MONROE COUNTY COMMUNITY SCHOOL CORPORATION BOARD OF SCHOOL TRUSTEES Special Meeting of the School Board April 27, 2011

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1 MONROE COUNTY COMMUNITY SCHOOL CORPORATION BOARD OF SCHOOL TRUSTEES Special Meeting of the School Board April 27, 2011 FOR ACTION: Award Contracts for Property Casualty and Worker Compensation Insurance Coverage Effective April 30, Recommendation: The administration recommends the contracts for all lines of coverage except worker compensation insurance be awarded to Hanover Insurance through The Hylant Group, as agent. We further recommend the contract for worker compensation coverage be awarded to FCCI, again through The Hylant Group, as agent. This award is made based upon The Hylant Group proposals providing the best combination of cost and coverage. Background Information: The MCCSC again worked with Insurance Audit and Inspection Co. serving as our consultant in the process of placing the school corporation s insurance coverage. Proposals were received from four companies. Insurance Audit and Inspection Company s recommendations, and the reasons for their recommendation, are included with this report. Insurance Audit and Inspection Co. recommended the school corporation consider a self-funded worker compensation insurance program as an alternative to our current practice. While this appears to be a viable insurance program worth considering it would represent a major shift in practice requiring the school corporation to assume significant cost risk compared to the current fully insured program. Therefore the administration recommends studying this option in depth during the coming year, continuing to develop our employee safety program and making a recommendation to the Board in 2012 to either pursue a self funded worker compensation program or continue to use the fully insured model.

2 INSURANCE AUDIT & INSPECTION CO., INC Rucker Road, Suite G Indianapolis, IN Fax April 18, 2011 Mr. Tim Thrasher Ms. Barbara Buckner Monroe County Community School Corporation 315 North Drive Bloomington, IN Dear Tim: We have received and reviewed the proposals for Monroe County Community School Corporation resulting from the specifications issued January 11, 2011 on your behalf. The bid specifications were provided to (6) six general lines insurance agencies. The attached spreadsheet is a summary of the proposals received. Our Recommendations: We recommend that the district place their Commercial Package, Auto, Umbrella, School Board Legal Liability, and Law Enforcement Liability with Hanover Insurance through The Hylant Group. We further recommend that the district add the coverages of Earthquake, Flood, Data Breach, and Emergency Event Management to their insurance program (all of these coverages are included on the expiring policies) and increase the limits on the Employee Blanket Bond and Computer Fraud from $100,000 to $250,000; Money & Securities Inside/Outside from $50,000 to $100,000; Forgery or Alteration from $50,000 to $100,000; and the Umbrella from $10,000,000 to $15,000,000. The premium for the required coverages and additional/increased coverages brings the total annual premium to $445,835, which is $11,636 less than the expiring premium. Workers Compensation will be discussed later in this letter. Commercial Package: The Hanover quote has the lowest premium for this part of your insurance program based on comparing limits quoted. Hanover also quoted a $500 deductible for the Inland Marine (currently at $1,000); a $250,000 per occurrence Earthquake and Flood deductible (other companies quoted percentage deductibles or could not provide the limits requested); includes Emergency Event $3,853 annual premium and Data $65 annual premium in this quote (these premiums are included in the $445,835 total); all companies exclude Childs Elementary due to it being in Zone A (see note on page 5 of the spreadsheet for coverage on this location we recommend that the district place the coverage through NFIP and excess through Hanover); Hanover included Business Income with the Extra Expense coverage (no other company did); increased the General Liability Damage on premises rented to you to a limit of $500,000 (some companies would not); Hanover will increase the Crime Coverage to requested optional limits (other companies would, but at more premium and/or higher deductibles).

