1 On Tap Summer 2004

What Your System Needs,How to Find It, and How to Reduce Costs

Planning for tomorrow’s problems maynot be the easiest thing to do when awater system is trying to meets today’sneeds. But when that problem is a lawsuitagainst the utility or a worker’s injuryclaim, having a backup—or more specifi-cally insurance—is a must, even for smallsystems struggling to contain costs and staywithin a budget.

Some utility boards and administratorsmistakenly believe they are exempt fromlawsuits because they are a public entity.Consequently, they don’t see insurance asa necessary expense. How wrong theyare. Small utilities can and have beensuccessfully sued.

What insurance should systems have?Lisa Ross of the Oklahoma Rural Water

Association (ORWA) says that at a minimuma utility needs three kinds of insurance.“What is necessary is the general liability,errors and omissions, and bond coverage.Those are the three things that every sys-tem should have. Not all systems haveproperty, so property insurance may not be necessary.”

Liability insurance covers the risk ofincurring legal liability to pay money dam-ages. This insurance guarantees financialprotection for a utility that might berequired to pay damages resulting fromlegally negligent conduct.

The negligent act might cause personalinjury, death, or property damage. Liabilityfor negligence may result not only from theconduct of the utility, but also from the con-duct of the utility’s agents and employees.Liability insurance is sometimes called third-party insurance because the insurance com-pany protects the insured against suit by athird party, that is, the claimant.

Errors and omissions insurance, some-times called professional liability insurance,is coverage for claims arising out of actualor alleged breach of duty, neglect, error,misstatement, wrongful hiring or firing, sex-ual harassment, or financial improprietycommitted by the board in providing waterto customers. This insurance covers areas

Insurance forWater Utilities

By Jamie Knotts • NESC Contributing Writer

www.nesc.wvu.edu 2

of business where general liability cover-age does not. It often covers defense costsand charges and expenses incurred fromclaims or suits filed against the utility’s boardor officers.

Bond insurance covers money andproperty loss as a result of dishonest orfraudulent acts by employees. Such dis-honesty might include theft of property,disappearance and destruction of prop-erty, stolen money, or cashed checks.

Covering Employee HealthcareScott Johnson of Benefit Management

Strategies, LLC in Overland Park,Kansas, is an agent provid-

ing coverage to approxi-mately 50 drinking

water systemsacross the country.He says thatsmall systemsfind it difficultto afford work-er’s healthinsurance.

“Smallerwater systems

find it very diffi-cult to bear the

cost of these (healthinsurance) programs,”

he says. “Many systemstend to have older employ-

ees and the rates for theseemployees are moderate to very high.Older employees can increase the cost of insurance roughly $200 to $400 peremployee per month.

“Generally, water systems are smallgroups having under 10 employees and sothey are limited in the options they have.In most cases, employers choose benefitsfor the employee.” He says employershave a wide range of deductible and co-insurance options they can choose from,but the rates are set by the state, so mostagents have little room to offer discounts.“Rates are controlled by state and whenyou get a quote from me, you get the bestquote I can give.”

Johnson says that states adopted lawsin an effort to control costs. The laws arenot the same in all states and are usuallyadministered by each state’s department of insurance.

“The laws were passed for two rea-sons,” he says. “They felt by leveling theplaying field, if you offer it, anyone canget it. They also thought that by limitingwhat insurance companies could write upin policies, they could control the rates, assort of a community rating concept. Whatit’s done is drive insurance companies outof the business, giving less choices of

providers to water utilities and others.”Johnson says workers want health care

coverage in their benefits package.“Utilities are getting more and more pres-sure to offer this to their workers,” hesays. “It’s a cost squeeze that employersare facing in trying to cover the cost.Health insurance rates are going uproughly eight to 12 percent a year, andthis only adds to this pressure.”

For a utility that wants to offer healthcare insurance, but can’t afford it, there isone option they can investigate. “Systemscan offer to reimburse employees X dol-lars per month to reimburse them onhealth insurance the worker buys,” hesays. “It allows the system to control thecost by giving a flat contribution permonth.” The employees would cover anyadditional costs.

Johnson says this option is not withoutcontroversy. “Some systems are doing thisbut it becomes discriminatory to a point inthat the healthier employees get the bestrates and the older employees get thehigher rates,” he says. “The older employ-ees can’t afford the coverage even withthe utility’s reimbursement, so it becomesa problem for management to consider ‘doI offer any insurance?’”

What’s the best way to find providers?Alan Ice of WesBanco Insurance servic-

es, Inc., in Shinnston, West Virginia, saysthat water utilities shouldn’t have troublefinding a good insurance provider. “Mostcommercial agents can write coverage forsmall systems,” he says. “It’s not compli-cated to write policies. It’s open and shut.But while price is a consideration, serviceis still the most important aspect.”

He suggests that man-agers check with otherwater systems to seewho they are usingor check if the stateinsurance commis-sion recommendsor offers a list ofagents in a partic-ular area. Look-ingthrough the yel-low pages of thephone directory isalso an option. Oneunique feature man-agers should considerwhen choosing an insur-ance provider is how somestates handle their worker’scompensation insurance.

“In most states, workers’ compensationwill be part of the insurance package thatthey must consider,” he says. “But WestVirginia is one of five states where it is

monopolistic in that the state offers thepolicy. Utilities have to go to the stateboard to buy that coverage separately.”

