TO: AC Transit Board of Directors
FROM: Shayna van Hoften, Interim General Counsel/Chief Legal Officer
SUBJECT: 2024-2025 Transit Operations Insurance Program Renewal
ACTION ITEM
AGENDA PLANNING REQUEST: ☐
RECOMMENDED ACTION(S):
Title
Consider authorizing the General Manager to bind the District’s 2024-2025 Transit Operations Insurance program.
Staff Contact:
Shayna van Hoften, General Counsel/Chief Legal Officer
Body
STRATEGIC IMPORTANCE:
Goal - Financial Stability and Resiliency
Initiative - Financial Efficiency and Revenue Maximization
Authorizing the General Manager to bind the proposed 2024-2025 Transit Operations Insurance program will allow the District to maintain its risk retention and risk transfer programs at the current optimum levels for the 2024-2025 policy period.
BUDGETARY/FISCAL IMPACT:
The total budgetary impact of binding the proposed insurance coverages as recommended by staff will not exceed $14,968,119.
BACKGROUND/RATIONALE:
The District’s insurance program is renewed on an annual basis. The District’s current insurance program, except for the commercial property and deadly weapons response lines of coverage, will expire at 12:01 a.m., April 26, 2024. Staff requests that the Board authorize the General Manager to bind the District’s policies as recommended below.
Commercial Property and Casualty Market Update: Industry rating agency AM Best reports that the U.S. property/casualty industry's underwriting losses for 2023 reached a 10-year high of $38 billion, attributable to severe weather-related losses, inflation, supply chain challenges, labor shortages, and upward reinsurance pricing. Inflation-both economic and social-remains a disruptive influence on the insurance market. Liability costs have risen an average of 16% over the past five-year period, four times higher than the average economic inflation rate, driven in large part by the social inflation of jury verdicts and claim settlement values. California, with an absence of tort liability caps and sovereign immunities, continues to lead nationally in disproportionately claim values and “nuclear” verdicts. Considering the forgoing market challenges, (re)insurers are responding with tighter underwriting, higher attachment points, increased retentions, and rate increases. Recognizing the upward trend in excess liability premiums, Staff continues to work with the District’s broker, Alliant, to evaluate alternative risk transfer options that are appropriate for consideration by the Board.
Staff recommends the following options for the 2024-2025 Transit Operations Insurance Program renewal to the Board for consideration:
Excess Automobile and General Liability: Liability Insurance provides insurance coverage for automobile liability, premises liability, employee benefits liability, and wrongful acts liability. Placement of the District’s excess liability insurance continues to be the most challenging and costly component of the District’s insurance program due to the size and nature of the District’s fleet, the District’s loss exposures and history, and the impact of industry-wide increases in bus accidents.
The finalized renewal proposals for the excess automobile and general liability insurance program have not yet been presented to the District. Alliant Insurance Services has provided a “not-to-exceed” renewal estimate of $14,269,199, an estimated 12% increase over last year’s premiums. This increase is due to an approximate 5% increase in revenue miles combined with a 19.5% increase in ridership, and the concomitant increase in on-the-road loss exposures. For reference, the expiring 2023-24 premium was $12,791,919. The coverage specifications will be provided as Attachment 1.
Excess Workers’ Compensation: During the 2022-23 renewal, the Board approved a two-year policy contract with the carrier, Safety National, which expires at this renewal. The expiring 2023-24 premium was $455,632; the 2024-25 proposal provides for a 2-year program commitment with no more than a 2% rate increase for the 2025-26 policy term (second year). The 2024-25 premium will not exceed $474,502 or an approximate 4% premium increase over the expiring policy premium. The coverage specifications are provided in Attachment 2.
Commercial Crime: Commercial crime insurance covers money, securities, or other tangible property belonging to the District or for which the District becomes legally liable, for covered events such as employee theft, funds transfer fraud, etc. The expiring 2023-24 premium was $16,688; the 2024-25 proposed premium is $17,376 and represents a 4% increase over the expiring premium. The coverage specifications are provided in Attachment 3.
