The Nuts and Bolts of Insurance

Ronda Hollis, CPCU Risk Management Consultant 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 Contract

Principle #1
Contractually transfer the appropriate risks relating to the contract to the contractor. Ask for appropriate insurance and bonds to cover the risk.

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.

 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.

Principle #3

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 States Interests

Statement of Work. Independent Contractor. Insurance and Bonds. Representations. Warranties. Consideration. Retention. 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 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

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.

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 Cover?

Your World has changed!

9-11-01

Common Types of Insurance Coverage

Commercial General Liability 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 Liability Tail Coverage

Commercial General Liability (CGL)

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.

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

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 it. For the purposes of this insurance, electronic data is not tangible property.

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 agencys 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."

"Products-completed operations hazard

(continued)

CGL Policy Definitions

Except: (1) Products that are still in your physical possession; or (2) Work that has not yet been completed or abandoned.

"Products-completed operations hazard

(Continued)

CGL Policy Definitions

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.

"Products-completed operations hazard

(Continued)

CGL Policy Definitions

(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.

"Products-completed operations hazard

(Continued)

CGL Policy Definitions

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 insured; (2) The existence of tools, uninstalled equipment or abandoned or unused materials; or

"Products-completed operations hazard

(Continued)

CGL Policy Definitions

(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

(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.

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.

Important 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 Bailees Customers.

Important 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 working.

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.

Important 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 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

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.

Important CGL Exclusions

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";

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 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

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.

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 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 proprietormust 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.

Commercial Automobile Coverage vs. Personal Automobile Coverage?

Automobile Liability Coverage Considerations

Askquestions, such as, but not limited to: Will the Contractortransport 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?

Automobile Liability Coverage Considerations

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

 Use whenever a Contractor transports mobile equipment to the work site: CGLinsurance does not cover the transport of mobile equipment. Ensure automobile liability includes coverage for owned, non-owned or hired vehicles. RequireCGLcoverage 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.

Automobile Liability Coverage Considerations

Professional Liability or Errors and Omissions Coverage

The Terms Professional Liability and Errors and Omissions Coverage are used interchangeably.

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.

Who Should Have Professional Liability or Errors and Omissions Coverage?

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 injuries. Oregon law requires all employers, unless exempt, provide this coverage for all subject employees working in Oregon.

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.

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

CRIME COVERAGE

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 Coverage?

When the contractor is handling money, securities, other valuable property, or data.

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 exhausted. 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 operations.

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.

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 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.

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 carriers liability and obtaining broader coverage.

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 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.

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.

 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.

Inland Marine Coverage Instrumentalities of Communication and Transportation

 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.

Other Types of Inland Marine Coverage

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.

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.

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.

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.

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.

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.

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.

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.

When Do You Need Aircraft Liability Coverage?

When the contractor is using an airplane to provide the contracted service.

 If the contract involves the aerial application of any chemical, fertilizer, seed, or bait addAircraft 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.

Aircraft Liability Coverage Considerations

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

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 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.

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.

What is a Bond?

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.

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.

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.

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.

(Labor & Materials Bond)

Guarantees that the contractor will pay certain subcontractors, laborers and material suppliers associated with the project.

Payment Bond

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 months. The bond amount requested depends on the risk of the contract. In most cases, bonds cost about 1% - 3% of the contract amount.

Coverage Assessment

How much insurance?

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.

Severity
INSIGNIFICA MINOR MODERAT MAJOR CRITICAL NT E

Likelihood

ALMOST CERTAIN

LIKELY POSSIBL E UNLIKEL Y RARE

M L L L

M M L L

H H M M

E E H H

E E E 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 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.

OR

Try Backing Into the Coverage Amount

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.

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

ICING ON THE CAKE

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.

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.

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 nonrenewed.

Certificates of Insurance

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.

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 Does SIR Mean?

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.

 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?

Reading Certificates of Insurance

Acrobat Document

Contractual 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 Machines

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.

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

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 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 onsite pollution exposure and maintains regulatory compliance. Lottery has made arrangements for appropriate disposal of machines.

Bodily Injury:

What could go wrong? Who could be harmed?

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 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.

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.

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.

Liability:

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 payouts. Financial loss to patrons if machines are defective and dont 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 locations. - 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 Thousands Property Damage: Major, Thousands to Millions Design Flaw: Critical, Thousands to Millions 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

Severity
INSIGNIFICA MINOR MODERAT MAJOR CRITICAL NT E

Likelihood

ALMOST CERTAIN

LIKELY POSSIBL E UNLIKEL Y RARE

M L L L

M M L L

H H M M

E E H H

E E E 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 1 Value Description (Opportunity) Insignifica Minor budgetary, funding, or resource nt gain; Little or no gain in public and/or client relations. Minor Low budgetary, funding, or resource gain; Some gain in public and/or client relations.

Moderate Moderate budgetary, funding, or resource gain; Adequate public and/or client relations. Major Major budgetary, funding, or resource gain; Good public and/or client relations. Huge budgetary, funding, or resource gain; Excellent public and/or client

Critical

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.

 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.

Bodily Injury:

Determine Non-Insurance Risk Control Measures

Property Damage:

Determine Non-Insurance Risk Control Measures

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.

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.

Liability:

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 installation.

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

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.

Did We Forget Something?

Doesnt this project have a predetermined 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.

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?

The End