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The Nuts and Bolts of Insurance

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The Nuts and Bolts of Insurance Ronda Hollis, CPCU Risk Management Consultant 3/10/05 DAS Risk Management Where Does Insurance, Bonding and Indemnification Fit in the ... – PowerPoint PPT presentation

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Title: The Nuts and Bolts of Insurance


1
The Nuts and Bolts of Insurance
  • Ronda Hollis, CPCU
  • Risk Management Consultant 3/10/05
  • DAS Risk Management

2
Where Does Insurance, Bonding and
Indemnification Fit in the Contracting Process?
  • At the inception of an idea.

3
Important Principles That Apply to Any State
Contract
4
Principle 1
  • Contractually transfer the appropriate risks
    relating to the contract to the contractor.
  • Ask for appropriate insurance and bonds to cover
    the risk.

5
Principle 2
  • Do not indemnify an independent contractor.
  • The state is subject to the Oregon Tort Claims
    Act (OTCA). OTCA limits state liability.
  • Contractors have unlimited liability.
  • Indemnifying a contractor may harm the states
    defense against a claim and make the state
    subject to unlimited liability.

6
Principle 3
  • Dont rely on insurance or bonds to cover all of
    the risks associated with your contract.
  • Many times outcome based statements of work,
    contract administration, and supervision are far
    better risk control measures to protect the
    states interests than insurance or bonds.
  • Insurance and bonds should be thought of as the
    safety net that catches us when everything else
    goes wrong.

7
Asking for Insurance Coverage Alone Does Not
Protect Your Agency From All the Risks of
Contracting
8
Indemnity/Hold Harmless
  • A method of contractually transferring the risk.
  • States that the contractor or service provider
    will not hold us responsible for any claims
    arising out of their negligent acts and that the
    contractor will pay associated claim costs.
  • Provides the state with claims protection.
  • Most effective when used in conjunction with the
    appropriate insurance clauses.

9
Other Contract Components Protecting the States
Interests
  • Statement of Work.
  • Independent Contractor.
  • Insurance and Bonds.
  • Representations.
  • Warranties.
  • Consideration.
  • Retention.
  • Payment schedule.

10
How Does Insurance Work?
  • Insurance policies tend not to overlap with other
    types of policies.
  • There are some perils that insurance policies
    just dont cover
  • Intentional Harm or wrongdoing, other than
    self-defense.
  • Crimes, other than defense coverage until found
    guilty.
  • Specialty markets exist for those perils that are
    too risky, too small, unpredictable, or not
    profitable for traditional insurance markets
  • Pollution Liability
  • Professional Liability

11
Common Policy Parts Pieces
  • Coverages The Insuring Agreement.
  • Exclusions What isnt covered.
  • Who is an Insured Who is covered by the policy.
  • Limits of Insurance How much the insurance
    company will pay.
  • Policy Conditions Restrictions, duties,
    responsibilities.
  • Definitions
  • What the terms mean.

12
What Does Claims Made or Occurrence Mean?
  • Insurance policies are written on a claims
    made or occurrence basis. These terms address
    claims reporting time periods.

13
A Claims Made policy covers all claims reported
and filed during the policy period.
14
An Occurrence policy covers all claims arising
out of incidents occurring during the policy
period, regardless of whether or not the policy
is still in effect at the time that the claim is
made.
15
Coverage Assessment
What kind of insurance or bonds?
16
What Does Insurance Really Cover?
17
Your World has changed!
9-11-01
18
Common Types of Insurance Coverage
  • Commercial General Liability
  • Automobile Liability
  • Professional Liability
  • Workers Compensation

19
Less Common Types of Insurance Coverage
  • Crime
  • Excess or Umbrella Liability
  • Pollution Liability
  • Various Inland Marine Policies
  • Aircraft
  • Garage and Garagekeepers Legal Liability
  • Tail Coverage

20
Commercial General Liability (CGL)
21
Commercial General Liability (CGL)
  • Insurance covering Third Party
  • Bodily injury.
  • Property damage.
  • Limited Contractual liability.
  • Products and completed operations.
  • May also cover personal and advertising injury
    liability.

22
General Liability Insurance Myths
  • General Liability insurance covers the
    indemnification provided in the contract.
  • FALSE
  • General Liability insurance will cover your
    entity if the contractors work is done
    negligently.
  • FALSE
  • There is contractual liability coverage in a
    General Liability policy.
  • MOSTLY FALSE

23
CGL Policy Definitions
  • Bodily Injury The injury of physical tissue by
    an outside force, bodily harm, sickness, or
    disease.
  • Personal Injury Libel, slander, false arrest,
    and invasion of privacy.

