Beyond City Hall: Insuring water and sewer authorities

WHEN most agents and brokers think about public-entity business, arranging insurance for cities, counties and school districts is what comes to mind. But there are many other governmental units that need protection too, and I've built my career serving their needs. Among these organizations are water and sewer authorities, which I'll discuss in this article. I'll also touch on housing authorities.

I work primarily in New Jersey and Pennsylvania, although I've also done business with authorities in New York. In the first two states, there are more than 250 water and sewer authorities. Some serve a single, large municipality; others provide services to multiple communities.

Generally, water and sewer authorities are run by boards of commissioners, who are appointed by the cities, counties or townships they serve. The board members typically hire an executive director to run the day-to-day affairs of the authority. The authorities' revenue usually comes from a combination of property taxes and user fees.

Unlike school districts and municipalities, many of which buy their insurance effective July 1 or Jan. 1, water and sewer authorities have no common renewal date. This makes life easier for brokers writing such business, since it spreads the work more evenly throughout the year. This spread of business also makes for more financial stability. For instance, losing an important market shortly before Jan. 1 or July 1, will not affect brokers writing water or sewer authorities as severely as those catering to school districts or municipalities.

Like other public entities, water and sewer authorities benefit from a number of laws that may not be applicable to other commercial accounts. In New York, New Jersey and Pennsylvania, for instance, water and sewer authorities ordinarily qualify as self-insurers for certain lines of coverage, such as general liability, auto liability and workers comp. The resulting flexibility has been important to authorities. In the past five to seven years, the number of insurance markets serving public entities has shrunk. To cope with the reduction of markets, as well as gain more control over their insurance, some authorities in New Jersey enter the MUAJIF (for Municipal Utility Authority Joint Insurance Fund). Other public-entity JIFs exist in New Jersey, while similar organizations, such as pools and reciprocals, serve governmental units in other states. These pools, JIFs and reciprocals potentially are assessable and have joint and several liability. One of the advantages I can offer water and sewer authorities is the ability to arrange guaranteed-cost coverage through private insurers or help place their coverage in pools, JIFs or other alternative-market mechanisms.

As with other public entities, a water or sewer authority's selection of an agent or broker may be at least partly political. If I see that an authority has been with a particular agent for many years, I assume there's a reason for that longevity and that it would be extremely difficult to unseat the incumbent.

Rather, I look for authorities that buy coverage with the help of outside insurance consultants. The consultants, who draft bid specifications and oversee the bidding process, largely take the political factor out of the buying decision, giving an out-of-town broker like me a legitimate shot at the business.

Probably less than half of the authorities in my territory use consultants. Those that do include smaller authorities that may not have full-time risks managers--as larger public entities often do--to handle bidding-related functions. The executive director often wears many hats and may not have the time or expertise to obtain and review bids. In such cases, retaining a consultant can make a lot of sense.

I keep in touch with these consultants and try to develop good working relationships with them. There are several I've known for more than a dozen years. I keep them informed of developments in the marketplace. Their clients are paying them a fee for their services, and anything I can do to help the consultants enhance their value to the authorities strengthens my relationships with both parties.

Timing is important when soliciting authorities. Those that join pools or JIFs generally make a three-year commitment. After an authority is in such a mechanism, you have little choice but to wait three years, then find out if they plan to once again put their insurance out for bid.

When water or sewer authorities bid out their business, I may see their requests for proposals announced in newspapers. Sometimes I get a call from a consultant who, thinking a particular account might be a good fit for me and my markets, asks if I'd be interested in providing a quote. I also contact the consultants periodically, just to see if there is anything coming up that I might be able to help them with.

Generally, a consultant invites a limited number of brokers to submit proposals. The consultant also assigns markets to the competing brokers, although brokers typically can request certain markets, which they may or may not get. Which markets are assigned to whom depends on information the brokers give consultants documenting the strength of their relationships with insurers (volume of business, length of relationship, etc.) and even with specific underwriters. For example, I usually am granted permission to approach NIF Group, a program manager/MGA for public-entity business. I've also known Tony Kaprowski, who heads up their public-entity program, for more than a decade.

Exposures and coverages

Water and sewer authorities can have large and unusual exposures. Including their pump stations, administration buildings and equipment, they may have total insurance values ranging from $5 million to over $1 billion. We need an inventory of all such real and personal property to prepare a submission. We also need a schedule of vehicles and, for workers compensation, information about the size and responsibilities of the workforce.

One of the atypical exposures water authorities have is failure to supply. An interruption of water service could lead to significant losses at some businesses. They or their insurers could sue the water authority for reimbursement. This exposure is addressed by a special coverage that most markets serving water authorities include in their packages. In underwriting this exposure, markets want information about backup facilities, and testing and maintenance of facilities.

