Contractual Insurance
Provisions
Sponsored by:
The Department of Management Services
And
The Department of Financial Services
11/11/2011
Agenda
Welcome, Objective, Introductions
Section I-State Risk Management Trust Fund
Section II-Workers’ Compensation
Section III-Liability and Surety Bonds
Insurance Provisions
11/11/2011
Objective
The objective of this workshop is for each State
professional to leave here with a better
understanding of:
State Risk Management Trust Fund
New statutory Workers’ Compensation
Liability insurance and surety bonds.
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Purpose of Contractual
Insurance Requirements
Contractual insurance requirements provide two major
benefits:
They ensure that a contractor has the financial
ability to pay for damages that result from their negligence
Protect the State from the vicarious liability (the liability
whereby one person is held responsible for the actions of
another) established by our contractual arrangements with
contractors.
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Section I
State Risk Management Trust Fund
Presented by:
Ray Williams, State Liability Claims Bureau
Helen Neubauer, State Employees’ Workers’
Compensation Claims Bureau
11/11/2011
Division of Risk Management
Provides statutorily required coverages to state of Florida agencies:
Workers' compensation (state employees and volunteers).
General liability (negligence of state employees, agents, and
volunteers).
Automobile liability (negligence of state employees, agents, and
volunteers).
Federal civil rights/employment discrimination.
State buildings and property (fire and windstorm).
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Section 768.28 -
Waiver of Sovereign Immunity In Tort
State can be sued in tort for money damages due to negligent
acts of employees, agents, and volunteers committed in
course and scope of employment.
Limits of liability $100,000 per person, $200,000 per
occurrence.
Breach of contract (by the state) claims or liability assumed by
the state under any contract is not covered by Risk
Management.
Risk Management does not cover claims based on delay or
lack of performance.
State does not waive sovereign immunity or increase liability
limits upon entering into a contract or obtaining insurance
coverage for tortious acts.
Illegal for state to agree to indemnify another party or another
State agency (s. 768.28(18)].
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State Risk Management Trust Fund’s
Recommended Contractual Liability Provisions
At a minimum agencies should consider the following provisions
for all contracts.
General Liability coverage requirement for all contractors.
The contractor’s General Liability policy should include the state agency
as an additional insured.
Indemnification language for all contracts.
– Non-construction contracts can include a broad form hold
harmless agreement, whereas the contractor indemnifies, defends,
and holds harmless the State from all liability and costs associated
with claims arising from contract. This provision simply transfers
the liability arising out of a breach of duty by the contractor. The
State may remain liable but the contractor has assumed the
obligation to pay any damages arising out of that liability.
– Because of Florida’s anti-indemnity statute (section 725.06 of the
Florida Statutes) construction contracts can only include a limited
hold harmless agreement. The limited form sometimes referred to
as a comparative fault indemnification agreement applies only to
the extent that the contractor is at fault.
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Advantages of Clear Contractual Liability
Provisions
Protects state agencies from claim costs.
Increases efficiency of claims handling
process.
Increases efficiency of litigation process.
Reduces unnecessary litigation and costs
between state and contractor.
Eliminates benefit to claimant from state
and contractor "pointing fingers".
11/11/2011
State Risk Management Trust Fund’s
Workers’ Compensation Coverage
Who is covered by the State Risk Management Trust Fund
Program for workers‘ compensation?
• Employees and volunteers from all departments of
the State of Florida.
• Other statutory employees.
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State Risk Management Trust Fund
General Information & Potential Problems
Workers’ Compensation Coverage
General Information:
When is workers' compensation insurance required?
• Every employer coming within the provisions of Chapter 440 shall
be liable for, and shall secure, the payment to his or her
employees, of the compensation payable under ss.440.13, 440.15
and 440.16.
• Employer includes the state and all political subdivisions, public and
quasi-public corporations, and any person carrying on any
employment.
• Employment includes all private employment in which four or more
employees are employed by the same employer, or with respect to
the construction industry, all private employment in which one or
more employees are employed by the same employer.
Potential Problems:
Claims from individuals that are not State of Florida employees,
volunteers or other statutory employees.
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Section II
Prepared For:
DMS Insurance Workshop
Tallahassee, Florida
December 3rd, 2003
11/11/2011
DIVISION OF WORKERS’
COMPENSATION
Mission: To actively ensure the self-execution of
the workers’ compensation system through
educating and informing all stakeholders in the
system of their rights and responsibilities,
compiling and monitoring system data, and
holding parties accountable for meeting their
obligations.
