Defining Insurance & Bonding Requirements
Purpose of Contractual Insurance Requirements n Contractual insurance requirements provide two major benefits: n They ensure that a contractor has the financial ability to pay for damages that result from their negligence. n 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.
Contractual Insurance Requirements n Duties of a purchasing professional: Clearly and concisely delineate the types and levels of insurance that must be carried by your contractors. n Determine how stringent your insurance requirements should be. n
Insurance Requirements Insurance requirement approach: § § § General Specific Expectations statement
Insurance Requirements Continued Providing and maintaining adequate insurance coverage for your business 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.
Insurance Requirements Continued The Contract shall not limit the types of insurance contractors may desire to obtain or be required to obtain by law. § The limits of insurance 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. §
Contractual Insurance Requirements As you begin the formation process you should consider deliberating over the following: 1. What types of exposures might give rise to a claim? 2. What types of insurance should be required?
Contractual Insurance Requirements Continued What type of indemnity should be sought? 4. What minimum limits and terms should be required? 5. What evidence of insurance will suffice? Each consideration should be discussed. 3.
Contractual Insurance Requirements Continued You may want to develop minimum standards by each type of contract that should be required. Examples: Construction Contracts: CGL, Auto, WC, Bonds Professional Services: CGL, WC, Bonds, Professional Liability Commodities: CGL, WC Or you may want to consider a combination of both.
Loss Exposures One of the first steps in the formation process is to consider the types of loss exposure that may give rise to a claim. n A loss exposure is basically a condition or situation that presents the possibility of financial loss and could negatively impact the State or the public. n
Loss Exposures Continued The following is a list of basic loss exposures that should be discussed to determine if an exposure exist: § Property § Liability § Net Income § Personnel or Human
Types of Insurance: Property n A property loss exposure results from direct physical damage to buildings or tangible property which cause a reduction in value.
Types of Insurance: Property Continued Property Insurance: This type of insurance provides protection to property owners or individuals that have an insurable interest of losses to buildings and tangible property. n Benefit: Assurance that a contractor can fulfill his contractual obligations if a loss results while performing work for the State. n
Types of Insurance: Property Continued n Property loss exposure: Builder’s Risk insurance provides protection for buildings or structures while in the course of construction, including foundations, fixtures, machinery and equipment used to service the building along with building materials and supplies used for construction.
Types of Insurance: Commercial General Liability n A liability loss exposure results when some activity or relationship exists that can create liability to others, such as when a third party’s property is damaged or they are injured as a result of our contractor’s negligence.
Types of Insurance: Commercial General Liability Continued n Commercial General Liability: This type of insurance pays those sums that a contractor is legally obligated to pay as damages because of bodily injury, property damage, personal injury and advertising injury, to which this insurance applies.
Types of Insurance: Commercial General Liability Continued n A standard general liability insurance policy automatically includes insurance coverage for bodily injury or property damages losses arising from premises and operations; along with products and completed operation. Medical payment, another insurance coverage automatically included provides payment for medical expenses regardless of fault.
Types of Insurance: Commercial General Liability Continued n Benefit: Liability insurance provides some assurance that a contractor has the ability to pay those damages that he is legally liable to pay to a third party that has suffered a loss as a result of the contractor’s negligence.
Types of Insurance: Commercial General Liability Continued n Liability loss exposures: There a variety of liability loss exposures that exist. Liability can arise from premises, business operations, completed operations, products, advertising, automobiles, garages, environmental impairment, liquor, professional activities and employed workers.
Types of Insurance: Indemnification & Additional Insureds n Indemnification: A contractual indemnification provision (a. k. a. hold harmless clause) simply transfers the liability arising out of a breach of duty to the contractor. The State may remain liable, but the contractor has assumed the obligation to pay any damages arising out of the liability.
Types of Insurance: Indemnification & Additional Insureds Continued n Type of indemnity agreements: Broad n Intermediate n Limited The difference among each is based on the degree of fault that is transferred. Florida has an antiindemnity statute for construction contracts, such contracts can only include a limited indemnification clause. n
Types of Insurance: Indemnification & Additional Insureds Continued n Additional Insured: This term signifies an additional insured that is not generally included as an insured under the liability policy of another, but for whom the named insured is required to provide a certain degree of protection.
Types of Insurance: General Liability & Indemnification n The State’s Bureau of Liability Claims recommends the following minimum provisions that agencies should consider for all contracts. General Liability insurance requirement for all contractors; n The contractor’s general liability policy should include the state agency as an additional insured; and if appropriate, n
Types of Insurance: General Liability & Indemnification Continued n Indemnification language n 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, including but not limited to attorney fees. 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.
Types of Insurance: General Liability & Indemnification Continued n 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.
Types of Insurance: Contractual Language Example n General liability sample language: n 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:
Types of Insurance: Contractual Language Example n Commercial general liability insurance 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.
Types of Insurance: Professional Liability n A professional liability loss exposure results when a third party alleges bodily injury or property damage caused by the professional or technical incompetence of our contractor.
Types of Insurance: Professional Liability Continued n Professional liability sample language: n 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:
Types of Insurance: Professional Liability Continued n Professional liability insurance (Errors and Omissions) for the negligent acts, errors or omissions in the performance of the professional services provided with a minimum limit of $300, 000.
Types of Insurance: Automobile Liability n An auto liability loss exposure results when a third party’s property is damaged or they are injured as a result of an accident caused by our contractor’s negligence.
