President Otis A. Singletary
July 16, 1986
Page 2


The fact that a decision was pending was presented as an information item to
the Finance Committee of the Board of Trustees at the June 24, 1986 meeting.
Don Clapp has subsequently discussed our self-insurance approach with those
members of the Board of Trustees who are on the Finance Committee and Council
of Supervisors, and there seemed to be general understanding of and support
for the self-insurance decision. There was no expressed feeling that the
Board should meet to consider this matter.

We had two alternatives to a program of total self insurance. The first
alternative was based on an insurance quote of $1,495,500 for the occurrence
type of coverage which we have had in the past. However, there were several
significant differences. First, It would require us to cover the first $2.0
million per occurrence and $6.0 million in the aggregrate. These numbers were
$1.5 million and $4.0 million respectively in 1985-86. Second, this $2.0/6.0
million deductible excludes legal defense costs which have historically
amounted to 30-40% of total costs. Third it would exclude any punitive
damages. Fourth, it did provide for $25 million in coverage as opposed to the
$6.0 million coverage for 1985-86. According to the actuary we would also
require a self-insurance fund of $5,002,700 under this option.

The second alternative is based on a quote of $414,100 for what is now called
claims-made coverage. This is very inferior coverage because it effectively
limits coverage to the period of the contract. Claims filed after the
contract expired would be covered only if we purchased basic insurance from
the same carrier and then only up to three years. This limitation effectively
excludes coverage for those most critical areas in which claims normally have
an extended period of discovery(i.e., pediatrics and obstretrics cases).The
total coverage under this contract would have been $5,165,000(807 of first
$5.0 million and 23.5% of second $5.0 million over the $1.5/$4.0 million of
self-insurance). According to the actuary we would also require a
self-insurance fund of $4,869,500 under this option.

The other point which I think is relevant is that the excess carriers have
never paid a cent in claims under this program. We interpret the fact that
the amount of self-insurance varies little whether or not we have the excess
insurance to be a reflection of how little exposure the excess insurer would
have. Even so the premiums have escalated to very unreasonable levels.

He didn't feel the $5,165,000 in claims-made coverage was really worth
consideration because of the very limited coverage, and the $25 million
occurrence coverage would have required an additional $1,148,200 over that
required for the total self-insurance approach.

Sincerely,



Peter P. Bosomworth
Chancellor



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