24
CGL Policy Definitions
"Property damage means a. Physical injury to
tangible property, including all resulting loss
of use of that property. All such loss of use
shall be deemed to occur at the time of the
physical injury that caused it or
25
CGL Policy Definitions
"Property damage means b. Loss of use of
tangible property that is not physically injured.
All such loss of use shall be deemed to occur at
the time of the "occurrence that caused it. For
the purposes of this insurance, electronic data
is not tangible property.
26
CGL Policy Definitions
"Property damage means As used in this
definition, electronic data means information,
facts or programs stored as or on, created or
used on, or transmitted to or from computer
software, including systems and applications
software, hard or floppy disks, CD-ROMS, tapes,
drives, cells, data processing devices or any
other media which are used with electronically
controlled equipment.
27
What Does This Really Mean?
A CGL Policy will not pay for losses due to a
contractors work on or damage to your agencys
electronic data!
28
CGL Policy Definitions
"Products-completed operations hazard means a)
Includes all "bodily injury" and "property
damage occurring away from premises you own or
rent and arising out of "your product" or "your
work."
29
CGL Policy Definitions "Products-completed
operations hazard (continued)
Except (1) Products that are still in your
physical possession or (2) Work that has not yet
been completed or abandoned.
30
CGL Policy Definitions "Products-completed
operations hazard (Continued)
However, "your work" will be deemed completed at
the earliest of the following times (a) When all
of the work called for in your contract has
been completed. (b) When all of the work to be
done at the job site has been completed if
your contract calls for work at more than
one job site.
31
CGL Policy Definitions "Products-completed
operations hazard (Continued)
(c) When that part of the work done at a job site
has been put to its intended use by any person or
organization other than another contractor or
subcontractor working on the same project. Work
that may need service, maintenance, correction,
repair or replacement, but which is otherwise
complete, will be treated as completed.
32
CGL Policy Definitions "Products-completed
operations hazard (Continued)
  • Does not include "bodily injury" or "property
    damage" arising out of
  • The transportation of property, unless the
  • injury or damage arises out of a condition
  • in or on a vehicle not owned or operated by
  • you, and that condition was created by the
  • "loading or unloading" of that vehicle by
    any
  • insured
  • The existence of tools, uninstalled
  • equipment or abandoned or unused
  • materials or

33
CGL Policy Definitions "Products-completed
operations hazard (Continued)
  • Products or operations for which the
  • classification, listed in the
  • Declarations or in a policy schedule,
  • states that products completed
  • operations are subject to the
  • General Aggregate Limit.

34
What Does This Really Mean?
  • Products and completed operations coverage pays
    claims on behalf of the contractor for damage or
    injury to third parties resulting from something
    the contractor made, repaired, or installed.
  • The bodily injury or property damage to third
    parties resulting from the service would be
    covered not the contractors actual product.

35
CGL Policy Definitions (Continued)
  • Contractual Liability A portion of Commercial
    General Liability coverage that allows limited
    coverage for liability assumed under the
    contract. The coverage allowed by Contractual
    Liability includes
  • Liability assumed under an insured contract.
  • Liability that the insured would have in the
    absence of the contract or agreement.

36
What is an Insured Contract?
  • Per the CGL Policy Definitions, an Insured
    Contract means
  • A contract for a lease of premises.
  • A sidetrack agreement (a railroad term).
  • Easements.
  • Agreements required by municipalities as a result
    of ordinances (not for work done for
    municipalities).
  • Elevator maintenance agreements.
  • Liabilities that would be imposed by law in the
    absence of any contract or agreement.

37
Important CGL Exclusions
  • Personal property in the care, custody
  • or control of the insured
  • What Does This Mean?
  • CGL will not cover property left in the care,
    custody or control of a contractor. This
    exposure should be covered with an Inland Marine
    Policy for the Goods of Bailees Customers.

38
Important CGL Exclusions
  • That particular part of real property on
  • which you or any contractors or
  • subcontractors working directly or
  • indirectly on your behalf are performing
  • operations, if the "property damage
  • arises out of those operations or
  • What Does This Mean?
  • CGL will cover property damaged by the
    contractor, except for the particular part they
    are performing work to.

39
Particular Part Example
A plumbing subcontractor working on a DAS owned
building accidentally starts the building on fire
while soldering copper pipes, and the entire
structure is burned down. If DAS sues the
builder for the loss, the exclusion in question
will apply only to that particular part of the
structure on which the plumber was working.
40
Particular Part Example (continued)
  • Thus, DAS would be covered (on an excess basis
    over any builders risk coverage on the work) for
    damage to all parts of the building other than
    the plumbing and all parts of the plumbing system
    other than the particular part being worked on at
    the time of the loss.

41
Important CGL Exclusions
  • That particular part of any property
  • that must be restored, repaired or
  • replaced because "your work" was
  • incorrectly performed on it.
  • What Does This Mean?
  • CGL will not cover a contractors faulty work.
    This exposure can be covered through a
    Performance Bond as long as the project has a
    specific time frame and specifications for the
    work

42
Important CGL Exclusions
Pollution (1) "Bodily injury" or "property
damage" arising out of the actual, alleged or
threatened discharge, dispersal, seepage,
migration, release or escape of "pollutants.
  • What Does This Mean?
  • CGL will not cover any type of pollution, except
    under very limited circumstances. If your agency
    needs to remediate pollution or has a pollution
    exposure, Pollution Liability coverage is needed.

