Lessons Learned: The History of Public Pooling in South Dakota

Public entity pooling in South Dakota was a home-grown solution to the national private liability insurance crisis facing all local governments in the 1980’s. Today the national private insurance market seems headed towards another crisis. For liability insurance, the heightened focus on law enforcement operations through the prism of racial/social justice, the COVID-19 pandemic, and increasing cyberattacks targeting local governments, among other factors, could soon render private liability insurance much more costly or even unattainable for public entities. For property insurance, more frequent and severe natural disasters, the COVID-19 pandemic, and increasing convective storm damages (wind and hail) in the Midwest could soon make private property insurance much more costly or even unattainable for local governments. As the history below demonstrates, the local governments of South Dakota joined together to create the public entity pools of South Dakota in response to the last private insurance crisis. These public entity pools are ready to assist local governments in the advent of another such crisis.

The last private liability insurance crisis was discussed in a series of articles published in 1986 in the SDML Magazine. In the January 1986 issue, then-SDML Executive Director Robert H. Miller announced: “In the past year we have seen liability insurance premiums increase by as much as 1,500% for one South Dakota city. We have seen five separate companies send out notice of non-renewal. We have seen insurance companies going out of business and some governments going without insurance.” Id. at 4,

Miller added that the “crisis in liability insurance” had many causes. He indicated that the causes were mostly because private insurance companies, “sold their products at low prices, below the cost of underwriting and invested their premium money at the then high interest rates. They were making money from investments rather than from premium income. Then the stock market and interest rates dropped. The private insurance companies tried to recover their losses by raising premiums. At the same time municipalities were faced with a national increase in lawsuits against cities, public officials and police officers. These lawsuits are up 400% in the past five years.” Id. at 4.

Miller noted that possible solutions included cities forming their own self-insurance programs, and some were choosing to proceed without insurance. Another solution was to establish a liability insurance program through the SDML. Id.

In the February 1986 issue, Miller discussed the 1986 Legislative Session and lamented its shorter duration which left “little time” to address “the insurance crisis faced by every town in South Dakota.” Id. at 4. He urged SDML members to contact their local legislators and the SD Congressional Delegation. He stated the insurance crisis was due to “cash flow underwriting” issues, which were a “polite name for poor investment and even poorer management practices used by insurance companies.” Id.

South Dakota’s Congressional delegation identified and addressed this crisis at the federal level. Both U.S. Senators Larry Pressler and Tom Daschle wrote guest columns on that topic for the SDML Magazine in 1986. In the May 1986 SDML Magazine, U.S. Senator Pressler penned a guest article titled: “Congressional Action on the Insurance Crisis.” Part of the solutions/actions contemplated or already taken included federal legislation allowing risk retention groups to form to collectively purchase liability insurance or to self-insure. Senator Pressler also discussed other pending tort-liability reforms at the federal level. Id. at 15.

U.S. Senator Daschle wrote a guest column in the July 1986 SDML Magazine, titled: “Liability Insurance: Municipal Officials Can Help find a Solution.” Senator Daschle noted that the liability insurance crisis had exploded over the last several months. “The cost of liability insurance has skyrocketed, and perhaps even worse, it is becoming increasingly difficult for municipalities to obtain coverage.” Senator Daschle then also addressed the pending federal legislation on the formation of risk retention groups, including those for local governments and schools. Id. at 15.

During the 1986 SD Legislative Session, the Public Entity Pool for Liability, or PEPL fund was established with the enactment of SDCL ch. 3-22. “Public entities” as defined by that chapter included State Government, all of its branches, agencies, board and commissions. The term also included all public entities established by law exercising any part of the sovereign power of the state, including, but not limited to municipalities, counties, school districts, townships, water districts established pursuant to Title 46A, sewer, sanitary, and conservation districts, and all other legal entities that public entities are authorized by law to establish. SDCL 3-22-2(12).

The SDML confirmed with then-South Dakota Attorney General Mark V. Meierhenry that SDCL ch. 3-22 allowed local public entities to form their own public pools. The SDML formed a Liability Insurance Task Force, or “Insurance Committee,” which consisted of the following members:

        Robert Wagner—City of Watertown, Chair

Ray “Woody” Woodsend—City of Rapid City

        Duane Anderson/Manfred Szameit—City of Sioux Falls

        Bob Miller, SDML Executive Director

The Insurance Committee recognized that the private insurance market was not responding to the needs of local governments so they would need to form their own insurance pool. As Woodsend explains, “the notion of public entities self-insuring was still in its infancy at that point.” The Insurance Committee contacted national and local organizations to gain perspective, including the National League of Cities and Mike Hagan of Hagan Bilbrey, Inc. Hagan connected them with American Risk Pooling Consultants, Inc. or “ARPCO,” who was forming public entity pools in states across the country, including Iowa and Pennsylvania.

