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PUBLIC ENTITIES
| Public entity liability, property and crime exposures
are very complex. Governmental operations are high risk. Law enforcement, prisoner custody, fire fighting and emergency response
are well r |
| Property owned by public entities represents enormous values. Small communities may be responsible for tens of millions or hundreds of millions of dollars in facilities. The concentration of value in educational facilities or water treatment plants is very large. |
| Governmental Accounting Standards Board (GASB) Rule 34 requires public entities to capitalize all land, land improvements, buildings, building improvements, constructions in progress, machinery, equipment, vehicles, infrastructure (pipeline, bridges, roads, etc.), easement, works of art and historical treasures as capital assets. The capitalization is based upon acquisition cost or fair-market value. This property is subject to depreciation on financial statements. |
| There is an enormous disparity between valuation needed on a insurance policy and values reported under GASB 34 accounting. Separately, my audits find an appalling disparity between recognition of public property as required under GASB 34 and the actual identification of property on schedules maintained by public entities. |
| One of the most common findings in audits of public entity insurance programs is property omitted from the insurance schedules. The sums omitted are often millions of dollars in value. The disparity between the listing of property in a public entity facility inventory and property found on physical inspection is simply appalling. One project found school buildings demolished nineteen years earlier were still listed on the insurance schedule while the replacement facilities had been omitted. A common occurrence is to find water treatment facilities representing millions of dollars in value totally omitted from insurance schedules. The sums omitted materially exceed the insurance agent’s errors and omissions coverage. |
| Public entities must also address integration of
their insurance program with penalties that may be imposed by the Federal
Emergency Management Agency (FEMA). The federal Stafford Disaster Relief Act of
1988 requires FEMA to reduce disaster relief funds to public entities and
nonprofit organizations that fail to address flood exposures.
The penalties are often $1,000,000 per damaged structure.
The school boards in two |
| Structuring public entity insurance programs so as
to avoid FEMA penalties is a difficult task. |
| Another public entity problem is responsibility for bond issue financed facilities. Bond documents often impose very strict requirements for insurance coverage to protect the bond trustee and bondholders. The bond document may require periodic certification that insurance on the bond issue financed facility is in compliance with requirements included in the loan agreement. |
| There have been many changes in governmental entity insurance programs during the past twenty-five years. The current insurance market is very limited. Many governmental entity insurance providers have restricted their property coverage so as to impose severe penalties in loss payments. The broad provisions extending coverage to facilities omitted or described in error have been restricted or removed. |
| I have over twenty-five years experience with risk and insurance programs for public entities. I have published material on the responsibility of public entities to structure insurance coverage to avoid severe reductions in disaster relief funds from the Federal Emergency Management Agency. I have substantial experience with bond issue opinion letters. |
| CONTACT INFORMATION: | ||
| James R. Mahurin, CPCU, ARM | Phone: (615)790-0083 | |
| 207 Third Avenue North | Email: jimmahurin@aol.com | |
| Franklin, TN 37064 | Website: www.risk-guide.com | |