43
Important Exceptions to the CGL Pollution
Exclusion
  • "Bodily injury" if sustained within a building
    and caused by smoke, fumes, vapor or soot from
    equipment used to heat that building
  • "Bodily injury" or "property damage arising out
    of heat, smoke or fumes from a "hostile fire"

44
Important Exceptions to the CGL Pollution
Exclusion
  • "Bodily injury" or "property damage arising out
    of the escape of fuels, lubricants or other
    operating fluids which are needed to perform the
    normal electrical, hydraulic or mechanical
    functions necessary for the operation of "mobile
    equipment" or its parts, if such fuels,
    lubricants or other operating fluids escape from
    a vehicle part designed to hold, store or receive
    them.

45
Current Case Law
  • Id. at 479. A tort claim, where there is a
    contract between parties, may only proceed where
    there is some kind of obligation owned by one
    party to the other beyond the duties that the
    contract imposes.
  • Id. at 477. Examples of such relationships are
    those between lawyers and clients, doctors and
    patients, or trustees and beneficiaries. The
    court has called these special relationships.

Jones v. Emerald Pacific Homes, 188 Or App 471,
id at 477 479
46
Special Relationships
  • Only Exist When
  • One party has relinquished control over the
    subject matter of the relationship to the other
    party and
  • Has placed its potential monetary liability in
    the others hands.

47
Automobile Liability
  • Insurance that provides coverage for third party
    bodily injury or property damage arising out of
    the use of an insured vehicle.

48
When Do you Need Automobile Insurance Coverage?
  • When the contractor needs to use an automobile
    to provide the services.

49
Commercial Automobile Coverage vs. Personal
Automobile Coverage?
  • Commercial Automobile Coverage is needed whenever
    the contractor will be transporting the states
    employees, clients, etc. or the states property.
  • Use of Personal Automobile coverage instead of
    Commercial or Business Automobile coverage may be
    appropriate for sole proprietors. Note The sole
    proprietor must either carry a Business Use
    Endorsement or insure that business use is
    covered under their personal auto policy.
  • Personal Automobile coverage will not name the
    state as an Additional Insured.

50
Automobile Liability Coverage Considerations
  • Ask questions, such as, but not limited to
  • Will the Contractor transport groups of people
    for the state?
  • Use vehicles or carry cargo that could make an
    accident severe?
  • Have multiple vehicles on the road at any given
    time?
  • Travel out-of-state to do contract work?
  • Bring heavy equipment or trucks onto your
    property?

51
Automobile Liability Coverage Considerations
  • Will driving be only a small part of the
    contractual activities?
  • Is there little or no chance that the state could
    be held responsible for the Contractor's actions
    while driving?

52
Automobile Liability Coverage Considerations
  • Use whenever a Contractor transports mobile
    equipment to the work site
  • CGL insurance does not cover the transport of
    mobile equipment.
  • Ensure automobile liability includes coverage for
    owned, non-owned or hired vehicles.
  • Require CGL coverage for the liability exposure
    arising from the Contractor's operation of the
    mobile equipment. Note Mobile equipment is not
    considered to be an automobile, therefore an
    automobile liability policy provides no coverage
    for the operation of this equipment.

53
Professional Liability or Errors and Omissions
Coverage
54
The Terms Professional Liability and Errors and
Omissions Coverage are used interchangeably.
55
Who Should Have Professional Liability or Errors
and Omissions Coverage?
  • Licensed and accredited specialists such as
  • Doctors or medical practitioners.
  • Engineers.
  • Information technology specialists (computer
    programmers, etc).
  • And non-licensed professionals such as
    interpreters, recorders, testing facilities, and
    research laboratories.

56
What Does Professional Liability or Errors and
Omissions Cover?
  • Pays the financial loss of the state, when the
    covered person fails to perform their
    professional duty.
  • The coverage is specific to the nature of the
    profession.
  • Covers malpractice, misconduct, negligence,
    errors, omissions, or incompetence in the
    performance of a covered act.

57
Workers Compensation
  • Insurance covering employee injuries, disability
    or death.
  • The policy protects the employer from being sued
    by the employee for injuries.
  • Oregon law requires all employers, unless exempt,
    provide this coverage for all subject employees
    working in Oregon.

58
When Should I Ask Questions About Oregon Specific
Workers Compensation?
  • When the contractor has one or more employees
    performing services under the contract in Oregon.

59
Specific questions about Workers Compensation?
  • Call the Department of Consumer Business
    Services, Workers Compensation, Employer Section
    at (503) 947-7815.

60
CRIME COVERAGE
61
Employee Dishonesty, Third Party Fidelity and
(when applicable) Money and Securities
  • Insurance covering loss to money, securities,
    and other property (other than money) caused
    directly by employee dishonesty.

