Fees Too Much for Tiny Tehama, Calif. : Soaring Insurance Costs a Threat to Small Towns

TEHAMA, Calif. —  In his 31 years in town, half of them as pastor of the local church, Mayor Edward Byram has watched the city of Tehama survive floods and drought. But a peril Byram never imagined is threatening to bring the tiny Sacramento River town to its knees.

Tehama, a town of 386 people and a few dozen giant walnut trees, has fallen victim to a new kind of scourge wreaking havoc on the budgets of cities and small counties throughout California this summer--a shortage of the vital insurance that protects governments and their officials from massive lawsuits.

Already this summer, the city of Hollister has halted its fleet of 10 buses to defray the rising cost of liability insurance. Premiums in other cities have increased as much as 1,200% this year because of the shortage, which has been brought on by a tight insurance market. Tehama has so far been unable to find insurance at any cost, even though it has never been sued or paid a damage claim.

Unless the city can find insurance by Sept. 1, Byram and a majority of the City Council say, they may have to resign rather than assume the risk of being held personally liable.

“I couldn’t see losing my home, not at my age,” Byram, who is 81, told a special town meeting last week at the Tehama City Hall. “We would like to serve you. But nobody sues for a couple of thousand any more. It starts at a million.”

The crisis, which is affecting cities across the country, began this year when most of the companies that used to insure cities and counties stopped taking new policies. Without liability insurance, cities and counties are exposed to the full brunt of million-dollar lawsuits for injuries within their borders.

Profits for insurance firms have slipped in the last year, and many companies decided not to continue covering losing propositions such as cities and counties. Those that stayed in the business raised their rates drastically.

Some Have Reserves

Large cities and counties, such as Los Angeles and San Diego, put millions of dollars in reserve to pay lawsuit settlements. But smaller cities and counties do not have enough leeway in their budgets to save that much money and are forced to buy insurance.

Marin County, for example, had its bill raised from $207,000 a year to $1.1 million, and insurance rate hikes for counties have ranged as high as 600%, according to a survey by the County Supervisors Assn. of California.

The League of California Cities says that municipalities have had to pay up to 1,200% more.

Hollister, a city of 11,000 in San Benito County, stopped bus service July 1 after its insurance bill ballooned from $54,000 last year to $205,000 this summer. It was covered for $10 million in losses last year, but the newest offer received by the city this summer would give only $1 million in protection.

Involved in Suits

Another small city, Point Arena on the Mendocino County coast, has failed to find any insurance. The city, population 450, is involved in a pair of million-dollar suits arising from automobile accidents, and the residents who serve as part-time officials cannot afford to be held personally liable.

“A couple of council members are giving serious thought to resigning,” Mayor Kay Spack said. “We’ve worked all our lives to build up what we’ve got, and we don’t want to lose it.”

The local officials are skittish because of a legal doctrine that requires cities and counties--and perhaps their officials, although that is less clear legally--to pay the bulk of a liability settlement even if someone else was largely to blame for the accident.

This legal precedent, called the “deep pockets” rule, exposes local governments to potentially huge settlements and has made insurance companies especially leery of covering cities and counties.

Scrambling for Coverage

Here in Tehama, officials began scrambling after they were notified earlier this summer that its insurance policy with Fireman’s Fund was being canceled on Aug. 1 after 30 years without a claim.

A crisis was averted when the company, which is dropping its coverage of local governments, agreed to extend the policy to Sept. 1. But attempts to buy new insurance have failed, and there is talk of shutting down the city and giving responsibility to the Tehama County Board of Supervisors, which already provides police protection and most other services.

Small cities and counties elsewhere in the state have formed special public agencies to buy insurance jointly, but Tehama has been unable to find such an arrangement.

At the meeting Wednesday night, Byram was joined by two other members of Tehama’s City Council who said they probably will resign if no insurance is found by Sept. 1. “I would probably have to throw in the towel if that’s the way it would go,” Councilman Chris Ray said.

Might Cost $25,000

Late last week, however, a San Francisco broker said he might be able to cover the city. Originally, Byram thought, it would cost about $25,000 a year--or about $65 for every resident, and nearly equal to total city spending on routine operations in a year. As recently as 1983, the city spent only $500 a year for liability insurance.

City officials are hopeful that they can obtain insurance for about $8,000 a year. The coverage will be substantially reduced, and the deductible would deplete the treasury if the city should lose a suit.

City Clerk Carolyn Steffan said that even with the lower cost for insurance, the city will spend more in all than it will take in this year. The city has reserves that will carry the insurance costs for a few years, but another rapid increase would wipe them out, she said.