Cyber-Liability/Data Breach: This insurance provides coverage for the District’s liability for a data breach in which its customers’ personal information or credit card information is exposed or stolen as the result of a hacker or other criminal gaining access to the District’s network. The policy also provides coverage for a variety of expenses associated with data breaches, ransomware, and other cyberattacks including, but not limited to, notification costs, credit monitoring, costs to defend claims by state regulators, fines and penalties, business interruption, and cyber extortion.
Globally, the frequency and severity of cyberattack losses continue to increase. Ransomware attacks account for the highest proportion of losses with ransomware payments averaging $1.5 million in 2023. The average cost of a data breach in 2023 was $4.5 million, representing a 15% increase over the last 3 years. These losses continue to be driven by the increasing sophistication of cyberattacks and associated increased costs of data and operational recovery, business interruption, and legally mandated notification and credit monitoring costs.
The District’s Innovation and Technology team has proactively responded to these trends with policies, procedures, and controls that have reduced susceptibility to these risks and presented a favorable underwriting profile to the market. These actions have resulted in coverage limit increase from $3 million to $5 million, a reduction in the District’s per claim retention from $250,000 to $100,000, and, as occurred at the last renewal, a premium reduction. The expiring 2023-24 premium was $190,883; the 2024-25 proposed premium will not exceed $174,452 and represents an 8.6% decrease over the expiring premium. The coverage specifications are provided in Attachment 4.
Fiduciary Liability: This coverage protects board officials, trustees, and professional administrator(s) of both the District’s 457(b) and pension plans, and the plans themselves, with respect to Errors and Omissions (E&O) in the administration of the employee benefits programs. The policy under consideration also provides for a waiver of recourse provision to protect the board members’ personal assets. The expiring 2023-24 premium was $31,946; the 2024-25 proposed premium will not exceed $32,590 and represents an estimated 2% increase over the expiring premium. The coverage specifications are provided in Attachment 5.
ADVANTAGES/DISADVANTAGES:
Advantage(s): The recommended program renews the 2023-2024 insurance coverage lines at levels that provide coverage consistent with prior policy terms and falls within the District’s risk-bearing capacity. Authorizing the General Manager to bind the proposed Transit Operations Insurance Program will allow the District to continue to maintain its risk retention and transfer strategy for the 2024-2025 policy period.
Disadvantage(s): Renewing the District’s insurance program as recommended will result in a overall premium increase of $1,481,051, or 11%, over the expiring program.
ALTERNATIVES ANALYSIS:
The Board could choose to authorize the binding of the 2024-2025 Transit Operations Insurance Program with reduced coverage limits or higher self-insured retentions. Staff does not recommend doing so currently as, except for the Excess Liability coverage line, coverage limits and premiums have remained relatively flat with modest increases or even decreases. With respect to the Excess Liability line of coverage, the scope of the District’s on-the-road operations and exposures present risks that are best transferred to insurance due to the potential for adverse impacts on District funds should those risks be retained within the operational budget.
Staff does not recommend the non-renewal of any of these policies as an alternative given the District’s risk exposures.
PRIOR RELEVANT BOARD ACTION/POLICIES:
SR-23-345 - Consider Authorizing the Renewal of the 2023-2024 Commercial Property and Deadly Weapons Response Insurance Programs
SR-23-224 - Consider Authorizing the Renewal of the 2023-2024 Transit Insurance Program
SR-22-309 - Consider Authorizing the Renewal of the 2022-2023 Commercial Property and Deadly Weapons Response Insurance Programs
SR-22-212 - Consider Authorizing the Renewal of the 2022-2023 Transit Insurance Program
SR-21-315: Consider Authorizing the Renewal of the 2021-2022 Commercial Property and Deadly Weapons Response Insurance Programs
ATTACHMENTS:
1. Excess Automobile & General Liability Proposal (will be provided prior to the Board meeting)
2. Excess Workers Compensation Proposal
3. Commercial Crime Proposal
4. Cybersecurity Liability Proposal
5. Fiduciary Liability Proposal
Prepared by:
Jean-Paul Popoff, Claims & Liability Manager
Approved/Reviewed by:
Shayna van Hoften, General Counsel/Chief Legal Officer
Chris Andrichak, Chief Financial Officer
Michael A. Hursh, General Manager/Chief Executive Officer
Ahsan Baig, Chief Information Officer