Insurance lapse leaves school uncovered

Carlton school board met in special session Tuesday to

consider options about an insurance lapse on the high school building.

As of Sunday, Jan. 26, Carlton school district was without insurance on the secondary building, which houses grades 7-12 as well as several Northern Lights Academy classrooms. Because of problems with old electrical equipment, the current insurer, Employers Mutual Casualty (EMC), discontinued the coverage as of the end of the policy's term.

The district is not completely without insurance. Things like liability, and most building contents are still covered at the high school/middle school. South Terrace elementary is still completely covered, with flood insurance for both structures still in force under another policy.

As things stood at the time of the meeting, if the secondary building were to become a total loss for a fire, there would be no payout to restore the building, which has a replacement value roughly estimated at $20 million.

The district was in a time crunch because of unique circumstances. EMC insurance company inspected in December while the policy period ended in January. Although December inspections are normal, most school districts have policies that end on June 30, providing plenty of time for follow-up.

Bill Owens, of Young and Associates Insurance in Duluth, the district's insurance broker, explained the current environment. He started by stating that insurance costs and deductibles are going up across the industry, for several reasons, just one of them being the increased cost of rebuilding. Insurance companies have a narrow focus on the age of Carlton's secondary school, parts of which have been in existence for over a century. As a result, Young and Associates has only three companies willing to insure the building at all, and he presented the board with three options.

The first option was to continue with no insurance for the secondary building, a possibility which got some consideration from the board. Board member Dan Solarz questioned what the district was really getting with the other two insurance options. Option 2 by Atlantic Casualty limited maximum payout to the cash value of the building which the insurance company pegged at $10 million, or roughly half of what it would cost to replace it. Option 3 from Berkshire Hathaway was even lower, only $8 million.

"If we have a total loss, the whole building burns down, coverage or not, we don't have a place for our kids," Solarz said.

Options 2 and 3 were more expensive and differed in coverage. No. 2, which was the cheaper of the pair, covered only fire damage. Something like a roof caving due to snow load, for example, would receive no proceeds. Option 3, by comparison, covered nearly everything, but at a higher cost. Both alternatives would subtract depreciation on all claims. Deductibles were $25,000 on Option 2 and $50,000 on Option 3.

The board agreed that the electrical problem had to be fixed as soon as possible. Head custodian Scott Bodin had already solicited bids, with widely differing estimated costs. He had a written one for $19,000, and a verbal for $55,000. He hoped to have at least two more.

After the meeting, Bodin said it "wasn't a maintenance issue," meaning everything is in good repair, it's just old. There are five electrical panels in question, one of which still has the screw-in type fuses. The others have the old style Pushmatic circuit breakers. "They still work just fine," he said.

In the end, the board voted unanimously 5-0 (Laura Nilsen absent) to go with Option 3 by Berkshire Hathaway, which would reinsure the building as soon as possible. In addition to other considerations, board member Ben Nilsen thought the district could not allow the perception that the building was uninsurable.

The increased cost was believed to be mitigated when agent Owens pointed out that once the electrical problem was fixed, they could probably get back on the old policy or something like it with EMC. Berkshire Hathaway required the year's premium of $44,600 up front but would refund the unused premium if the district terminated the policy early to go back to EMC.

There were still risks. All insurance companies involved would probably require another inspection after the electrical work and could still decide at that time to drop the coverage.