11/11/2011
Struck from the previous Statute
Exemptions Not applicable
On Commercial Building
($250,000 project value)
11/11/2011
New Definitions
Construction Industry
Home owners – Acts of construction on
their own property not included
Employee
Includes Sole Proprietors, Partners, and
Independent Contractors, working, or providing
services in the construction industry
Corporate Officer
Includes member of a Limited Liability
Company who owns at least 10% of the Company
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Exemptions (On orAfter January 1, 2004)
Limited to three in the construction
Businesses.
Members of Limited Liability Companies
(LLC’s) are eligible for the construction exemption
Officers must have an exemption on file or they
are an employee.
Officers must be share holders, each owning at
least 10% of the total stock issued by the corporation.
11/11/2011
Exemptions (Continued)
Exemption Certificates apply only to the
corporate officer named on the exemption, and
apply only within the scope of the business or
trade listed on the exemption.
Exempt officers may not recover WC
benefits, and, carriers may not consider an
exempt officer as an employee for determining
premium.
11/11/2011
Exemptions (Continued)
The DFS shall revoke an
exemption if it determines the
officer no longer meets the
requirements of the exemption.
(1/1/2004)
11/11/2011
Stop Work Orders (SWO’s)
A SWO is effective upon all sites for an employer. (10/1)
A violation of a SWO constitutes insurance fraud. (10/1)
SWO’s and Penalty Assessments shall be in effect
against any successor corporation or business entity.
(10/1)
11/11/2011
Stop Work Orders (continued)
SWO’s and penalty assessments shall be in effect
against any successor corporation or business entity
with the same principals or officers. (10/1/2003)
A corporate officer is not eligible for an
exemption if he/she is “affiliated” with a person
who is delinquent in paying a SWO or penalty
assessment. (1/1/2004)
11/11/2011
Powers of the Department
Conduct Investigations
Enter and inspect place of business at any reasonable time.
Examine and copy business records.
Administer oaths and affirmations.
Certify to official acts.
Issue and serve subpoena’s for attendance of witnesses or
records.
Issue SWO’s.
Enforce terms of SWO’s.
Levy and pursue actions to recover penalties.
Seek injunctions.
11/11/2011
Fraud on an Insurance Application
Submitting false, misleading, or incomplete information, on a
workers’ compensation application for coverage with the purpose of
avoiding or reducing the amount of premium constitutes a second-
degree felony.
If the DFS determines that an employer has provided materially
incorrect workers’ compensation information to avoid proper
premium calculations, the DFS must immediately inform the
employers’ insurance carrier which then must commence an on-site
audit of the employer within 30 days. If the carrier fails to commence
an audit, the DFS may contract with an auditor to conduct the audit at
the employer’s expense. The carrier is not required to conduct the
audit if it gives notice of cancellation of the policy within 30 days after
receiving notification from the DFS and an audit is conducted in
conjunction with the cancellation.
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Coverage
Any employer that knowingly employs any
person who has used false, fraudulent, or
misleading oral or written statements as
evidence of identity commits a first degree
misdemeanor. (10/1)
11/11/2011
A Contractor is required to provide evidence of
workers’ compensation insurance or a valid
exemption to from all subcontractors.
A subcontractor is not liable for the payment of
compensation to the employees of another
subcontractor and is protected by the exclusiveness-of-
liability provisions only if the subcontractor or
contractor has secured coverage for the
subcontractor’s employees, and if the subcontractor’s
own gross negligence was not the major contributing
cause of the accident.
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Every employer, when applying for and receiving a
building permit must show proof and certify to the
building permit issuer that it has secured coverage.
11/11/2011
In addition to not obtaining coverage, failure to
secure payment of compensation also includes
materially understating or concealing payroll;
materially misrepresenting or concealing employee
duties to avoid proper premium classification and
materially misrepresenting or concealing
information pertinent to the computation of an
experience modification factor.
11/11/2011
Out of State Employers
Any employer with employees engaged in work in this State
must obtain a Florida endorsement or purchase a Florida
workers’ compensation policy. The coverage must utilize
Florida class codes, rates, rules and manuals. Failure to do so
constitutes a second-degree felony.
All Construction industry employees are assigned to Florida.