In the December 1986 issue, Miller wrote that the Insurance Committee was “moving full steam ahead with trying to find a solution to your insurance problems.” Later that month, Insurance Committee Chair Bob Wagner announced the formation of a worker’s compensation insurance pool for all cities and counties, which would be owned and operated by the local governments that joined it. That pool still operates today as the SDML Worker’s Compensation pool.

Miller also wrote that the Insurance Committee was developing a separate pool for liability insurance that would provide a “stable, affordable and reliable source” for liability insurance. Id. at 4. “Once the liability pool is in place you will be free of the abuse you have been taking from the insurance industry in the past few years.” Miller added that, “you are close to being out of the influence of the strangeness of the insurance market.” Id.

As this process unfolded, the SDML Board of Directors had conversations with the SD Association of County Commissioners (SDACC) and the Associated School Boards of South Dakota about combining their efforts for their respective members. Schools later decided to form their own pools. On December 29, 1986, the SDML Executive Committee authorized the Insurance Committee to act on behalf of the entire SDML Board of Directors to create a Liability Insurance Pool. The Insurance Committee then met that same day to authorize the creation of the “South Dakota Public Assurance Alliance” (SDPAA). The SDPAA was authorized to enter into contracts for the administration of the SDPAA and to begin its operations on January 1, 1987. Sioux Falls and Mitchell were the charter Members of the SDPAA.

In its first year, over 50 municipalities representing 75% of all municipal liability premiums paid in South Dakota joined the SDPAA. On October 6, 1987, the SDPAA held its first Annual Meeting of Members in Brookings, SD. The SDPAA announced that its Members included “Sioux Falls with a population of 81,343 and Davis, with a population 100, and everything in between.”

In early 1987, the SDACC recognized the benefits of public pooling and requested that counties be allowed to join the SDPAA. The SDPAA Board quickly authorized counties and all other local governments to become SDPAA Members. Woodsend notes that Custer County and Lawrence County were, “very interested almost from the beginning,” and were among the first counties to join the SDPAA. By the first Annual Meeting of SDPAA Members that fall, the SDPAA was endorsed by both the SDML and the SDACC for their respective members.

In 1987, the first SDPAA Board of Trustees (n/k/a the SDPAA Board of Directors) was comprised of the following:

        Jack White—Mayor, City of Sioux Falls, Chair.

        Manfred Szameit—Finance Officer, City of Sioux Falls

        Ray “Woody” Woodsend—City Attorney, Rapid City

        Duane Anderson—City Attorney, City of Sioux Falls

        Stan Rietveld—City Councilor, City of Mitchell

        George Opitz—County Commissioner, Lawrence County

The 1987 SDPAA Annual Meeting announced that a risk management questionnaire would be sent to each SDPAA Member to assist in “identifying risks and establishment of a risk management program.” Today the SDPAA’s Loss Control activities, including loss control surveys and numerous training opportunities, are provided through the SDPAA’s long-standing vendor, Safety Benefits, Inc. of South Dakota.

In 1987, the SDPAA provided local governments with general liability, auto liability, auto physical damage, public official error and omissions, property, liquor liability and police professional coverages. In 2015, the SDPAA added Cyber liability and Enhanced Crime coverages to the list of available coverages. In 2016, the public official error and omissions coverages was merged into the general liability coverage.

For its first twenty-five years, the SDPAA was served by third party administrators. Marketing was originally handled by Hagan Bilbrey, Inc. Pool Administration was first performed by ARPCO, then for five years afterwards by Hagen Benefits. For many years, the SDPAA was part of a “pool of pools,” which consisted of seven public pools across the country that were all administered by ARPCO. The investment Trustee during the SDPAA’s entire existence has been the First National Bank of Sioux Falls, SD. The SDPAA’s Coverage Underwriter for many years was Hagan Bilbrey Inc. Claims administration has always been handled locally, first by Crawford & Co., then by Claims Associates, Inc. as of May 1, 1999.

On December 6, 2012, the SDPAA Board of Directors hired Judy Payne to be the first Executive Director of the SDPAA. Payne was the former State Risk Manager, who was the architect and first Executive Director of the State’s risk pool. Payne modeled the SDPAA after other public entity pools, created its first Organizational Chart, and hired a team of five others to assume in-house the functions of administration, marketing, underwriting, and Member Services. The SDPAA Board, with Payne’s assistance, was able to improve its policies and practices so that the SDPAA achieved “Recognition” status with the Association of Governmental Risk Pools (AGRiP). AGRiP Recognition is achieved by only the top 20% of public pools who demonstrate the adoption and adherence to solid fiscal and governance policies. Payne retired in January 2018 after serving the citizens of South Dakota for over three decades.

Today the SDPAA’s 434 Members consist of over 85% of the municipalities and counties in South Dakota, as well as townships, special districts, and other local government entities. Throughout its history the SDPAA Board has maintained stable, competitive rates for their fellow Members. If you are not a Member of the SDPAA but wish to inquire about the many benefits for your public entity, then please contact the SDPAA office at 800-658-3633 option 2 or by email at sdpaa@sdmunicipalleague.org.