62
When Do You Need to Ask for Employee Dishonesty
Coverage?
  • When the contractor is handling money,
    securities, other valuable property, or data.

63
Third Party Fidelity Bond
  • If the Employee Dishonesty coverage is not
    specifically endorsed to include a Third Party
    Fidelity/Crime Bond, in most cases, it will not
    be comprehensive enough to provide coverage for a
    claim for theft by your contractor or their
    employees that results in a loss for your agency.

64
What is the Difference Between an Umbrella Policy
and Excess Coverage?
65
Umbrella Policies
  • Provide excess coverage over another underlying
    liability policy.
  • Many times provides broader coverage than the
    primary (underlying) liability policy.

66
Excess Liability
  • Pays after the primary (underlying) liability
    policy limits have been exhausted.
  • May not be as broad as primary (underlying)
    liability policy.

67
Pollution Liability Coverage
68
Contractors Pollution Liability Coverage (CPL)
(CPO)
  • Contractors Pollution Liability (CPL) and (CPO)
    protects contractors against claims for
    third-party bodily injury, property damage or
    cleanup costs/environmental damages arising from
    pollution conditions caused in the performance of
    covered operations.

69
Contractors Pollution Liability Coverage (CPL)
(CPO)
  • The coverage applies to sudden and gradual
    pollution events and responds to cleanup costs,
    both on and off the work site.
  • CPL provides coverage for damages due to
    pollution arising from the performance of covered
    operations by the Insured or their
    subcontractors, claims alleging improper
    supervision of subcontractors against the
    Insured, and coverage for claims arising out of
    environmental work performed by the Insured or
    their subcontractor.

70
Contractors Pollution Liability Coverage (CPL)
(CPO)
  • CPL provides this coverage in a claims made basis
    and Contractors Pollution Occurrence (CPO)
    provides this coverage on an occurrence basis.
  • CPL and CPO can have a Professional Liability
    component added. This coverage would likely be
    needed for Environmental Consultants.
  • If the contractor will be transporting hazardous
    materials or pollution that has been removed
    through remediation, check the policy to make
    sure that the transportation exposure is included
    in the coverage.

71
Inland Marine Coverage
72
What is Inland Marine Coverage?
  • Coverage for property which involves an element
    of transportation.
  • Either the property is
  • Actually in transit,
  • Held by a bailee,
  • At a fixed location which is an important
    instrument of transportation,
  • Or is a movable type of goods which is often in
    different locations.

73
Various Inland Marine Coverages
74
Kinds of Inland Marine Insurance
  1. Domestic goods in transit,
  2. Goods of Bailees customers
  3. Moveable equipment and unusual property,
  4. Property of certain dealers, and
  5. Instrumentalities of communication and
    transportation.

75
Goods in Transit
  • Types of Carriers
  • Common carriers are airlines, railroads, or
    trucking companies that furnish transportation to
    any member of the public seeking their services.
  • Contract carriers do not hold themselves out to
    the general public but rather furnish
    transportation for certain shippers for which
    they have contracts.
  • Private carriers haul their own goods or goods
    entrusted to them.

76
Goods in Transit Common Carriers
  • Are regulated by the Interstate Commerce
    Commission or a state public utilities commission
    and are liable to shippers for the safe delivery
    of freight entrusted to them.
  • The amount of liability to the common carrier may
    be limited by the bill of lading, which is the
    contract between the shipper and carrier.

77
Goods in Transit Common Carrier - Bill of Lading
  • A straight bill of lading fixes no limit on the
    amount of recovery.
  • A released bill of lading does limit recovery to
    a specified amount.
  • Generally low and usually are quoted as dollar
    amounts per pound or parcel.
  • The shipper generally has the option to pay an
    insurance charge and declare a value for the
    shipment thereby increasing the limit of the
    carriers liability and obtaining broader
    coverage.

78
Goods in Transit Contract Carrier
  • The liability of contract carriers is defined by
    the contract between the carrier and the shipper.
  • If contracts are initiated by the carrier, they
    often release the carrier from substantial
    responsibility except in the case of extreme
    negligence.

79
Goods in Transit Private Carriers
  • Private carriers usually are carrying their own
    goods and are exposed for the full value of those
    goods if they are damaged or destroyed, subject
    to the Terms of Merchandise Sale.

80
Goods in Transit Private Carriers Terms of
Merchandise Sale
  • F.O.B means free on board and indicates the
    point at which ownership and exposure to loss
    shift from the seller to the buyer. For example
  • F.O.B. shippers loading dock means that the
    transit exposure would be the buyers once the
    goods are on the shippers loading dock.
  • F.O.B. destination means that the transit
    exposure would be the sellers until the goods
    reach the buyers destination.

