By Donald S. Malecki, CPCU

This writer recently received a telephone call from the legal director of a municipality inquiring about the possibility of assistance concerning his employer's property and casualty insurance program. He started out by saying that in reviewing the city's current public official liability policy, he saw so many exclusions he began to wonder what was being covered.

This is not the first such inquiry from a municipality and it is not likely to be the last. Yet, it would seem that these kinds of inquiries are unnecessary because the producer of record should be able to explain the rationale for the exclusions. If that is not case, then the municipality should be seeking a producer of property and casualty insurance who is more knowledgeable on the coverage issues.

Realizing that this municipality would not be willing to invest in additional sums to obtain an analysis explaining the coverage provided by its public official liability policy, this writer, feeling compassionate that day, proceeded to explain in writing the rationale for this type of policy and its common exclusions.

The word common is emphasized in the preceding sentence, because these kinds of policies can and do vary widely in their terms and the exclusions they impose. The same goes for other special policies of municipalities, such as law enforcement liability, ambulance attendants, and fire fighters errors and omissions policies.

In fact, producers who are looking to develop municipal clients need to be very careful about the various policies available. Producers need to invest some time in comparing the policies they intend to market and to become familiar with the kinds of coverages municipalities generally require. It is well worth the investment of time, particularly with those municipalities that are receptive to purchasing their insurance based on the best possible coverage at the lowest possible price (which does not mean the lowest bidder).

It is commonly known in insurance circles that municipalities, generally speaking, are interested in price and nothing else. While that may be true, this writer has found members of city councils to be very interested in insurance and often receptive to paying more for insurance knowing that the protection is better than what is available at a lower price.

Market conditions

The market for municipal insurance is a lot different today from what it was 10 years ago. With the abrogation of immunity in many areas, high loss potential and little or no thought given to risk management techniques, many insurers withdrew from the market, forcing municipalities en masse to go bare or to form pools. Some of the pools that currently exist may provide strength in numbers, but the nature of the protection being provided sometimes is no better (and sometimes worse) than the insurance that individual municipalities can purchase.

Today, the insurance market appears to have leveled out. However, the fact that insurance is available at premiums that are affordable does not necessarily mean that protection corresponds to the good ol' days. It is unclear why some policies are so deficient. It may be that the insurers who draft and sell policies do not understand the unique needs of municipalities, or they operate under the perception that broad coverage should not be provided, and that no one will know the difference anyway.

Public official liability

There really is no mystery to public official liability coverage. If a producer understands the rationale for directors and officers liability insurance, all he or she has to do is apply a similar analysis approach to governmental entities and the coverage they seek. It stands to reason that if the executive officers of a profit-making corporation can be sued for making mistakes or poor decisions that can result in economic loss, so too can the elected and appointed officials of municipalities.

Both such entities are confronted with loss exposures involving anti-trust violations, employment-related offenses, zoning, civil rights, and the usual run-of-the-mill allegations of making, or failing to make, good, practical decisions.

However, there are some differences between a D&O policy and POL policy. For example, the corporation that desires entity coverage needs to purchase it for an extra premium. On the other hand, entity coverage has long been an automatic coverage feature of most public official liability policies.

The POL policy, unlike the D&O policy, also includes employees and volunteers as insureds. This is an important feature that can save the municipality money. One reason is that the municipality does not have to purchase a separate firefighters errors and omissions liability policy. All too often firefighters maintain they need their own E&O liability policy when, in reality, the POL will serve that purpose. In fact, the POL can provide better and broader protection in some cases than what a separate policy for firefighters can provide.

Producers need to keep in mind that law directors or attorneys commonly serve as members of boards and likely need coverage for the opinions they render professionally dealing with municipal government. The policy therefore that flatly excludes professional liability needs to be amended to include the professional decisions of attorneys while serving in their capacities as members of boards.

Key feature of coverage

The key feature of any insurance policy is the insuring agreement or so-called "broad grant of coverage." If the insuring agreement and the definition of operative terms contained there are not broad in scope, it is not worth looking at anything else. In that light, it is recommended that one look at the policy's definition of wrongful act.

Unless this term "wrongful act" is defined to include any actual or alleged error or misstatement or act or omission or neglect or breach of duty, including malfeasance, nonfeasance or misfeasance, the policy needs to be shelved. Without this broader definition, coverage will not be broad enough to cover the offenses that commonly come about by intentional conduct, such as civil rights.

