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
ImportantCGL 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
ImportantCGL 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
ImportantCGL 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
ImportantCGL 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 CoverageConsiderations

• 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 CoverageConsiderations

• 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 CoverageConsiderations

• 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 [phone].

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 TransitCommon 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 TransitCommon 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 TransitContract 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 TransitPrivate 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 TransitPrivate 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 CoverageInstrumentalities 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.

108
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