81
Goods of Bailees Customers
  • A bailment exists when goods are left to be held
    in trust for a specific purpose and returned when
    that purpose has ended.
  • The bailor is the owner of the goods.
  • The bailee is the one in possession of the goods.
  • Almost any person or enterprise that accepts the
    property of the state for storage, service,
    repair, or processing needs to carry an Inland
    Marine Policy for the Goods of Bailees Customers
    in order for this property to be covered for loss
    or damage while in the bailees possession.

82
Inland Marine Coverage Instrumentalities of
Communication and Transportation
  • Exposures related to transportation (rolling
    stock, bridges, and tunnels) can be insured using
    inland marine insurance.
  • Inland marine insurance can also be provided on
    instrumentalities of communication such as
    television towers and transmission equipment.

83
Other Types of Inland Marine Coverage
  • Tractors, mobile equipment, cranes, and backhoes.
  • Computer equipment.
  • Livestock.
  • Fine arts.
  • Patterns, molds, and dies.
  • Partially completed products that are sent to
    another location for completion or processing.
  • Valuable papers, records, records of accounts
    receivable.
  • Goods on exhibition.

84
When Should Your Agency Require Inland Marine
Coverage?
  • When agency goods or property are being
    transported by another entity.
  • When agency goods or property are left in the
    care, custody, and control of another entity.
  • When a contractor is transporting state equipment
    from one place to another.
  • When state property is placed on exhibition by
    another entity e.g. artwork, historical
    documents, artifacts, etc.

85
Builders Risk Coverage
  • Inland Marine Insurance that provides direct
    damage coverage to buildings or structures under
    construction.
  • Also covers foundations, fixtures, machinery, and
    equipment used to service the building,
    materials, and supplies used in the course of
    construction.
  • Fire, theft, and vandalism are the most frequent
    claims.

86
When Does Your Agency Need to Ask for Builders
Risk Coverage?
  • When a building is being constructed.
  • When substantial alterations will be made to an
    existing structure i.e., bearing walls, lifting
    foundations, extensive construction.

87
When Your Agency Doesnt Need to Ask for
Builders Risk Coverage
  • For construction to an existing building that
    does not involve structural modifications, or
    substantial alteration of the building.
  • For construction of structures other than
    buildings e.g. tunnels, bridges, roads, culverts,
    etc.

88
Builders Risk Installation Floater
  • Usually an add-on to a Builders Risk Policy, but
    may be purchased separately by subcontractors on
    the project.
  • Insurance that covers machinery and equipment of
    all kinds during transit, installation, and
    testing at the purchasers premises.
  • Theft and vandalism are covered.

89
When Should You Require a Builders Risk
Installation Floater
  • When a building is being constructed, repaired,
    or remodeled and there will be
  • More than 10,000 in building materials and
    supplies at a storage location, or in transit
    that are intended to become a permanent part of
    the building.

90
Builders Risk Occupancy Clause
  • An add-on to a Builders Risk Policy.
  • Allows Builders Risk coverage to continue once
    the owner or tenants occupy a building under
    construction prior to substantial completion of
    the building.
  • If not purchased, Builders Risk coverage ends
    once the building is occupied by the owner or
    tenants.

91
Aircraft Liability
  • Covers liability for bodily injury and property
    damage to others (i.e., injury to, or death of
    persons outside the aircraft as well as property
    damage or destruction done with the aircraft),
    arising out of the ownership, maintenance, or
    operation of an aircraft.

92
When Do You Need Aircraft Liability Coverage?
  • When the contractor is using an airplane to
    provide the contracted service.

93
Aircraft Liability Coverage Considerations
  • If the contract involves the aerial application
    of any chemical, fertilizer, seed, or bait
    add Aircraft Aerial Application Liability
    Coverage.
  • Check the qualifications and certifications of
    the pilot.
  • If carrying state passengers on behalf of the
    state, make sure that
  • (1) The pilot is certified to carry
    passengers
  • and
  • (2) The Aircraft Liability provides coverage
  • for the passengers on a per seat
    limit.

94
Garage and Garagekeepers Legal Liability Coverage
95
Garage Liability Coverage
  • Covers garage operators for liability, medical
    payments, and automobile physical damage arising
    out of the operations of auto dealers, service
    stations, auto repair shops, and parking lots.
  • Includes General Liability coverage for garage
    operations.

96
Garagekeepers Legal Liability Coverage
  • Coverage for autos left for service, repair,
    storage, or Safekeeping.
  • The limits of coverage should be high enough to
    cover the total value of any autos left for
    safekeeping (yours and others) at any time.

97
What About Self-Insurance?
98
Before Accepting Self-Insurance
  • Make sure the contractor has the financial
    stability to be self-insured. Ask for
  • Audited financial statements of their
    self-insurance fund.
  • Assurance that funds have been set aside in a
    funded reserve to pay claims.
  • Ask for policies, procedures, or other adequate
    documentation demonstrating the contractors
    ability to adjust, process, settle, litigate, and
    pay claims.