Payroll of executive supervisors who occasionally visit a
Florida location, but are not in direct charge of a Florida location
may be assigned to the headquarters state (except construction,
who are assigned to Florida)
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Fines and Penalties
Any subsequent violation of compliance within 5
years after the most recent violation, shall constitute
insurance fraud. (10/1/2003)
DFS may impute payroll for penalty calculation
purposes, when an employer fails or refuses to provide
business records. (10/1/2003)
DFS may require any employer who is found to be
non-compliant to file periodic reports for two years.
(10/1/2003)
11/11/2011
Fines and Penalties (continued)
A $1,000 penalty shall be assessed against an
employer for each day of non-compliance. In addition,
the non-compliant employer shall pay 1.5 times the
manual premium the employer would have paid during
the period of non-compliance or $1,000, whichever is
greater. (10/1/2003)
In addition to other penalties, $5,000 per employee for
each employee of the employer who the Division
determines not to be an independent contractor as
defined in 440.02. (10/1/2003)
11/11/2011
Sub Plan D
An assessable policy - meaning that if the premiums
collected are insufficient to cover the claims, the
employers who are insured in the Sub Plan will be
assessed additional premium to make up the difference.
“Experience Mod” 1.1 or less
No more than 15 employees, or they will be moved
out of the plan
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All employers must update an application for
coverage within 7 days of any change of information.
(10/1/2003)
11/11/2011
Section III
Liability and Surety Bonds
Jack Swisher, Office of Insurance Regulation
11/11/2011
What is insurance?
One definition:
Insurance is the pooling of fortuitous losses by the
contractual transfer of the risk of such losses to
insurers, who, in exchange for a premium, agree
to indemnify the insured for such losses and
associated expenses or to render other services
connected with the risk.
An operational definition:
Pooling of losses
Payment of fortuitous losses
Transfer of risk
Indemnification
11/11/2011
Requirements of an Insurable
Risk:
There must be a large number of exposure units
The loss must be accidental and unintentional
The loss must be determinable and measurable
The loss should not be catastrophic
The chance of loss must be calculable
The premium must be economically feasible
11/11/2011
Basic parts of an insurance
contract:
Declarations
Definitions
Insuring agreement
Exclusions
Conditions
Miscellaneous provisions
11/11/2011
What is liability insurance?
One brief definition:
Insurance to protect one from the
possibility of legal liability.
Each person in the U.S. has legal rights.
A Legal Wrong is a violation of a person's
legal rights in the form of a failure to
perform a legal duty owed to a certain
person or to society in general.
11/11/2011
Three broad classes of Legal
Wrongs:
Crime (a legal wrong against society -
punishable by fine, imprisonment, or
death)
Breach of Contract (a legal wrong based
on a violation of an agreement between
individual members of society –
punishable by specific performance or
money damages)
Tort (a legal wrong other than a crime or
a breach of contract – punishable by
money damages
11/11/2011
Three classifications of Torts:
Intentional Torts (e.g., assault, battery,
trespass, libel, slander, etc.)
Absolute Liability – aka Strict Liability
(e.g., ownership of wild or dangerous
animals, manufacturing medicines,
blasting operations, etc.)
Negligence
11/11/2011
Elements of a Negligent Act:
Existence of a legal duty
Failure to perform that duty
Damage or injury to the
complaining party
Proximate cause relationship
between negligent act and the
infliction of damages
11/11/2011
Liability Insurance
Liability insurance primarily protects a
policyholder from money damages
arising from a tort, however, most liability
policies also protect the policyholder from
additional costs including, but not limited
to, the cost of investigation and defense
of a claim. It should be noted that most
liability insurance policies are primarily
designed to protect the policyholder from
money damages arising from the
negligence of that policyholder.
11/11/2011
What is Commercial General
Liability Insurance?
The word 'general' denotes the fact that the policy does
not cover those legal wrongs which are insurable under
more specific policies such as an automobile liability
policy, an aircraft liability policy, or surgeon's
professional liability policy. It does cover those
occurrences which are 'general' in nature and are not
specifically insurable under another type of policy.
The word 'commercial' denotes the fact that the policy
is specifically designed to cover commercial ventures
and does not contain an exclusion for commercial
activities. (Note that a personal auto policy excludes
commercial activities as does the liability section of a
homeowners policy.)
11/11/2011
What is Commercial General
Liability Insurance? (cont)
It is worth noting that an older version of the
Commercial General Liability Policy was the
Comprehensive General Liability Policy. The word
'comprehensive' was deleted from many insurance
policies because some people held that name to be
misleading in that the word 'comprehensive' implied the
policy covered everything. Whether the policy is called
Commercial General Liability or Comprehensive
Liability, it is often referred to by the acronym 'CGL'.