3 Commercial Auto: The Hanover has the best quote for the district: lower Garagekeepers Comprehensive deductible; will now include Primary Liability for the Special Education teachers under their policy. (The coverage will apply only when the teachers are driving their vehicle in the course of their employment with MCCSC.) Commercial Umbrella: The Hanover $15,000,000 limit (currently $10,000,000) is the best fit for the district. It will go over all of the underlying coverages written through Hanover, plus the Citizens Insurance Workers Compensation quote. We recommend that the district increase the limit to $15,000,000. School Board Legal Liability: The only real difference in the Hanover and lndiana Insurance quote is the premium, with the Indiana quote being lower. However, as neither company will write this coverage by itself, the best choice is the Hanover policy. Law Enforcement Liability: As all other coverages are written with Hanover, the Hanover policy is the best choice as the coverage cannot be written by itself. Workers Compensation: Workers Compensation/Employers Liability insurance is standard coverage from company to company. The only difference being in the premium charged. Some companies will apply credits, where others apply debits; some will apply only credits or only debits; some will apply neither all based on your previous year(s) claims experience. All companies start out with the same state rates and then calculate the premium depending on what they feel is the best charge for their company and the insured. As you can see from the attached spreadsheets we received 16 Work Comp/Employers Liability quotes. There are 3 different types of quotes: First Dollar paid by the company; Deductible quotes; and Self-Insured retention quotes. We have included a definition of each type. Please refer to the Memorandum pages entitled Workers Compensation Risk Financing Options for MCCSC for an explanation on each type. The district must decide between the First Dollar quote and the Self-Insured Retention quote. We are not recommending any of the deductibles quotes due to the premiums quoted. First Dollar Quote: We recommend the $1,000,000 limit $400,329 (expiring premium is $486,187). We feel this is the best fit, of this type, for the district as the limits are higher and the premium is lower. Also, all company loss control services are included in this premium. Further, if the district wishes to contract with The Hylant Group for additional loss control services, the maximum charge would be $10,000 (based on past years services) this can be negotiated with the district as to the type and number of services requested. Self-Insured Retention: We recommend the $1,000,000 limit, with a $300,000 Self-Insured retention, through Citizens Insurance. Both Citizens and Safety National have extensive experience in this type of insurance, and the Safety National quote is a little lower than the Citizens quote, but with Citizens your entire insurance program is with one agent and the loss control services with Citizen are more in tune with the districts needs. Citizens will include 4 days, per year, of loss control services with their quote.

4 Safety National has a minimum charge of $19,000 or a fixed charge of $39,000 included in their quote. Further, the Hanover Umbrella would be excess of the Citizens Insurance policy, whereas Indiana Insurance would not. We recommend the Citizens quote, with the extra loss control through The Hylant group for $10,000. The district needs to decide between these quotes. Both have their good points and bad points, as follows: 1. First Dollar district paying out $400,329 no matter what claims the company pays in claims (only 2 of the last 6 years has the district exceeded this amount); the district does not share in any layer of risk. 2. Self-Insured Retention if the district has a good year for claims you could possibly pay as low as $145,000 or if the district has a bad year, you could pay as high as $424,000 or more. The district cannot foresee what their claims will be in the next year, or several years forward, but if past years are any indication, the best choice for Workers Compensation is the Citizens Insurance quote with the $1,000,000 limit and the $300,000 Self-Insured Retention. (Please see the included attachment entitled Excess and Guaranteed Cost Workers Compensation Cost Comparison for further explanation.) Summary of Recommendations: 1. Place the Commercial Package, Auto, School Board Legal Liability, Law Enforcement Liability, and Umbrella with Hanover Insurance. 2. Place the Workers Compensation/Employers Liability with the Citizens Insurance Self- Insured Retention program. Due to the savings from the expiring premiums, we consider this a very successful bid. Please do not hesitate to contact us with any questions or comments. Please advise the decision of the board on the recommendations, the options chosen, and if Terrorism is to be included on the policies. Sincerely, Becci Despain Staff Consultant PS: Emergency Event Management - $100,000 limit Coverage highlights: Coverage responds to covered emergencies, including a) Actual or attempted violent acts; b) Premises contamination from bacterial micro-organisms transmitted through human contact with food, viruses, etc; c) Suspension of operations due to contaminated food; d) Specified felonies, such as child abduction, sexual assault, or criminal use of a firearm; e) Incidents such as a fire, explosion, workplace accident that result in adverse regional or national news coverage all apply for a maximum of 60 days after the covered emergency event. Covers public and media relations expenses; loss of business income; medical treatments, counseling, and funeral expenses for individuals who were physically injured during the emergency event.