99
Tail Coverage
  • Can be purchased to extend the period of time a
    claim can be reported for a claims made policy.
  • Should be required when a contractor provides
    insurance coverage that is on a claims made
    basis.

100
What is a Bond?
101
(No Transcript)
102
What is a Bond?
  • A Surety Bond is a risk transfer mechanism that
    performs the following functions
  • Guarantees that the bonded project will be
    completed according to the terms of the contract
    and at the determined contract price.
  • Guarantees that the laborers, suppliers, and
    subcontractors will be paid even if the
    contractor defaults.
  • Relieves the owner from the risk of financial
    loss arising from liens filed by unpaid laborers,
    suppliers, and subcontractors.

103
What is a Bond? (Continued)
  • Reduces the possibility of a contractor diverting
    funds from the project. 
  • Provides an intermediary (the surety) to whom the
    owner can air complaints and grievances.
  • Lowers the cost of construction in some cases by
    facilitating the use of competitive bids.

104
Bonds?
  • Bonds are different from insurance.
  • A bond is a simple guarantee.
  • If there is a loss, the bonding company (Surety)
    will pay but will seek full reimbursement from
    the contractor.
  • Premium is based on the contractors loss
    experience, assets, and finances.

105
Why Require Insurance and Bonds?
  • You can contractually make the provider of the
    good or service responsible for their negligence.
  • However, if the contractor does not have a way
    to pay for these losses, then the contract alone
    will not protect the state. Insurance and bonds
    are ways to backup contract indemnity statements.

106
What Are The Typical Kinds of Bonds Used in
Contracts?
107
Bid Bond
  • Provides financial assurance that the bid is
    submitted in good faith and that the contractor
    intends to enter into the contract at the bid
    price and if stated in the bid, provide the
    required performance and payment bonds.

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Performance Bond
  • Protects the state from financial loss should
    the contractor fail to perform the contract in
    accordance with contract terms and conditions.

109
Payment Bond (Labor Materials Bond)
  • Guarantees that the contractor will pay certain
    subcontractors, laborers and material suppliers
    associated with the project.

110
Maintenance Bond
  • Protects the state against defects in
    workmanship or materials (usually for two years)
    after the contractor has completed the work.

111
Additional Bond Information
  • Bond terms are usually 12 24 months.
  • The bond amount requested depends on the risk of
    the contract.
  • In most cases, bonds cost about 1 - 3 of the
    contract amount.

112
Coverage Assessment
How much insurance?
113
Two Schools of Thought
114
Traditional Contract Risk Assessment
  • What is the activity?
  • Who could be harmed?
  • What could go wrong?
  • How bad could it be?
  • How much could it cost?
  • Assignment of insurance amounts based on the Risk
    Rating.

115
Use the risk rating to set insurance and bonding
limits.
Severity
INSIGNIFICANT MINOR MODERATE MAJOR CRITICAL
ALMOST CERTAIN M H E E E
LIKELY M M H E E
POSSIBLE L M H E E
UNLIKELY L L M H E
RARE L L M H H
Likelihood
116
E Extreme Risk
  • First, consider not doing the activity.
  • If you must, you will need to decide how much a
    potential loss could cost?
  • In general, risks at this level warrant more than
    1 million in coverage.

117
H High Risk
  • Could a potential loss cost in excess of 1
    million? If so, ask for more coverage.
  • Make sure your assessment considers all costs of
    potential losses.
  • Risk Management would not recommend limits of
    less than 1 million for High rated risks.

118
M Moderate Risk
  • Standard limit of insurance is 1 million.
  • Assessment should consider all costs of potential
    losses.
  • If assessment reveals potential loss in excess of
    1 million, your risk may actually be high (see H
    for High Risk.)

119
L Low Risk
  • If risk is minimal, this is the area where
    coverage and limits may potentially be flexible.
  • Standard limit is still 1 million.
  • In the case of minimal risks, the agency could
    make a business decision to lower the limits of
    coverage.
  • Risk Management would not generally recommend
    insurance limits of less than 500,000.
  • If the risk assessment reveals only
    minute risk, agency could make a
    business decision to waive coverage.

120
OR
121
Try Backing Into the Coverage Amount
122
Coverage Assessment
  • Analyze the perils covered by the type of
    insurance you will be requiring.
  • Looking at the perils, and analyze if these
    perils exist in the performance of the contracted
    work.

123
Coverage Assessment
  • For each peril that exists in the contracted
    work, perform a risk assessment of
  • Who could be harmed?
  • What could go wrong?
  • How bad could it be?
  • How much could it cost?
  • Rate the perils and assign insurance amounts
    based on the Risk Rating.

124
Supplemental Clauses
ICING ON THE CAKE
125
Additional Insured
  • Protects the state when named in an action that
    is not its responsibility or fault.
  • Ensures that the contractor or service providers
    insurance company will expend funds to have the
    states name removed.
  • The state benefits by not having to use its
    assets for litigation purposes.

