami Beach
SUMMARY:
Item 1,3,4 and 5 are marginally improved from their 2003 lows. Item 2 is definitely better,
driving pricing and availability improvement in various market sectors. Property is much
improved. Workers' Compensation and professional liability have replaced property as the
most difficult / stressed lines of coverage to place / complete.
How THE INSURANCE MARKET VIEWS YOUR EXPOSURES:
1. 100% Hiahlv Concentrated Property: Large Property Schedule, 100% South Florida
coastal risk. NO inland spread of risk, 100% of property is exposed to wind and
considered coastal almost waterfront property.
2. Loss Limit - Wind Limit is absolutelv within the 100% loss limit. In a direct hit
storm, the $25,000,000 limit is a 100% LOSS. Markets expect to payout the entire
$25,000,000 limit in a medium to large size wind storm. Therefore, their pricing must
reflect the exposure.
3. Probable Maximum Loss - Your Probable Maximum Loss (PML) will range from
$78,000,000 to $196,000,000 (or 20% to 50% of your Total Insurable Values), Your
renewal of $25,000,000 (or 6% of your TIV) is not enough coverage. We stronqlv urQe
the City to consider purchasing higher limits of wind coverage.
4. Hurricane Andrew -The $1,500,000 damage the City incurred from Hurricane Andrew
is considered peripheral damage and is NOT a benchmark for considering the expected
loss from a medium to large windstorm. Hurricane Andrew directly hit areas
approximately 20 miles south of Miami Beach. All carriers expect the City to sustain
substantial damage within your PML in a medium to large windstorm.
5. EXDosure to Fire: The City must also consider their exposure to loss by a fire. There
are several buildings that have significant values that could be affected in the event of a
fire. The top 4 Valued Buildings in the City are as follows:
# BUILDING NAME ADDRESS VALUE
1. Convention 1900 Convention Center $159,909,512
Center Drive
2. Theater 1700 Washington Avenue $52,061,590
3. Police Station 1100 Washington Avenue $24,399,062
4. City Hall 1700 Convention Center $15,585,690
Drive
c;
City of Miami Beach
RENEWAL NEGOTIATIONS:
Obtaining a comprehensive and competitively priced program of insurance in the
marketplace requires more than access to the market. Past experience and credibility with
markets are the foundation of a successful campaign for the City of Miami Beach.
Complete and accurate submissions, with detailed specifications, are essential. Arthur J.
Gallagher & Co. made a complete presentation to each company contacted.
G
City of Miami Beach
MARKETING SUMMARY
CARRIER: QUOTEDI COMMENTS
DECLINED
Lexington Insurance Company Quoted Primary $10,000,000
Allianz Insurance Company Declined Pricing and Attachment
Underwriters at L10yds of London Quoted Quota sharing $15MM XS $10MM
Steadfast Insurance Co. Quoted $45MM XS $25MM @ $90,000
Commonwealth Ins. Co. Declined Pricing and Attachment
Essex Ins, Co. Declined Pricing and Attachment
St. Paul Insurance Companies/USF&G Declined Pricing and Attachment
Nutmeg Insurance Company Quoted Quota sharing $15MM XS $10MM
Landmark American Insurance Co., Quoted Quota sharing $145MM XS $25MM
Westchester Specialty Group Declined Pricing and Attachment
ARCH Quoted Quota sharing $15MM XS $10MM
ERC Declined Due to pricing and attachment
James River Insurance Declined Due to pricing and attachment
LMG Property Declined Due to pricing and attachment
AXIS Quoted Quota sharing $145MM XS $25MM
XL Insurance Declined Due to pricing and attachment
Travelers Insurance Declined Due to pricing and attachment
c;
City of Miami Beach
,. Of the 6 carriers on the existing program, 2 carriers would not offer a reduction, nor
would they change their attachment point. We therefore restructured the program and
went out to the marketplace to complete the program.
, We were able to replace those carriers with new participants. The restructured renewal
program provides the city with the same coverage a savings of $162,000 (10%) from
the prior year.
PROPERTY PROGRAM STRUCTURE:
As mentioned previously, the City's Probable Maximum Loss (PML) is in excess of
$78,000,000. This means that in a Category 3, 4 or 5 hurricane, insurance companies
expect to pay in excess of $78,000,000. The renewal program presented to the City
provides for $25,000,000 of Wind Coverage.
The $25,000,000 is substantially less than your PML, and we do not feel that this amount is
adequate. In fact, we urge you to consider buying more coverage, not less. We will obtain
quotations for additional limits of insurance at the City's direction.
The structure of the City's Property Renewal program follows:
Limits, Structures & Subscriptions - TIV $393,258,466
$170,000,000 Limit Per Occurrence. $25,000,000Named Windstorm Sublimit
Deductible for Named Windstorm is 5% (subiect to $15,000,000 Maximum and $1,000,000 Minimum)
Layers Company Limit Premium Terrorism
Premium
2nd Excess Laver Axis Surplus Lines Ins. Co. $72,500,000 p/o $145,000,000 $147,500 $10,326
$145,000,000 per Landmark American Ins. Co, $72,500,000 p/o $145,000,000
occurrence
excess of
$25,000,000
1 st Excess Laver Nutmeg Insurance Co. $5,000,000 p/o $5,000,000 $500,000 $58,334
$15,000,000 per Arch Specialty Ins. Co. $5,000,000 p/o $5,000,000
occurrence Lloyd's of London $5,000,000 p/o $5,000,000
excess of
$10,000,000
Primary Laver Lexington Insurance Co. $10,000,000 p/o $10,000,000 $762,921 $53,044
$10,000,000 per
occurrence
primary layer,
including Wind
Total Premium $1,410,421 $121,704
Plus Florida Fire Marshall and FEMA $24 $0
Total Cost $1,410,445 $121,704
c;
City of Miami Beach
,.. $25,000,000 Sublimit for Named Wind
., Flood and Earthquake are excluded.
,.. Terrorism Coverage is subject to the Terrorism Risk Insurance Act 2002. If not
purchased, Waivers must be signed and provided to carrier at time of binding.
PROPERTY PROGRAM ENHANCEMENTS
Lexin2ton Insurance
}i.> Demolition and Increased Cost of Construction sub-limit increased from $1,000,000 to
$10,000,000.
., 25% limitation for Debris Removal deleted
}i.> Newly Acquired sub-limit increased from $1,000,000 to $2,000,000
., Errors & Omissions sub-limit increased from $1,000,000 to $5,000,000
BOILER AND MACHINERY RENEWAL PROGRAM
}i.> All policy terms, conditions and exclusions will remain as expiring.
., Despite the large claim that was paid several years ago, Hartford Steam Boiler has held
the premium at $23,368 - No Increase.
SUMMARY:
We believe the program presented to the City is a very competitive program in today's
property market. The total renewal premiums have been reduced from $1,595,117 to
$1,433,789. This is a 10% savings!!!
We continue to believe that the $25,000,000 Wind sublimit does not provide the City
with enough coverage and advise the City they should be purchasing more coverage.
We recommend the City purchase at least to their Probable Maximum Loss. We
believe an additional $50,000,000 (excess of $25,000,000) of wind coverage would cost
approximately $500,000 although we do not have quotations for this limit.. If you are
interested, please let us know.
Additionally, we recommend the City purchase coverage for Terrorism. We believe due
to the City's high profile, that your do in fact have an exposure to terrorism. The
purchase of such coverage is a necessity.
We thank you for allowing us to serve you over the past 8 years. We value the City's
trust and pledge our personal and corporate commitment to servicing your needs.