For water authorities that have them, dams and reservoirs constitute another unusual exposure. Insurers willing to entertain such risks underwrite them carefully. Water authorities must complete separate questionnaires about such facilities. Engineering reports attesting to the condition of any dams also are required. Pipelines are another important exposure for both water and sewer authorities. Underwriters want to know how many miles of pipeline an authority has, as well as the age of the pipes.

Pollution exposures can be significant for both water and sewer districts. Some markets offer limited pollution coverage for release of disinfectants, but coverage generally must be arranged on a stand-alone basis. While I usually recommend such insurance, smaller entities tend not to buy it.

Generally, markets serving this niche provide all needed coverage within a package, while writing umbrella and public officials liability on a stand-alone basis. Agents also can look outside the package markets to find stand-alone coverage for public officials liability from such insurers as Diamond State, AIG, National Casualty and General Star.

One unusual twist to auto and general liability insurance written for water and sewer authorities and other public entities is that insurers generally provide coverage on a non-auditable basis. This is a great benefit to clients, who don't have to worry about having audits put their budgets out of whack. From a standpoint of service--e.g., adding and deleting vehicles to schedules--it also makes life easier for brokers.

Depending on the size of water and sewer authorities, their premiums may run from $50,000 to more than $500,000, with an average of about $100,000. Despite the significant exposures water and sewer authorities have, their loss experience typically is excellent.

Bid openings

Like other public entities, water and sewer authorities typically make public all bids they receive. (I rarely quote on public entities that do not conduct public bid openings. In such situations, you can't even be sure your quote will be presented. Nor do you have any idea of what you're up against in regard to the competition.) Usually bids are solicited and opened well before the current coverage expires. Then the board or a committee reviews and votes on them. A winner may be announced anywhere from one to five weeks later.

During the interim, brokers sometimes have the opportunity to negotiate over terms and conditions--even price. I feel, however, that brokers should give prospects their best numbers from the beginning, although underwriters sometimes have a different take on the matter and would like brokers to try selling a higher price first. It can be vexing to inform such an underwriter that you've lost to a bid 10% lower than yours, only to be told that the underwriter could have matched it. In that case, why on earth didn't the underwriter do so in the first place? I always want to go in with my best numbers, and I stress that to underwriters. After bids are open, I sometimes can negotiate a minor coverage enhancement, but I usually have little or no room to maneuver on price.

I sometimes get to meet with the board or committee to explain parts of my proposal or otherwise discuss the bid, and I look for every opportunity to do so. While I may work with the prospect's consultant and have a good relationship with him or her, I also do everything possible to build a relationship with the water or sewer authority itself. That's my real prospect--and hopefully client.

Once we land an account, we send out auto ID cards and certificates of insurance right away. For an account we insure on a guaranteed-cost basis, we introduce the in-house claims person who will serve them. For one with a large self-insured retention, we introduce the assigned third-party administrator, who will be the key person ensuring that the client's self-insurance program runs smoothly. We also continue to interact with consultants when they are on a retainer to provide ongoing services. But many are hired solely to prepare insurance specs and oversee the bid solicitations. Then they move on.

Housing authorities

Housing authorities have significant differences from water and sewer authorities. For one thing, I rarely find myself working with consultants in this niche, but rather interact with the executive directors. Unlike water and sewer authorities, housing authorities have little discretion on when to seek bids. Regulations compel them to do so at specified times, which may be every year, every three years or some other interval. Interested brokers simply ask to be added to a housing authority's bid list, then they are contacted at the appropriate time.

Most public entities accept or reject bids for whatever reason they like, but housing authorities pick winning bidders strictly on price, assuming all requested coverages are provided. Indeed, I've been awarded contracts without even meeting the insureds; it can be that impersonal. Given this fact, I'm careful about which housing authorities I pursue. Generally, I shun small housing authorities and those for which I don't think I have the most competitive markets. I also prefer larger housing authorities because they are more likely than smaller ones to retain some of the risk. That gives me an opportunity to offer ways to help them control losses within their retention level. The upshot is that I wind up, at least to a degree, competing on the basis of something other than providing guaranteed-cost coverage at the lowest possible price.

Prime concerns for underwriters include the age and upkeep of buildings and prior property losses. As with water and sewer authorities, they like to see a good spread of risk. A housing authority with $100 million of property is easier to cover if the property is spread around rather than concentrated in one place.

There are a limited number of markets for housing authorities. Like water and sewer authorities, many of them turn to pools, JIFs or reciprocals. We use NIF Group for small and midsize housing authorities. Other markets include the New Jersey Public Housing Authority Joint Insurance Fund and HARRG, a national risk retention group. In Pennsylvania, another market is the Housing Authority Reciprocal Insurance Exchange (HARIE).

I hope this article has prompted you to consider more than municipalities and school districts when evaluating opportunities in the public-entity niche. Water, sewer and housing authorities are just the beginning of the options that may be available to you. Others include fire districts, transit authorities, bridge authorities, park districts, parking authorities and improvements authorities. These entities and others make up your government. They also could make up a significant part of your book of business.