The Nuts and Bolts of Insurance

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The Nuts and Bolts of Insurance Powered By Docstoc
					               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
Contracting Process?

 At the inception of an idea.
Important Principles That
  Apply to Any State
            Principle #1
Contractually transfer the
 appropriate risks relating
 to the contract to the
Ask for appropriate
 insurance and bonds to
 cover the risk.
           Principle #2
Do not indemnify an independent
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 state’s defense against a claim and
 make the state subject to unlimited
            Principle #3
• Don’t 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 state’s
  interests than insurance or
• Insurance and bonds should be
  thought of as the safety net
  that catches us when everything
  else goes wrong.
     Asking for Insurance
  Coverage Alone Does Not
Protect Your Agency From All
   the Risks of Contracting
     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.
  Other Contract Components
Protecting the State’s Interests

•   Statement of Work.
•   Independent Contractor.
•   Insurance and Bonds.
•   Representations.
•   Warranties.
•   Consideration.
     •Payment schedule.
      How Does Insurance Work?
• Insurance policies tend not to overlap with
  other types of policies.
• There are some perils that insurance policies
  just don’t 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
Common Policy Parts & Pieces
• Coverages – The Insuring Agreement.
   –Exclusions – What isn’t covered.
• Who is an Insured – Who is covered by the
• Limits of Insurance – How much the
  insurance company will pay.
• Policy Conditions – Restrictions, duties,
• Definitions –
   What the terms mean.
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.
A Claims Made policy covers all
   claims reported and filed
   during the policy period.
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.
  Coverage Assessment

 What kind
of insurance
 or bonds?
What Does Insurance Really
Your World has changed!
        Common Types of
       Insurance Coverage
• Commercial General
• Automobile Liability
• Professional Liability
• Workers’ Compensation
      Less Common Types of
       Insurance Coverage
• Crime
• Excess or Umbrella Liability
• Pollution Liability
• Various Inland Marine Policies
• Aircraft
• Garage and Garagekeepers’ Legal
• Tail Coverage
Commercial General Liability
 Commercial General Liability
Insurance covering “Third Party”:
Bodily injury.
Property damage.
Limited Contractual liability.
Products and completed
May also cover personal and
  advertising injury liability.
General Liability Insurance Myths
• General Liability insurance covers
  “the indemnification provided in the
   – FALSE
• General Liability insurance will cover
  your entity if the contractor’s work is
  done “negligently”.
   – FALSE
• There is “contractual liability”
  coverage in a General Liability policy.
       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.
        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
       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

  For the purposes of this insurance,
      electronic data is not tangible
       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.
What Does This Really Mean?

A CGL Policy will not pay
for losses due to a
contractors work on or
damage to your agency’s
electronic data!
      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."
       CGL Policy Definitions
 "Products-completed operations hazard“

(1) Products that are
still in your physical
possession; or
(2) Work that has not
yet been completed or
      CGL Policy Definitions
"Products-completed operations hazard“

However, "your work" will be deemed
completed at the earliest of the following
(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.
       CGL Policy Definitions
 "Products-completed operations hazard“

(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

Work that may need service, maintenance,
 correction, repair or replacement, but
    which is otherwise complete, will be
           treated as completed.
        CGL Policy Definitions
 "Products-completed operations hazard“

Does not include "bodily injury" or "property
damage" arising out of:
(1) 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
(2) The existence of tools, uninstalled
     equipment or abandoned or unused
     materials; or
      CGL Policy Definitions
"Products-completed operations hazard“

(3) 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.
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.
     CGL Policy Definitions

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
 Liability that the insured would have in
   the absence of the contract or
 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).
•Agreements required by municipalities as a
result of ordinances (not for work done for
•Elevator maintenance agreements.
•Liabilities that “would be imposed by law in
the absence of any contract or agreement.”
           CGL Exclusions
1) 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 Bailee’s Customers.
            CGL Exclusions
2) 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.
  “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
    “Particular” Part Example

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.
            CGL Exclusions
3) 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 contractor’s 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
             CGL Exclusions
(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.
    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
• "Bodily injury" or "property
  damage“ arising out of heat, smoke
  or fumes from a "hostile fire";
  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.
               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
 • 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
      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 other’s hands.
     Automobile Liability

Insurance that provides coverage
for third party bodily injury or
property damage arising out of the
use of an insured vehicle.
     When Do you Need
Automobile Insurance Coverage?