126
Additional Insured
  • Should be issued as an endorsement to the
    contractors insurance coverage.
  • The endorsement to the contractors insurance
    coverage may be issued on a blanket basis that
    applies to any entity the contractor enters into
    a contract with.

127
Notice of Cancellation or Change
  • Requires the contractor or service providers
    insurance company to notify us if
  • There is a possibility of the policy limits being
    exhausted.
  • The policy is cancelled or non-renewed.

128
Certificates of Insurance
129
Certificate(s) of Insurance
  • Requires the contractor to prove to the state
    that it has met the insurance requirements of the
    contract.
  • One way to prove this request is by submitting a
    Certificate of Insurance stating the coverage and
    policy limits.

130
What Does SIR Mean?
  • Stands for Self-Insured Retention.
  • Works like a deductible.
  • If you see this on a Certificate of Insurance, it
    means the contractor will perform all the
    functions normally undertaken by an insurance
    company for claims within the SIR.
  • Any losses must exceed the SIR amount before the
    insurance company will handle the claim.

131
What Document(s) are Acceptable to Verify
Insurance Coverage?
  • Certificate of Insurance.
  • Letter from corporation stating they are
    self-insured. This should be accompanied by a
    financial statement, unless you are certain about
    the entitys financial stability.
  • Letter from bank stating the amount held in
    reserves to pay claims and lawsuits.

132
  • Make sure the coverage and policy limits match
    the contract requirements.
  • Look at the policy effective date and expiration
    dates to make sure they coincide with the
    contract term. If not, request another
    certificate several months before the policy
    expires.
  • The State of Oregon or your agency is named as
    the certificate holder and additional insured.
  • What do the comments in the description section
    say? Contact the agent with any questions.
  • Is there an SIR (self-insured retention) listed?

133
Reading Certificates of Insurance
134
Contractual Risk Assessment Example
  • Lottery Purchase of Poker/Slot Machines

135
What is the scope of the contractual activity?
  • What is the overall activity?
  • Procurement of 325 Video Poker/Slot Machines

136
What are the activity components?
  • Design and development of specifications for the
    machines.
  • Manufacture of the machines.
  • Quality control and testing.
  • Transportation of the machines to the Lottery
    Warehouse.

137
  • When and where does the activity
  • take place(s)?
  • Victoria B.C.
  • 5/26/05 through 11/30/05
  • Who will be performing the
  • activities?
  • Victoria Games, Inc.
  • ABC Trucking, Inc. a Common Carrier, F.O.B.
    Shippers Dock

138
  • Will the contractor interact with
  • the public, staff, vendors, etc.?
  • There will be interaction between the
    manufacturer and various Lottery employees during
    design, development, manufacturing, and quality
    control.
  • The Common Carrier will have interaction with
    Lottery employees during the delivery of the
    machines to the Lottery Warehouse

139
  • Will there be any hazardous materials
  • involved?
  • Only at the manufacturing site and related to
    property disposal of the machines when they are
    no longer useable. The manufacturer has all
    appropriate premises coverage for the on-site
    pollution exposure and maintains regulatory
    compliance. Lottery has made arrangements for
    appropriate disposal of machines.

140
What could go wrong? Who could be harmed?
Bodily Injury
  • Bodily injury and/or illness to contractor
    employees on-site.
  • Bodily injury and/or illness to Lottery employees
    on-site during design, development, quality
    control, and testing.
  • Bodily injury to vendors or patrons of the
    machines if they are defective and start a fire,
    cause electrocution, sharp edges, etc.

141
What could go wrong? Who could be harmed?
Property Damage
  • Machines could be damaged at the manufacturers
    location or during transport.
  • Machines could be defective and cause a fire at
    the vendors location.
  • Machines could be stolen while in transit.
  • Machines could improperly pay out causing
    financial loss.

142
What could go wrong? Who could be harmed?
Environmental Damage
  • It is unlikely that the Lottery would be held
    responsible for pollution exposures during the
    manufacturing process or transportation.
  • The Lottery has already made arrangements for
    appropriate disposal of machines.

143
What could go wrong? Who could be harmed?
Design Flaws
  • Faulty manufacturing due to improper design.
  • Dangerous conditions in machines due to faulty
    design.
  • Payouts of machines could be defective, causing
    financial loss to the Lottery and vendors.

144
What could go wrong? Who could be harmed?
Liability
  • Bodily injury and/or illness to the vendor or
    patrons using the machines.
  • Damage to property of vendor or near or adjacent
    property owners due to conditions in machines
    that causes fire.
  • Financial loss to vendors if machines are
    defective an cause improper payouts.
  • Financial loss to patrons if machines are
    defective and dont pay out as much as they
    should.

145
  • Is there any impact on workload or
  • damage to our systems?
  • - Delay in installation and implementation of
    marketing program for machines in vendor
    locations.
  • - Additional costs for repair or re-design of
    machines.

