Liability Insurance's Skyrocketing Costs Confound Districts
District officials embarking on shopping trips to their insurance agencies this winter had better take along smelling salts: Over the past year, the cost of liability insurance has skyrocketed, many of the longtime vendors have quit the market, and those that do remain are requiring policyholders to shoulder more risk.
Shop until you drop, experts advise, but don't be surprised to see rates rise anywhere between 20 percent and 200 percent this year. They blame the changing market on the flagging economy, the blow to the insurance industry's financial footing on Sept. 11, and an increase in lawsuits involving school districts.
Such hikes in liability-insurance costs come as many districts are also getting walloped by double-digit increases in health-insurance premiums. ("Districts Hard Hit By Escalating Costs of Health Coverage," Jan. 30, 2002.)
The cost of liability insurance varies widely, depending on district size and history. The premium on some policies is $10,000 annually, while others cost as much as $500,000 a year, according to brokers.
In what experts call a "hard market," the impact can be significant for districts that are already strapped for cash because of the economic downturn, said Bob Vogel, the director of government relations for the Montana School Boards Association, which sponsors a group insurance policy used by nearly all of the state's 350 districts.
"The market was very soft for a long time, and a lot of people were vying for your business," added Jerry Roberts, the director of risk management for the Kentucky School Boards Association. "That market has changed. We're seeing not only fewer people who want to play ... but reduced coverage."
His Frankfort-based group provides insurance policies for two- thirds of the state's 176 districts.
It all adds up to bad news for districts that, by law, are often required to hold liability-insurance policies, said Doug G. Kocher, the director of property and casualty for Forrest T. Jones & Co. in Kansas City, Mo., which provides insurance for 1,000 school districts nationwide.
Even those that are not required to do so feel compelled to purchase the coverage as a kind of coat of armor to protect them in case of a lawsuit, he said.
"You sure can't go on without it," Mr. Kocher said. "Suppose something happens?"
Too Big a Gamble?
School districts typically hold several types of liability policies, Mr. Kocher said. Such packages may include insurance for teachers, school board members, school volunteers, district property, and vehicles, such as school buses. The policies cover destruction caused by fire, for example, and financial costs resulting from lawsuits over negligence or sexual discrimination.
During the 1990s, liability insurance was considered to be affordable, Mr. Kocher said. Then, a year ago or so, insurance companies saw their profits eroded amid a flagging stock market, and as a result, began to raise rates, he said. Those losses were compounded by the attacks on the World Trade Center and the Pentagon on Sept. 11, and again the carriers raised prices.
At the same time, underwriting school district business has become a bigger gamble, according to Robert P. Hartwig, the senior vice president and chief economist for the Insurance Information Institute, a nonprofit organization based in New York City that monitors the industry.
Each year, an increasing number of lawsuits are filed against districts, Mr. Hartwig said. Though many cases are settled, he said, insurance companies still must pay lawyers' fees—a considerable cost for carriers.
Given those factors, some vendors have decided to pull out of the sector altogether, leaving school districts with fewer options, Mr. Hartwig said.
Among those that have given up providing insurance or reinsurance policies covering districts are the Columbus, Ohio-based Nationwide Mutual Insurance Co.; The Hartford Financial Services Group Inc., based in Hartford, Conn.; and The St. Paul insurance company in St. Paul, Minn.
Reinsurance companies cover the costs of other insurance companies when they are required to make substantial payouts.
'Backed Into a Corner'
Meanwhile, school officials and the brokers that represent them are hunkering down for a wild ride.
Administrators in Colorado are expecting increases of 20 percent to 150 percent for liability policies that offer less coverage—increases that will cost districts thousands of dollars, said Cheryle Sullivan, the executive director of the Denver-based Colorado School Districts Self Insurance Pool, which provides insurance for 141 districts. In anticipation of the shift in the market, officials there began the bidding process two months earlier than in the past, Ms. Sullivan said.
Moreover, the process has become much more cumbersome, she added. For example, the pool will have to pay $30,000 to have scientists calculate the probability of flooding at every one of the 4,000 buildings it hopes to insure, even though many are located on arid land.
The cost of such policies in Ohio is expected to rise between 50 percent and 200 percent this year, added Dave Harcum, the president of the Harcum-Hyre Insurance Agency, based in Columbus, which helped 720 districts in the state secure liability packages this winter.
Mr. Harcum said he spent one entire year shopping for policies when the districts' carrier discontinued service after 18 years of representation.
District officials in Omaha, Neb., are also having difficulty finding a company to provide insurance.
"We're getting backed into a corner here," said Dennis L. Pool, the assistant superintendent in charge of budget and finance for the 45,000-student system.
He recently got word that his district's school board liability-insurance policy was canceled by the New York City-based American International Group Inc. The carrier no longer provides services to school districts, he said.
Unfortunately, Mr. Pool said, alternatives are scarce.
Officials sent out 12 bids, and only one company, the Chicago-based Coregis Insurance Co., bit. Its quote was only 10 percent higher than the cost of the old policy, but the business is also asking the district to pay a higher deductible—$50,000 vs. $25,000.
"We end up taking on most of the risk," Mr. Pool said, "and we're only covered against the greatest [catastrophes]."
One option may be to form a liability-insurance pool like those in other states, he said. Similar arrangements to cover health-insurance costs have also aided districts in some places.
Such groups are growing in popularity as school leaders work to bring down costs, said Dubravka Romano, the associate executive director for risk management for the Texas Association of School Boards. The group purchases policies on behalf of 400 of the state's 1,000 school districts.
When districts collaborate, they spread around the risk, Ms. Romano noted.
"Over the past six months, our business had gone up probably 25 or 30 percent," she said.
Another way is to assure carriers that school districts pose limited risks, said Mr. Hartwig of the Insurance Information Institute. That could mean hiring additional security guards or better defining a school's sexual-harassment policy, he said.
Making such changes represent long-term investments, Mr. Hartwig said, because the market "does not look like it is going to get any better" for some time.
Vol. 21, Issue 21, Pages 1, 15Published in Print: February 6, 2002, as Liability Insurance's Skyrocketing Costs Confound Districts