3 Ways Public Entities Differ from Other Commercial Exposures

Public entities aren’t your average commercial insurance risk.

From their unique coverage opportunities to their extremely high values, public entities face a wide range of exposures you might not expect based on experience with your more traditional commercial accounts.

Here are three ways insuring a public entity differs from insuring a typical commercial exposure—and what you need to know about approaching these aspects of the business.

Interlocal pools: Public entity pooling has been a viable insurance alternative to the standard market since the early 1980s, when traditional insurance marketplaces struggled to provide affordable insurance coverage for government entity risks. Today, approximately 80% of cities, counties, schools and special districts in the U.S. access insurance coverage or services through pools, according to Brendan Falvey, product line director for public entities for Markel Corporation.

Because pools have multiple members and retain a large amount of risk, “they’re typically able to provide pretty competitive pricing driven by shared costs and savings,” as well as critical value-added risk management loss control and claims management services to their members, Falvey says.

“For a single city that doesn’t have the budget to hire risk management loss control staff, pools typically will have risk management loss control professionals who visit their members and help develop risk management loss control practices,” Falvey says.

But don’t write off the standard market as an option. “Pools are the right answer for many insureds, but not all,” says Chuck Wright, president of Travelers Public Sector Services. “When you’re buying from a standard market, you’re setting the limits that are adequate for a single insured.”

By contrast, “in a pool arrangement, you’re banding together with other public entities and buying a property policy,” Wright says. “Agents need to pay attention to whether the property limits are adequate for the overall exposures of the pool.”

Property schedules: Public entities often have large property schedules spread over wide areas. “They have a lot of concentrations of values,” says E. Stuart Powell, Jr., vice president of technical affairs at the Independent Insurance Agents of North Carolina, whose sister corporation brokers insurance for the state. “We have some universities that have buses in the $600,000-700,000 range and they’re all stored in one lot at night, which is within a mile of a river that has been prone to flooding.”

James R. Mahurin, CPCU, ARM, , has worked with public entities accounts since the 1970s and typically finds that property schedules omit at least 20% of their buildings and structures.

Although many public entities accounts encompass utilities, property schedules may overlook millions and millions of dollars in electrical equipment, pumps, motors, water towers, communications towers, bridges, traffic signal centers, scientific laboratories, major utility pipelines and more, Mahurin says.

“On my most recent assignment, we found about $13 million in previously omitted property,” says Mahurin, who has lectured to state and national audiences on public entity risk for about 30 years. “Personnel in the administrative offices often have no clue what structures are owned, leased, loaned or borrowed—or how to find them.”

Mahurin once found millions of dollars in sole source engineering drawings stored in cardboard boxes in a combustible building. “Some of the documents dated to the 1700s,” he recalls. “The entity had two very large walk-in safes ideally suited for these documents. One safe held the city Christmas decorations and the other safe held their picnic supplies.”

And if property is isolated and underground, coverage may be excluded under some property insurance policies that exclude “building” below the surface of the earth. Consider a nondescript above-ground door beside an isolated road that opens to an underground complex filled with millions of dollars in pumping equipment and power distribution boxes. Incredibly, “the only part of an underground complex eligible for property coverage from some providers may be the doorway,” Mahurin says.

Concentrated locales: For most public entities, in the event of any catastrophe, all values face immediate and simultaneous exposure. “Other commercial risks, they may have a plant in Tennessee and a plant in Illinois. They’ve got that separation,” Wright says. “By definition, a city, a county, a public school—all their property values are concentrated in the same zip code. Make sure the limits you set, whether blanket or some other way, are adequate for that type of exposure.”

For example, as owners and operators of substantial property dispersed over wide areas, public entities may face significant flood exposure. “Water intake and outflow facilities are often in or near designated flood hazard areas,” Mahurin says. “Many buildings were constructed prior to NFIP implementation and are located in very high-risk flood areas.”

According to Mahurin, any structure eligible for flood insurance through the NFIP and located in—or even touching—the 100-year flood zone is required to obtain the maximum available NFIP flood coverage. And failing to procure flood insurance can mean devastating consequences.

“When a public entity fails to procure the NFIP coverage, FEMA will reduce federal disaster relief funds by the amount of NFIP flood insurance the entity could have purchased,” Mahurin says. “Public entities are routinely penalized $5-$25 million in disaster relief funds. A small rural county school board was penalized $12 million following $15 million in damage to facilities.”

Even if your public entities clients achieve full compliance, don’t expect or assume that federal relief will act as an alternative to private insurance or reinsurance. “With stretched budgets at all levels of government, counting on federal relief post-disaster is a tricky proposition—even more so if your client is a repeat claimant,” Falvey says. “In the event of a natural catastrophe or disaster, agents and their clients should direct any potential federal aid to those areas typically not covered by private insurance, such as emergency response costs and long-term economic recovery.”

What three emerging risks will have a big impact on the public entities market in the coming year? Keep an eye on IAmagazine.com and upcoming issues of the Markets Pulse e-newsletter to find out.

Jacquelyn Connelly is IA senior editor.