146
What are the potential loss exposures associated
with this activity?
  • Bodily injury
  • Property damage
  • Design flaw
  • Liability

147
Rate the Severity of Each Potential Loss
Exposure. How bad can each loss be? What could
it cost?
  • Bodily Injury Minor, Hundreds to Thousands
  • Property Damage Major, Thousands to Millions
  • Design Flaw Critical, Thousands to Millions
  • Liability Major, Thousands to Millions

148
What is the Likelihood That Each of These
Potential Losses Will Happen?
  • Bodily Injury - Unlikely
  • Property Damage - Possible
  • Design Flaw Possible
  • Liability Possible

149
Use the Risk Rating to Set Insurance Limits
Severity
INSIGNIFICANT MINOR MODERATE MAJOR CRITICAL
ALMOST CERTAIN M H E E E
LIKELY M M H E E
POSSIBLE L M H E E
UNLIKELY L L M H E
RARE L L M H H
Likelihood
150
Determine the Risk Rating or Level of Risk for
Each Loss Exposure.
  • Bodily Injury Low Risk
  • Property Damage Extreme Risk
  • Design Flaw Extreme Risk
  • Liability Extreme

151
Weighing the Value of Opportunities
Rating Value Description (Opportunity)
1 Insignificant Minor budgetary, funding, or resource gain Little or no gain in public and/or client relations.
2 Minor Low budgetary, funding, or resource gain Some gain in public and/or client relations.
3 Moderate Moderate budgetary, funding, or resource gain Adequate public and/or client relations.
4 Major Major budgetary, funding, or resource gain Good public and/or client relations.
5 Critical Huge budgetary, funding, or resource gain Excellent public and/or client relations.
152
What Could Be The Opportunities On This Project?
  • Funding for government.
  • Good public perception for the effective
    negotiation with vendors, effective installation
    of machines.
  • Good vendor relations for effectively managing
    implementation of the machines.
  • Economic stimulation from additional funding
    sources.

153
Determine Non-Insurance Risk Control Measures
Bodily Injury
  • Include safety protocols and training
    requirements in the contract.
  • Verify that all of the contractors employees are
    properly trained and/or certified as required for
    the scope of work.
  • Verify that all Lottery employees going to the
    manufacturers location are properly trained
    and/or certified as required for the duties they
    will perform.
  • Require the contractor to log all incidents and
    to include mitigation strategies for preventing
    the incident in the future.

154
Determine Non-Insurance Risk Control Measures
Property Damage
  • Contractual terms that hold the contractor
    responsible for damage to the machines while on
    their premises.
  • Contractual terms that hold the contractor
    responsible for defects in the product that are
    not discovered during quality control or testing.
  • Negotiation of contract with manufacturer and/or
    common carrier for responsibility for machines
    during transit and security protocol.

155
Determine Non-Insurance Risk Control Measures
Design Flaws
  • Lottery review of manufacturers design work
    prior to production.
  • Use of best practices in design work.
  • Require high levels of knowledge, skills, and
    experience of manufacturers design staff.
  • Lottery oversight of design work and
    manufacturing application during all phases of
    project.
  • Contractual warranty of design work and retention
    of manufacturer compensation until work is
    inspected and found to be satisfactory.

156
Determine Non-Insurance Risk Control Measures
Liability
  • In depth review and supervision of manufacturers
    quality control and testing of machines for
    electrical components and other parts that could
    cause bodily injury, property damage, or
    financial loss to vendors, patrons, or others (as
    appropriate).
  • Warranties on the machines that cover potential
    defects found after installation.

157
Assignment of Insurance Coverage
  • Bodily Injury Low Risk CGL.
  • Property Damage Extreme Risk CGL, Truckers
    Coverage, Inland Marine coverage for Domestic
    Goods in Transit and Goods of Bailees Customers.
  • Design Flaw Extreme Risk Professional
    Liability
  • Liability Extreme Risk - CGL

158
Assignment of Insurance Amounts
  • Commercial General Liability (CGL) 2 million
    per occurrence with 5 million aggregate.
  • Truckers Coverage 2 million per accident.
  • Inland Marine
  • Domestic Goods in Transit The value of the
    shipment.
  • Goods of Bailees Customers The value of the
    product at completion.
  • Professional Liability 1 million per
  • occurrence with 2 million aggregate.

159
Did We Forget Something?
  • Doesnt this project have a pre-determined
    timeframe for completion and detailed
    specifications?

Lottery should consider requiring Performance
Bond for the amount of the contract or their
maximum probable loss if the contractor does not
perform.
160
Bonding Related Questions to Ask
  • How much will it cost to find another contractor
    e.g. RFP, staff time, etc. and complete the
    project if this contractor does not complete?
  • If the contractor does not complete the project
    within the specified timeframe, how much will it
    cost the Lottery and/or vendors?
  • If the product is completed, but not as
    specified, how much could it cost the Lottery if
    another vendor has to fix the machines?

161
The End
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