MEMORANDUM

TO: Pete Sprague, Assembly President

Members, Kenai Peninsula Borough Assembly

THRU: Dale Bagley, Mayor

FROM: Jeff Sinz, Finance Director

Colette Thompson, Borough Attorney

Todd Syverson, Assistant Superintendent

Gary Lamb, Risk Manager

Richard Campbell, General Services Director

DATE: February 6, 2003

SUBJECT: Ordinance 2002-19-33, approving a settlement with AML/JIA and appropriating $250,000 in additional property and liability premiums

Following competitive solicitation for proposals for three years of property and liability coverage issued in the spring of 2001, the borough awarded the contract to AML/JIA, which was the existing provider. AML/JIA quoted approximately $190,000 per year for property insurance and $85,000 for liability coverage. The borough prepaid all three years. AML/JIA was unable to secure reinsurance at a rate that was equal to or less than what was proposed to the borough. Although the bid included the right to cancel coverage, the AML/JIA instead purchased property insurance, honoring its proposal to the Kenai Peninsula Borough, but also suffering a loss of $487,736.45 during fiscal year 2002. Unfortunately, shortly after issuance of that coverage, the September 11, 2001 terrorist attack occurred, and property insurance premiums skyrocketed. For fiscal year 2003, AML/JIA again honored its commitment to the Kenai Peninsula Borough, but in doing so incurred a financial loss of $969,904.

In October 2002, the AML/JIA contacted the local broker, Walters & Associates, seeking to meet with the borough administration in an effort to negotiate premiums. Upon receiving additional information, the borough administration's risk management committee met with the executive director, chief financial officer, and other staff of AML/JIA to review the situation and negotiate a settlement. This ordinance, if approved, would approve the settlement agreement in which the borough agrees to pay the sum of $250,000 to AML/JIA as an additional premium for fiscal year 2003 for property insurance coverage. This will help offset the loss sustained by AML/JIA for this year and is at a rate that the borough is very unlikely to obtain from any other insurer, even for the remainder of fiscal year 2003. As a part of the settlement, the third year of the coverage agreement with AML/JIA will be mutually terminated, and the borough will seek competitive proposals for one year of replacement coverage commencing July 1, 2003. One year in coverage is sought because it is hoped that the markets may soften with declining premiums at the end of the next year. AML/JIA would be considered eligible to submit a proposal for such coverage for the next year.

The administration recommends that this settlement be approved as the least costly alternative. If not approved, the administration expects that AML/JIA will cancel its coverage for the remainder of this year and for next year. The borough would then be forced to obtain alternate coverage within a very short time period. The borough would also pursue whatever legal recourse is available to recover financial damages resulting from the AML/JIA cancellation.

Hearing on shortened time is requested as only one meeting is scheduled in March, which is 21 days after the date of introduction, and the following meeting is not until April 1, 2003. It is important that this be acted on soon to allow sufficient time to finalize the settlement, if it is approved, and begin the process to acquire insurance for the next fiscal year. This was not brought to the assembly earlier as the AML/JIA Board approved this settlement, as described in the accompanying letter from Kevin Smith dated January 13, 2003, after packet closure for the February 4, 2003 meeting.