Ice echoes Johnson’s feeling that healthcare coverage is a tremendous expense forsmall water systems. “It is one of thebiggest expenses they have outside ofsalary.” Ice recommends that utilities thor-oughly compare insurance providers toget the best rates. “Each insurance compa-ny will vary from state to state,” he says,“and that means that coverage is going tobe very local.” He notes that joining ahealth maintenance organization (HMO)may be something to consider. “A systemneeds to do a lot of research to get the bestpossible cost and coverage.”

Reduce CostsPenny pinching water boards wanting

to reduce insurance costs do have a fewways to save money.

“Water systems are not much differentthan anyone else,” Ice says. “They can optfor higher deductibles on vehicles andother coverages.” He recommends thatutilities need to construct buildings within fire codes to keep prices as lowas possible. He also suggests that systemmanagers take a close look at theirinsurance claims because fewer claims

keep insurance costs down. Competitivebidding of insurance providers is also away to possibly reduce costs. “It isimportant that an agent make a presen-tation and show both his knowledge ofhis product, and most importantly, hisknowledge of the client’s operation,” Icesays. “The lowest price is not always thebest buy.”

Ice says that it is possible for trainingto help reduce cost, “but for most watersystems, employee skill level is controlledby state mandates and they almost have tohave the training to do the job anyway.”He does note that defensive driver trainingis an important measure that can helplower insurance costs.

“One of the biggest losses I’ve seencomes from employee dishonesty where the directors and employees have very fewchecks and balances on their books,” Icesays. “Folks in these systems need to makesure they have these checks and balanceson inventory, purchases, and on theiraccounting systems. You don’t want thesame person taking payments who also isreconciling accounts. This applies both todirectors and officers, as well as employees.If one person has direct control, thepossibility of a loss is much, muchgreater.” (For more information about

3 On Tap Summer 2004

Health care coverageis a tremendous

expense for smallwater systems.

More information about worker’s compensationis available in the article “Worker’s

Compensation 101: What Employersand Employees Need to Know”exclusively on the NationalEnvironmental Services Center Web site www.nesc.wvu.edu.

www.nesc.wvu.edu 4

companies try to give them too much coverage. If a system buys more than the$25,000 and $100,000 levels, the systemforgoes its rights and can be sued at anyamount over that point. A lot of water sys-tems don’t know this, and I’m sure it’s thesame in other states.”

Incentives Keep Costs Down“We give systems a loss experience cred-

it, which means that if they don’t have aclaim, they get a percentage of their premi-ums back,” Ross says. “If they’ve been in theprogram for two years without a claim theyget five percent of their premiums back.”The amount returned increases with thenumber of years without a claim. “Twelveyears in the program without a claim willget you 28 percent of your premium back.We’ve given over half a million dollars backto the systems that paid premiums.”

The program expects to offer dis-counts in the near future for systemsthat get adequate training. “We’re work-ing on that now,” she says. “By law,board members will need six hours oftraining, and they will get a discount ontheir liability on so many hours of training.”

While Ross says no other state ruralwater associations have comparable pro-grams, she says the ORWA is working tohelp other associations get one started.

“We’ve been told from insurance bro-kers that the market is going up, withproperty insurance rates especially,” shesays. “The rates we offer have never goneup in 12 years. They’ve only gone down.We were set up by people who work indrinking water systems, so it’s set up tomeet their needs.”

For more information about the Oklah-oma Rural Water Association insurance pro-gram, visit their Web site at www.okruralwater.org or call Lisa Ross at (405) 672-8925.

To learn more about different kinds ofinsurance and related topics, go to theInsurance Information Institute’s Web site at www.iii.org.

A version of this article originally appeared inthe Fall 2000 Water Sense. Published between 1995and 2000 by the National Environmental ServicesCenter, Water Sense was a newsletter coveringfinancial and management issues in the waterindustry.

checks and balances, see the article“Checks and Balances: Internal Controlfor Small Water Systems” on page 50.)

Safety Programs Can HelpSteve Pappas, director of loss control

for Indiana-American Water Co., Inc., saysthat an effective loss control and safetyprogram has led to lower insurance premi-um costs in the utilities he works with.

“Lower costs aren’t going to be seenovernight,” he says. “It will take two tothree years at a minimum to see costsavings. Training programs will, overtime, help to reduce accidents and liabil-ity claims, change or modify people’sbehaviors, and lower insurance costs.”

He credits his safety program as a suc-cess at saving the water company money in the past four years. “Everyone has ashared ownership and responsibility,” hesays, “but you need support from all levels,from management down to the workers.”

The safety program Pappas overseescovers workers’ defensive driver train-ing, process safety management, person-al protective equipment, job hazardanalysis at each facility, and hazardouscommunication skills.

Consider Pool InsuranceNot to be mistaken with insurance that

covers you against mishaps while swim-ming, pool insurance is a program thatcombines the resources of insurers of similar interests or characteristics, such as local government pools or water utilitypools. Often created through state legisla-tion, these pools generally offer lowerrates for those participating.

The ORWA has been offering groupinsurance for drinking water systems formore than 12 years. Lisa Ross manages theOklahoma Rural Water Assurance Groupand says utilities in Oklahoma seem to bepleased with the service they offer. “Weare doing pretty good,” she says. “Wedon’t have any trouble keeping people.”

The association offers group insurancefor general liability, auto, errors and omis-sions, property, bonds, and employmentpractice liability. They do not carry healthinsurance.

“In Oklahoma, water systems canonly be sued for $25,000 on propertyand $100,000 on bodily injury, and thismay differ from state to state because ofdifferent laws and tort levels,” she says.“Some states say a municipality or watersystems can’t be sued at all.

“We offer utilities insurance up tothose levels,” Ross says. “Other insurance