  When the contractor needs to
  use an automobile to provide
  the services.
   Commercial Automobile Coverage
  vs. Personal Automobile Coverage?
• Commercial Automobile Coverage is needed
  whenever the contractor will be transporting
  the state’s employees, clients, etc. or the
  state’s 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.
    Automobile Liability Coverage
• 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
 Automobile Liability Coverage
– 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
   Automobile Liability Coverage
• 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.
Professional Liability or
 Errors and Omissions
  The Terms Professional
  Liability and Errors and
Omissions Coverage are used
     Who Should Have Professional
    Liability or Errors and Omissions
 Licensed and accredited specialists such
   Doctors or medical practitioners.
   Information technology specialists
    (computer programmers, etc).
   And non-licensed professionals such
    as interpreters, recorders, testing
    facilities, and research laboratories.
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.
    Workers’ Compensation
Insurance covering employee injuries,
 disability or death.
The policy protects the employer
 from being sued by the employee for
Oregon law requires all employers,
 unless exempt, provide this coverage
 for all subject employees working in
When Should I Ask Questions
  About Oregon Specific
  Workers’ Compensation?

 When the contractor has one or
  more employees performing
 services under the contract in
    Specific questions about
    Workers’ Compensation?
Call the Department of Consumer
 & Business Services, Workers’
 Compensation, Employer Section
 at (503) 947-7815.
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.
 When Do You Need to Ask
  for Employee Dishonesty
When the contractor is handling money,
securities, other valuable property, or
  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.
 What is the Difference
Between an Umbrella Policy
  and Excess Coverage?
          Umbrella Policies
Provide excess coverage over
 another underlying liability policy.
Many times provides broader
 coverage than the primary
 (underlying) liability policy.
         Excess Liability

Pays after the primary (underlying)
 liability policy limits have been
May not be as broad as primary
 (underlying) liability policy.
Pollution Liability Coverage
    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
   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
• 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
   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.
Inland Marine Coverage
 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.
Various Inland Marine Coverages
     Kinds of Inland Marine
1. Domestic goods in transit,
2. Goods of Bailee’s customers;
3. Moveable equipment and unusual
4. Property of certain dealers, and
5. Instrumentalities of
   communication and transportation.
           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.
           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.
         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
  carrier’s liability and obtaining broader
          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.
          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.
           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 buyer’s
     once the goods are on the shipper’s loading
   – F.O.B. destination means that the transit
     exposure would be the seller’s until the goods
     reach the buyer’s destination.
       Goods of Bailee’s 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 Bailee’s
  Customers in order for this property to be
  covered for loss or damage while in the bailee’s
       Inland Marine Coverage
 Instrumentalities of Communication
         and Transportation
• Exposures related to
  transportation (rolling stock,
  bridges, and tunnels) can be
  insured using inland marine
• Inland marine insurance can also
  be provided on instrumentalities
  of communication such as
  television towers and
  transmission equipment.
            Other Types of
        Inland Marine Coverage
• Tractors, mobile equipment, cranes, and
• Computer equipment.
• Livestock.
• Fine arts.
• Patterns, molds, and dies.
• Partially completed products that are
  sent to another location for completion or
• Valuable papers, records, records of
  accounts receivable.
• Goods on exhibition.
   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
• 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.
       Builder’s 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.
 When Does Your Agency Need
   to Ask for Builder’s Risk
When a building is being
When substantial alterations will
 be made to an existing structure
 i.e., bearing walls, lifting
 foundations, extensive
   When Your Agency Doesn’t
       Need to Ask for
    Builder’s 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.
Builder’s Risk Installation Floater
Usually an add-on to a Builders Risk
 Policy, but may be purchased
 separately by subcontractors on the
Insurance that covers machinery and
 equipment of all kinds during transit,
 installation, and testing at the
 purchaser’s premises.
Theft and vandalism are covered.
  When Should You Require a
        Builder’s Risk
     Installation Floater
When a building is being constructed,
 repaired, or remodeled and there will
  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.
Builder’s Risk Occupancy Clause
• An add-on to a Builder’s Risk Policy.
• Allows Builder’s Risk coverage to
  continue once the owner or tenants
  occupy a building under construction
  prior to substantial completion of the
• If not purchased, Builder’s Risk
  coverage ends once the building is
  occupied by the owner or tenants.
        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
    When Do You Need
Aircraft Liability Coverage?
 When the contractor is using an
airplane to provide the contracted
      Aircraft Liability Coverage
• If the contract involves the aerial application of
  any chemical, fertilizer, seed, or bait
  add Aircraft Aerial Application Liability
• 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
  (2) The Aircraft Liability provides coverage
      for the passengers on a “per seat” limit.
Garage and Garagekeepers’
 Legal Liability Coverage
    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.
 Garagekeepers’ Legal Liability
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.
What About Self-Insurance?
   Before Accepting Self-Insurance
• Make sure the contractor has the
  financial stability to be self-insured. Ask
   • 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 contractor’s ability to adjust, process,
  settle, litigate, and pay claims.
          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
What is a Bond?
           What is a Bond?
A Surety Bond is a risk transfer
 mechanism that performs the following
  Guarantees that the bonded project will be
   completed according to the terms of the
   contract and at the determined contract
  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.
       What is a Bond?