5 MEMORANDUM DATE: April 18, 2011 RE: Monroe County Community School Corporation Workers Compensation Risk Financing Options for Monroe County Community School Corporation Monroe County Community School Corporation (Monroe) has been presented with several proposals for Workers Compensation insurance or self insurance. These proposals employ three different methods of financing risk: Guaranteed Cost insurance, Self insurance, and Deductible Plan insurance. A brief explanation of each is included below. Guaranteed Cost Insurance Monroe is currently insured under a guaranteed cost insurance program. This is fullyinsured, meaning there is no deductible and losses are paid from the first dollar. The premium is determined by the insurance company and is fixed, with the only variable being whether estimated payroll varies when compared to the final, actual payroll. Losses, whether high or low, do not affect the policyholder s cost in a given year or policy period. The premium the policyholder pays includes the cost of claims administration and loss control. The advantage of guaranteed cost insurance is that the policyholder knows what its total cost will be in advance, regardless of how many claims it has, or the dollar cost of the losses incurred from those claims. The disadvantage is that the insurance cost is generally higher because the insurance company bears all of the financial risk. In years when losses are low, the cost of risk typically will be higher than it would be under the two loss sensitive plans discussed below. Conversely, in a year when losses are high, the policyholder s cost of insurance is unaffected for the policy period. Self Insurance Under a self insurance plan, the policyholder accepts a layer of risk instead of transferring the entire risk to the insurance company. The layer assumed by the policyholder is called a self insured retention (SIR). In Monroe s case, the proposed retentions are either $250,000 or $300,000 per claim. Claims that result in payments above these amounts are covered by Excess Insurance to full statutory amounts prescribed by Indiana law. The cost of the Excess Insurance policy is far less than the cost of insurance under a guaranteed cost plan, since the policyholder is sharing the risk. The insurance applies specifically to each claim. In Monroe s case, there is also an aggregate feature, which provides a stop loss to prevent unlimited losses in any one year. Under a self insured plan, claims are managed by a Third Party Administrator (TPA) under a contract with the policyholder. The fees charged by the TPA may be fixed annually or may vary by the number and type of claims presented. Monroe has been presented with both options. The TPA pays medical bills and indemnity payments as they are presented from a loss fund established by the policyholder. The policyholder periodically replenishes the loss fund as claims are paid. However, the TPA does not pay claims until they are presented so the policyholder retains its funds, earning interest on them until payments are required. This can be advantageous to the policyholder, because workers compensation claims are usually paid out over a

6 period of years, which may enable the policyholder to benefit financially particularly if prevailing interest rates are favorable. Another component of a self insured plan is loss control, which can either be provided by the TPA or is available from a third party on an unbundled basis at an additional fee which will vary depending upon the level of service requested by the policyholder. The accompanying spreadsheets indicate whether loss control is included or separate additional charges apply. There are a number of advantages to a self insured plan, but among the most attractive to policyholders is the potential for significant cost savings if claim frequency and severity can be kept in check. The accompanying spreadsheets compare the cost of a fully insured program with that of a self insured program under good, average and poor loss scenarios. Deductible Plans Large deductible plans resemble self insured plans in that the policyholder accepts a layer of risk instead of transferring the entire risk to the insurance company. A fundamental difference between them is that the insurer provides claims administration and loss control services as well as insurance or excess insurance. The insurance company usually advances amounts within the policyholder s deductible to pay for claims when payments are required, thereafter seeking reimbursement from the policyholder. The insurer may require the policyholder to produce a letter of credit in favor of the insurer as security for repayment of amounts the insurer has advanced which fall within the policyholder s deductible. The advantage of a deductible plan is that, similar to a self insured plan, the policyholder can realize a significant savings compared to a fully insured plan in years when loss experience is average or good. Moreover, the policyholder does not have to qualify as a self insurer with the state and does not need to enter into contracts for the claims administration or loss control services. A large deductible plan has a per claim deductible of at least $100,000, although most are in the $250,000 to $300,000 range. Monroe was not offered a large deductible plan. The deductibles offered per claim are nominal, being either $1,000 or $5,000. Even small claims are likely to exceed these deductibles, so the insured will bear small per claim amounts. But, overall in total, the insurer still bears significant financial risk. Accordingly, it should be expected that there would be little savings on the cost of the insurance. In fact, it appears that the deductible program quotes are higher than comparable fully insured guaranteed cost quotes.