Types of Insurance: Automobile Liability Continued n Automobile Liability Insurance: This type of insurance pays those sums that a contractor is legally obligated to pay as damages because of bodily injury or property damage caused by an accident, to which this insurance applies. Medical payments, another insurance coverage provided, provides payment for medical expenses regardless of fault.
Types of Insurance: Automobile Liability Continued n Hired and non-owned liability: This is an additional coverage available which applies to autos leased, hired, rented and not owned by the contractor and used in connection with their business.
Types of Insurance: Automobile Liability Continued n Automobile liability sample language: n 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:
Types of Insurance: Automobile Liability Continued n Automobile liability insurance covering all vehicles, owned or otherwise, used in connection with this contract, with a minimum combined single limit of $500, 000, including hired and non-owned liability and $5, 000 medical payment.
Types of Insurance: Net Income and Crime n A crime insurance policy provides a variety of insurance options that should be considered when we contract for services that involve the management, administration or care, custody and control of the State’s money or securities.
Types of Insurance: Net Income and Crime Continued n Employee dishonesty insurance: This type of insurance pays for employee theft of money and securities. Typically this insurance applies to property held by the contractor or for which the contractor is legally liable.
Types of Insurance: Net Income and Crime Continued n Theft, disappearance and destruction insurance: This type of insurance pays for theft, disappearance or destruction of money or securities, other than employee theft.
Types of Insurance: Net Income and Crime Continued Benefit: The intent of a crime policy is for the benefit of the contractor only, but by adding the State as an additional insured, the benefit is extended to the State too. n Money & Securities loss exposure: Theft is the primary concern, the most common is employee theft. n
Types of Insurance: Workers’ Compensation n Workers’ Compensation insurance: This type of insurance provides medical benefits, disability benefits and rehabilitation benefits to injured workers; survivor benefits to the surviving spouse and children;
Types of Insurance: Workers’ Compensation Continued n Employers liability insurance: This insurance is automatically included in a standard workers’ compensation policy to provide liability coverage to protect the contractor in the event of a suit.
Types of Insurance: Workers’ Compensation Continued n Limits: Medical benefits-unlimited n Disability benefits and rehabilitation benefits: As stipulated in Chapter 440 of the Florida Statutes. n Employers liability insurance: n • $100, 000 per accident • $100, 000 person • $500, 000 policy aggregate
Workers’ Compensation Contractual Language Example n 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 Contractual Language Example Continued n Worker’s compensation and employer’s liability insurance in accordance with Chapter 440 of the Florida Statutes, with minimum employers’ liability limits of $100, 000 per accident, $100, 000 person, and $500, 000 policy aggregate. Such policy shall cover all employees engaged in any Contract work.
Workers’ Compensation Contractual Language Example Continued n Employers who have employees who are engaged in work in Florida must use Florida rates, rules, and classifications for those employees.
Workers’ Compensation Contractual Language Example Continued n In the construction industry, only corporate officers of a corporation or any group of affiliated corporations may elect to be exempt from workers’ compensation insurance 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.
Workers’ Compensation Contractual Language Example Continued n Independent contractors, sole proprietors and partners in the construction industry cannot elect to be exempt and must maintain workers’ compensation insurance
Surety Bonds n Surety Bonds – provide guarantees n A Bid Bond promises that the contractor bidding on a solicitation will, if the bid is accepted, enter into a contract and furnish the other necessary contract bonds. Bid bonds are typically provided with a penalty equal to 10% of the amount bid.
Surety Bonds Continued n n A Performance Bond guarantees that the contractor will perform the work according to the contract, within the stipulated time, and according to the agreed price. A Payment Bond also referred to as a labor and materials bond; guarantees that certain bill incurred by a contractor for labor and materials will be fully paid at the completion of the project.
Surety Bonds Continued n Surety Bond Benefits: The contractor is liable to the surety company. n The surety company must fulfill the contractor’s obligation and/or pay damages if the contractor fails to perform its obligation to the State. n
Surety Bonds Continued n n When a bond is issued, the surety company is attesting to the contractor’s integrity, capability, trustworthiness, financial responsibility, or whatever qualities may be required for the undertaking. Sureties companies carefully analyze the contractor and may even require collateral.
Surety Bonds Continued n Risk with other alternatives: Certified check, cashiers check, certificate of deposit or irrevocable letter of credit do not provide a guarantee. n The obligation and responsibility to fulfill the contract would fall on the purchasing professional. n The collateral originally provided deprives the contractor of funds needed to complete the project. n
Surety Bond Cost A bid bond is provided for a nominal fee to the contractor, typically ranging from $500 $1, 000. n The cost for a performance bond or payment bond is based on the contract price, type of contractor, financial wherewithal. n
Surety Bond Cost Continued n Example: Type of Bond: Payment or Performance Bond n Type of Contractor: Major construction contractor n Bond Amount: $1, 000 n Total Premium: $13, 000 approx. n
Surety Bond Considerations n We suggest the following considerations: n Does the contract have an exposure of default by a vendor not performing in accordance with the contract specifications, stipulated time or agreed price? If yes, then consideration should be given to a performance bond requirement.
Surety Bond Considerations Continued n Does the contract have an exposure of defective materials or workmanship? If yes, then consideration should be given to a maintenance guarantee within the performance bond or as a separate maintenance bond.
Surety Bond Considerations Continued n n Does the contract warrant a requirement of a performance bond? If yes, then consider the purpose, exposure, pre-qualification process and availability of a bond. To determine the bond limit consider the cost to complete the required services.
Conclusion n Questions? Thank you for your participation.
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