Most of the policy forms used in commercial
property/casualty insurance are copyrighted products
created by the Insurance Services Office (ISO). The
CGL policy used in this discussion is an ISO policy. I
know of no independently filed general liability policies.
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The
ISO Commercial General Liability
Coverage Form
What is covered?
Who is insured?
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What is covered?
Insuring Agreement – Coverage A
We will pay those sums the insured becomes legally
obligated to pay as damages because of bodily injury or
property damage to which this insurance applies. We
will have the right and duty to defend the insured
against any suit seeking those damages. However, we
will have no duty to defend the insured against any suit
seeking damages for bodily injury or property damage
to which this insurance does not apply. We may, at our
discretion, investigate any occurrence and settle any
claim or suit that may result.
(Italicized words or phrases are defined within the policy.)
11/11/2011
What is covered? (cont)
Insuring Agreement – Coverage B
We will pay those sums the insured becomes legally
obligated to pay as damages because of personal and
advertising injury to which this insurance applies. We
will have the right and duty to defend the insured
against any suit seeking those damages. However, we
will have no duty to defend the insured against any suit
seeking damages for personal and advertising injury to
which this insurance does not apply. We may, at our
discretion, investigate any occurrence and settle any
claim or suit that may result.
Insuring Agreement – Coverage C
We will pay medical expenses (as described below) for
bodily injury caused by an accident.
11/11/2011 (Italicized words or phrases are defined within the policy.)
Who is insured?
In general, only those named in the Declarations of the
policy, but also:
If the insured is an individual – the spouse is insured.
If the insured is a partnership or joint venture – the
partners are and their spouses are insured.
If the insured is a limited liability company – the
members and managers are insured.
If the insured is a corporation – the officers, directors,
and stockholders are insured.
Also insured are employees and volunteer workers –
regardless of the form of the business.
However, insured status is limited to the scope of the
business insured and the role of the individuals
involved.
11/11/2011
How does a contractor's CGL policy
cover the State of Florida?
By requiring that the contractor name the State of
Florida as an additional insured. This is done by
means of an endorsement to the CGL. (An
endorsement is a written provision which modifies the
provisions of the original contract. An endorsement is
sometimes called a rider.)
Endorsements developed by the ISO give an additional
insured a very limited status. The intent of the
coverage is to provide the additional insured a sort of
"tag along" status. The coverage only applies to the
extent that the named insured is involved in the claim
and the policy applies to the particular claim. Most
claims involving an additional insured end up with the
additional insured being dismissed from the suit while
the cost of the dismissal is borne by the named insured.
11/11/2011
How does a contractor's CGL policy
cover the State of Florida? (cont)
Historically, insurers looked very skeptically at requests for
additional insured endorsements. Individual underwriting
consideration was given to each request, so the cost for the
endorsement was based largely on the time spent on a very
specific underwriting effort. As time passed, more requests
were received and less time was spent on any individual
request; the cost for the endorsement was based more on the
cost of the creating the endorsement than on the underlying
risk. Now, some insurers have developed independent (i.e.,
not developed by ISO) products generally called Blanket
Additional Insured endorsements. These endorsements
provide Additional Insured status to any entity which requires
the named insured to provide that entity Additional Insured
status as a condition of a contract between the named insured
and that entity. The Blanket Additional Insured endorsement
greatly reduces the amount of paperwork for the insurer, the
named insured, and the named insured's agent.
11/11/2011
How does a contractor's CGL policy
cover the State of Florida? (cont)
By requiring reasonable limits of liability.
Reasonable limits of liability are a judgmental
compromise between the cost of the worst liability
situation which could possibly happen to a
contractor and the limits of liability which will
normally be available to the contactor in question.
Some of the common limits which are usually
available are $100,000, $250,000, $500,000, and
$1,000,000 per occurrence.
11/11/2011
How could the State of Florida be
held liable for something a
contractor did?
The legal doctrine of imputed negligence
means that under certain circumstances,
the negligence of one person can be
attributed to another. The particular
doctrine of the most interest is vicarious
liability.
11/11/2011
Surety Bonds
There are always three parties to a surety bond
Principal
Obligee
Surety
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Surety Bonds
For the sake of a simple introduction, there are
some rough similarities between a surety bond
and a liability insurance policy. Consider that the
Principal has roughly the same status as the
named insured in a liability insurance policy.