Reduces the possibility of a
 contractor diverting funds from the
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.
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 contractor’s
 loss experience, assets, and finances.
     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.
What Are The Typical Kinds
of Bonds Used in Contracts?
             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.
      Performance Bond
 Protects the state from financial
 loss should the contractor fail to
perform the contract in accordance
with contract terms and conditions.
         Payment Bond
(Labor & Materials Bond)
Guarantees that the contractor will pay
 certain subcontractors, laborers and
 material suppliers associated with the
      Maintenance Bond
 Protects the state against defects
in workmanship or materials (usually
for two years) after the contractor
      has completed the work.
  Additional Bond Information

Bond terms are usually 12 – 24
The bond amount requested
 depends on the risk of the
In most cases, bonds cost about 1%
 - 3% of the contract amount.
  Coverage Assessment

How much
Two Schools of Thought
         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.
                Use the risk rating to set
              insurance and bonding limits.

             ALMOST           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
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.
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.
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.)
L = Low Risk:
• If risk is minimal, this is the area where
  coverage and limits may potentially be
• 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
• If the risk assessment reveals only
  minute risk, agency could make a
  business decision to waive coverage.
Try Backing Into the
  Coverage Amount
     Coverage Assessment
• Analyze the perils
  covered by the type of
  insurance you will be
• Looking at the perils,
  and analyze if these
  perils exist in the
  performance of the
  contracted work.
        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.
Supplemental Clauses

        Additional Insured
Protects the state when named in an
 action that is not its responsibility or
Ensures that the contractor or
 service provider’s insurance company
 will expend funds to have the state’s
 name removed.
The state benefits by not having to
 use its assets for litigation purposes.
      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
      Notice of Cancellation
            or Change
Requires the contractor or service
 provider’s insurance company to
 notify us if:
  There is a possibility of the policy
   limits being exhausted.
  The policy is cancelled or non-
Certificates of Insurance
   Certificate(s) of Insurance

