Steer clear of "limit less" insurance options

If you are responsible for placing your municipal insurance, you know what the primary coverages are that must be renewed each year. These include property, general liability, public officials' liability, auto liability and physical damage, and crime insurance.

It is more difficult to determine what the appropriate limits of coverage are for your community, and what deductibles, if any should be considered.

Property Insurance: At a minimum, all of your municipal buildings (real property) should be valued on a replacement cost basis. If you have not had an appraisal performed in several years, you should recommend that funds be budgeted for one to be performed.

An appraisal of your contents (personal property) is much more expensive but has the advantage of forming the basis for a complete inventory of municipal property, if you don't now have one. Contents are most often insured at actual cash value (replacement cost minus depreciation), although replacement cost coverage may be available.

Standard property insurance deductibles are anywhere from $500 to $2,500 per claim. Higher deductibles are available, but expect to receive diminishing returns on your premium reduction as your deductible increases. A certain percentage of an insurer's premium is calculated to pay for a catastrophe loss that won't be affected by a deductible that most municipalities can comfortably retain.

Many property insurance policies provide you an opportunity to specifically list certain types of property. Examples include accounts receivable and computer equipment and software. It is very important that you have an accurate estimate of these values. Many property insurers will provide a minimum or standard limit for specific types of property, which often may be wholly inadequate.

For example, if you do not attach an appropriate value to your computer software, where you might electronically store much of your municipal data, your insurance recovery may be much less than the actual cost to reproduce the data.

You should spend some time at least each year with your insurance representative to review your property insurance schedules and values. Understanding how your property will be valued if a loss occurs will avoid the potential for misunderstandings and uninsured losses.

Liability Insurance: You are probably more likely to hear someone tell you, "You just won the lottery," than you are to hear your insurance representative say, "Your liability insurance limit is more than enough."

You just never know how some claims will develop. Some claims that initially look terrible are eventually settled for nominal sums. Others that appear routine when first received end up costing millions.

One thing is certain: small municipalities can be hit with multi-million judgment. If you represent a small community, never use your size as a basis for assuming that a small insurance limit will be sufficient.

It is true, however, that larger municipalities usually have a higher frequency of claims, so that the odds increase that one or more of these claims will be severe. But, for example, a multi-million dollar claim can result from a police pursuit in a community with three police officers or with 30.

Crime Insurance: Your largest exposure to a crime loss probably is employee theft. Because this is an uncomfortable topic to even consider, this loss exposure often receives less attention than others do. The result could be that your limit of coverage is an amount recommended by your insurance representative, without any analysis as to what your actual exposure to loss might be.

Crime insurance usually has a deductible so that the municipality assumes, as a cost of doing business, "minor" theft such as pilferage of office supplies.

But a severe case of embezzlement may take place over a long period of time and involve large sums. If you are uncertain about the ability of your internal financial controls to deter or detect fraud, at least make sure you are adequately insured.

We'll discuss risk management techniques and sources of information to control this exposure in the next "Tips" column.