Consider that the Obligee has roughly the same
status as a claimant in a liability insurance policy.
Consider that the Surety has roughly the same
status as the insurer in a liability insurance policy.
11/11/2011
Differences between liability
insurance and surety bonds
There are three parties to a surety bond (principal, obligee,
and surety) while there are only two parties to a liability
insurance contract (insurer and named insured).
Under a liability insurance policy, the insurer expects to pay
losses. Under a surety bond, the surety, in theory, does not
expect any losses.
Under a liability insurance policy, the insurer does not normally
have the right of recovery of a loss payment from the insured.
Under a surety bond, the surety has the right of recovery of a
loss payment from the principal.
Under a liability insurance policy, the covered event is
generally a fortuitous event outside the control of the insured.
Under a surety bond, the covered event is generally
something within the control of the principal.
Frequently, liability insurance and surety bonds are sold by a
property/casualty insurer which is licensed to sell both lines of
business. However, within most insurers, the commercial
liability insurance business and the surety bond business are
two very distinct and separated operating divisions.
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Types of Surety Bonds
Contract Bonds
Bid Bond
Performance Bond
Payment Bond
Maintenance Bond
License and Permit Bonds
Public Official Bonds
Judicial Bonds
Fiduciary Bond
Court Bond
Federal Surety Bonds
Miscellaneous Surety Bonds
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Contract Bonds
Contract bonds guarantee that the principal will fulfill all its
contractual obligations. In selling a bond to cover a specific
contract, the surety must consider the obligations required by
the contract and the ability of the principal to fulfill those
obligations.
Under a bid bond, the obligee is guaranteed that the party
awarded a bid on a contract will be able to secure and furnish
a performance bond.
Under a performance bond, the obligee is guaranteed that
work will be competed in accordance with the contract
specifications.
Under a payment bond, the obligee is guaranteed that
suppliers and subcontractors will be paid when the bills are
due (thus avoiding a lien against the contractor and work
stoppage).
Under a maintenance bond, the obligee is guaranteed that
defective materials used by the principal will be replaced and
poor workmanship performed by the principal or its
subcontractors will be corrected.
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Insurance Provisions
Providing and maintaining adequate insurance
coverage is a material obligation of the Contractor
and is of the essence of the Contract. Upon request,
the Contractor shall provide a certificate of insurance.
The Contract shall not limit the types of insurance
Contractors may desire to obtain or be required to obtain by
law. The limits of coverage under each policy maintained
by the Contractor shall not be interpreted as limiting the
Contractor’s liability and obligations under the Contract. All
insurance policies shall be through insurers authorized to
write policies in Florida.
11/11/2011
Workers’ Compensation
Contractual Language Suggestion
During the Contract term, the Contractor at its sole expense shall provide
commercial insurance of such a type and with such terms and limits as may be
reasonably associated with the Contract, which, as a minimum, shall be:
workers' compensation and employer's liability insurance in accordance with
Chapter 440 of the Florida Statues, with minimum employers' liability limits of
$100,000 per accident, $100,000 per person, and $500,000 policy aggregate.
Such policy shall cover all employees engaged in any Contract work.
Employers who have employees who are engaged in work in Florida must use
Florida rates, rules, and classifications for those employees. In the
construction industry, only corporate officers of a corporation or any group of
affiliated corporations may elect to be exempt from workers‘
compensation coverage requirements. Such exemptions are limited to a
maximum of three per corporation and each exemption holder must own at
least 10% of the corporation or be a member of a limited liability company
owning at least 10% of the company. Independent contractors, sole
proprietors and partners in the construction industry cannot elect to be exempt
and must maintain workers‘ compensation insurance.
11/11/2011
Contractual Language Suggestion
During the Contract term, the Contractor at its sole expense shall provide
commercial insurance of such a type and with such terms and limits as may be
reasonably associated with the Contract, which, as a minimum, shall be:
Commercial general liability coverage on an occurrence basis in the minimum amount of
$500,000 (defense cost shall be in excess of the limit of liability), naming the State as an
Additional Insured.
Automobile liability insurance covering all vehicles, owned or otherwise, used I
the Contract work, with minimum combined single limit of $500,000, including
hired and non-owned liability and $5,000 medical payment.
Suggested language for all other lines of coverage will be provided prior to internet
posting:
Professional Liability, Garagekeepers, Environmental Liability, Aircraft Liability and
Ocean Marine.
11/11/2011