Requires the contractor to prove to
 the state that it has met the
 insurance requirements of the
One way to prove this request is by
 submitting a Certificate of Insurance
 stating the coverage and policy limits.
     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.
     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 entity’s
  financial stability.
 Letter from bank stating the amount
  held in reserves to pay claims and
 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
 Is there an SIR (self-insured retention)
Reading Certificates of Insurance
Risk Assessment Example
   Lottery Purchase of
   Poker/Slot Machines
  What is the scope of the
   contractual activity?
What is the overall activity?
Procurement of 325 Video Poker/Slot
      What are the activity
• Design and development of
  specifications for the
• Manufacture of the machines.
• Quality control and testing.
• Transportation of the
  machines to the Lottery
When and where does the activity
take place(s)?
•   Victoria B.C.
•   5/26/05 through 11/30/05

Who will be performing the
•   Victoria Games, Inc.
•   ABC Trucking, Inc. – a Common Carrier,
    F.O.B. Shippers Dock
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
Will there be any hazardous materials
•   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
      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.
        What could go wrong?
        Who could be harmed?
Property Damage:
• Machines could be damaged at the
  manufacturers location or during
• Machines could be defective and
  cause a fire at the vendors location.
• Machines could be stolen while in
• Machines could improperly pay out
  causing financial loss.
    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
• The Lottery has already
  made arrangements for
  appropriate disposal of
    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
        What could go wrong?
        Who could be harmed?
• 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
• Financial loss to patrons if machines are
  defective and don’t pay out as much as
  they should.
 Is there any impact on workload or
damage to our systems?
- Delay in installation and
 implementation of marketing
 program for machines in vendor
- Additional costs for repair or re-
 design of machines.
 What are the potential
loss exposures associated
    with this activity?
• Bodily injury
• Property damage
• Design flaw
• Liability
  Rate the Severity of Each
   Potential Loss Exposure.
       How bad can each loss be?
           What could it cost?
• Bodily Injury: Minor, Hundreds to
• Property Damage: Major, Thousands to
• Design Flaw: Critical, Thousands to
• Liability: Major, Thousands to Millions
    What is the Likelihood That
     Each of These Potential
       Losses Will Happen?

•   Bodily Injury - Unlikely
•   Property Damage - Possible
•   Design Flaw – Possible
•   Liability – Possible
                    Use the Risk Rating to Set
                         Insurance Limits

             ALMOST           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
    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
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.
  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
• Economic stimulation from additional
  funding sources.
    Determine Non-Insurance
     Risk Control Measures
Bodily Injury:
• Include safety protocols and training
  requirements in the contract.
• Verify that all of the contractor’s 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.
      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
• Negotiation of contract with manufacturer
  and/or common carrier for responsibility for
  machines during transit and security protocol.
    Determine Non-Insurance
     Risk Control Measures
Design Flaws:
• Lottery review of manufacturer’s design work
  prior to production.
• Use of best practices in design work.
• Require high levels of knowledge, skills, and
  experience of manufacturer’s design staff.
• Lottery oversight of design work and
  manufacturing application during all phases of
• Contractual warranty of design work and
  retention of manufacturer compensation until
  work is inspected and found to be satisfactory.
      Determine Non-Insurance
       Risk Control Measures
• 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
          Assignment of
        Insurance Coverage
   Bodily Injury: Low Risk – CGL.
   Property Damage: Extreme Risk – CGL,
    Trucker’s Coverage, Inland Marine
    coverage for Domestic Goods in
    Transit and Goods of Bailee’s
   Design Flaw: Extreme Risk –
    Professional Liability
   Liability: Extreme Risk - CGL
            Assignment of
          Insurance Amounts
• Commercial General Liability (CGL): $2 million
  per occurrence with $5 million aggregate.
• Trucker’s Coverage: $2 million per accident.
• Inland Marine:
  – Domestic Goods in Transit: The value of the
  – Goods of Bailee’s Customers: The value of the
    product at completion.
• Professional Liability: $1 million per
  occurrence with $2 million aggregate.
  Did We Forget Something?
• Doesn’t this project have a pre-
  determined timeframe for
  completion and detailed
Lottery should consider requiring
    Performance Bond for the
amount of the contract or their
  maximum probable loss if the
  contractor does not perform.
  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
• If the product is completed, but not as
  specified, how much could it cost the
  Lottery if another vendor has to fix the
The End

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