It is not unusual to find some POL policies that limit their definitions of wrongful act or conduct to negligent acts, errors or omissions. This definition of wrongful act in POL policies is a "red flag" signaling potential problems. A policy with this kind of limited coverage grant does not need numerous exclusions because the coverage, when sought, will be argued by the insurer never to have been provided in the first place.

Exclusions

Many of the exclusions found in the public official liability policy are meant to preclude coverage that is available under other policies. For example, it is not unusual to find exclusions dealing with bodily injury, personal injury, advertising injury, and property damage, simply because these are the subject of commercial general and excess liability policies. The problem, however, is that errors and omissions coverage causing property damage or bodily injury will be argued not to constitute an occurrence under a general liability policy.

Also commonly excluded are damages arising out of law enforcement activities because law enforcement liability policies are available for that purpose. This does not mean that the POL policy necessarily excludes all types of claims that can be filed against a law enforcement agency. There may be some cross-over coverage where the head of the law enforcement agency may have some protection under the POL policy, depending on the nature of the claim.

Pollution exclusions are common with the POL policy today. Given that the commercial general liability policy exclusion is not absolute or total in scope, one will likely find insurers seeking to make the exclusion in the POL policy total, or attempt to make it that way.

Many POL policies exclude claims, demands or actions seeking relief or redress in any form other than monetary damages. Included within this category would be cases involving injunctive relief. A member of the public, for example, may file an injunction with a court asking that the municipality cease the dumping of refuse because of the noise or odor. The costs incurred by the municipality to quash such demands would not be covered by those POL policies that contain this exclusion, even though a purpose of these policies is to cover these kinds of claims.

Another set of exclusions commonly forming a part of public official liability policies deals with legal actions over inverse condemnation and adverse possession. Legal actions by landowners against the municipalities for the following types of offenses generally are not covered.

Briefly, inverse condemnation is a term to describe a cause of action against a municipality or other governmental agency to recover the value of property that has been taken for public use without full compensation. An owner of property, for example, who does not want to sell his or her property to a municipality may find that the next step of the municipality is to condemn the property.

Adverse possession, on the other hand, can mean a situation where a governmental entity has openly occupied or used land for public purposes on a continuous and exclusive basis without challenge by the legal owner. An example is the owner of vacant land near a municipal airport on which the city has built a facility in which to store materials and remains there for the statutory period. If not challenged, the owner risks granting an easement or possibly losing all title to that section of the land.

Some POL policies specifically exclude any claims based on or attributable to any failure or omission of the municipality to effect or maintain insurance of any kind. However, many insurers are willing to delete this exclusion for an additional premium.

The foregoing are the common exclusions of POL policies. There may be others, such as those affecting employment-related offenses. One needs to be extremely careful that the protection of the policy is not entirely "whittled" through exclusions or through limited definitions of terms.

An example is the policy that excludes willful violation of a statute or ordinance. One can understand the probable rationale for an insurer's desire to exclude the willful violation of statute or ordinance. But when the exclusion reads: violation of statute or ordinance, the premium for the policy should be very cheap because most of the civil rights coverage evaporates with the latter wording. In fact, to be safe nearly every tort known can be said to be a violation of some statute or ordinance. Thus, most coverage dealing with liability arising from statute or ordinance is eliminated.

Claims-made policy

Producers need to keep in mind that most POL policies are on a claims-made basis just like D&O policies. However, some insurers have been known to provide POL coverage on an occurrence basis, particularly those insurers of pools. When a municipality decides to leave a pool where coverage has been provided on an occurrence basis, it is very important that the producer take into consideration the so-called "tail" coverage problems.

Sometimes producers do not inquire about the past coverage of municipalities and work under the assumption that the POL coverage has been on a claims-made basis. It can be a rude awakening to find out, too late, when the prior coverage was on an occurrence basis. One of the first questions that producers need to ask about POL coverage, therefore, is how coverage has applied in the past.

Becoming familiar with public official liability insurance is a definite plus for producers. In fact, a good way to open the door to sales is to contact law directors of municipalities because they often are charged with having to make decisions on the purchase of this kind of insurance and they often know very little about the purpose for this coverage and the rationale for exclusions.