INSURANCE AND BONDS INSURANCE AND BONDS FOR PUBLIC ENTITIESFOR PUBLIC ENTITIES

COMMONWEALTH OF VIRGINIACOMMONWEALTH OF VIRGINIA

DEPARTMENT OF THE TREASURYDEPARTMENT OF THE TREASURY

DIVISION OF RISK MANAGEMENTDIVISION OF RISK MANAGEMENT

Step 4:Step 4:

Monitor Monitor PlanPlan

Step 1:Step 1:

Identify Identify ExposuresExposures

Step 2:Step 2:

Develop Develop StrategiesStrategies

Step 3:Step 3:

Implement Implement ProgramsPrograms

THE RISK MANAGEMENT PROCESSTHE RISK MANAGEMENT PROCESS

RISKS IN PURCHASINGRISKS IN PURCHASING

COSTCOST

TIMETIME

QUALITYQUALITY

METHODSMETHODS

Insurance can address or is addressed by these issues.Insurance can address or is addressed by these issues.

COSTCOST

Most transactions have a cost implication.Most transactions have a cost implication.

Consider the consequences associated with lost time and Consider the consequences associated with lost time and

productivity due to late delivery, health and safety problems, productivity due to late delivery, health and safety problems,

product inadequacy, and product failure.product inadequacy, and product failure.

Others include competition, economic volatility, litigation due to Others include competition, economic volatility, litigation due to contractual disputes and cost increases.contractual disputes and cost increases.

TIMETIME

Consequences of late delivery, no delivery, poor Consequences of late delivery, no delivery, poor response to service calls or delay due to events— response to service calls or delay due to events— man made or natural.man made or natural.

QUALITYQUALITY

Product or services not conforming to specifications or not meeting Product or services not conforming to specifications or not meeting user requirements due to poor specifications, poor evaluation or user requirements due to poor specifications, poor evaluation or poor decision making.poor decision making.

METHODSMETHODS

Consequences associated with buyer behavior and purchasing processes.Consequences associated with buyer behavior and purchasing processes.

Inefficient processes,Inefficient processes,

mismanagement,mismanagement,

fraud,fraud,

ineffective contract development,ineffective contract development,

and management,and management,

or poorly trained buyersor poorly trained buyers

These affect the level of risk associated with a procurement.These affect the level of risk associated with a procurement.

COMMERCIAL GENERAL LIABILITY COMMERCIAL GENERAL LIABILITY INSURANCE  INSURANCE  

““CGL”CGL” 

The fundamental liability policy  CGL PROVIDESCGL PROVIDES:

• Claims adjusting services•  Legal defense for those claims•  Payment of valid claims

CLAIMS-MADECLAIMS-MADE and OCCURRENCEOCCURRENCE FORMS 

BOTH INCLUDEBOTH INCLUDE:

• Coverage• Exclusions• Conditions

BOTH INCLUDE THREE COVERAGESBOTH INCLUDE THREE COVERAGES:  

COVERAGE A: Bodily Injury/Property Damage 

COVERAGE B: Personal and Advertising Injury   COVERAGE C: Medical Payments

 

CGLCGL 

COVERAGE A  

EXCLUSIONS  

a.    EXPECTED OR INTENDED INJURY  b.    CONTRACTUAL LIABILITY  c.    DEFENSE COSTS ASSUMED UNDER CONTRACT  d.    LIQUOR LIABILITY  e.    WORKERS’ COMPENSATION/EMPLOYER’S LIABILITY  f.     POLLUTION  g.    AIRCRAFT, AUTOS AND WATERCRAFT  h.    MOBILE EQUIPMENT  i.      WAR  j-n. INSURED’S PROPERTY, PRODUCTS AND WORK

PRODUCTS AND COMPLETED OPERATIONSPRODUCTS AND COMPLETED OPERATIONS 

Bodily injury or property damage occurring away from premises owned or rented by the insured and arising out of the insured’s product or work.

(A product away from the insured’s premises injures a third-party)

This affects the Products-Completed Operations aggregate.

AS OPPOSED TO

(A product injures a third-party while on the insured’s premises)

This affects the General Aggregate of the policy.

CGLCGL

 COVERAGE B: PERSONAL AND ADVERTISING INJURY

PERSONAL INJURY means “injury, other than bodily injury,” arising out of:

 • False arrest, detention or imprisonment.

•` Malicious prosecution.

• Wrongful eviction, wrongful entry, invasion of private occupancy.

ADVERTISING INJURY means injury arising out of one or more of: 

• Oral or written publication of material that slanders or libels.

• Oral or written publication of material that violates a person’s right of privacy.

• Misappropriation of advertising ideas or style.

• Infringement of copyright, title or slogan.   

Injury can include, but not limited to, physical harm or impairment, mental anguish, fright, shock, humiliation and loss of reputation.

 

CGLCGL 

COVERAGE C: MEDICAL PAYMENTS  

MEDICAL PAYMENTS COVERAGE is not liability insurance, because it pays regardless of whether the insured is legally liable. 

Provides a modest amount of money to settle minor injury cases without having to make a determination of liability. 

EXCLUSIONS: • Any insured. • Any hired person or tenant of the insured. • Anyone entitled to workers’ compensation.   

COMMERCIAL AUTOMOBILE LIABILITY INSURANCECOMMERCIAL AUTOMOBILE LIABILITY INSURANCE(Business Auto)(Business Auto)

  

Ownership, maintenance and use of automobiles creates both property and liability loss exposures. The exposures are usually excluded in commercial general liability and property policies. 

 PROPERTY EXPOSURES: • Decrease in, or loss of the auto’s value.

• Loss of use of the auto until it can be repaired or replaced.   

 

LIABILITY EXPOSURES: 

• Owned Autos  Respondeat Superior (Let the employer answer) also known as “vicarious liability”. • Autos Not Owned  Hired and Borrowed Liability Assumed Under Contract Employers Non-Ownership Liability Bailee Loss Exposure • Operations Difficult to Separate from the Auto Exposure • Uninsured and Underinsured Motorists • Auto Medical Payments  

  

NOT restricted to traditional “professions.” PLI defined as “liability for the failure to use the degree of skill expected of a person in a particular field or profession.” - architect’s & engineers, consultants, laboratory technicians, computer programmers, insurance agents, etc.

“Malpractice” or “errors and omissions” No consistent use of terms.

PROFESSIONAL LIABILITY INSURANCEPROFESSIONAL LIABILITY INSURANCE

PROFESSIONAL LIABILITY INSURANCEPROFESSIONAL LIABILITY INSURANCE

•Physician’s Professional Liability Insurance (Med Mal)

•Director’s and Officer’s Liability Insurance (Negligence)

•Public Official’s Liability Insurance (Negligence)

•Employment Practices Liability Insurance (Discrimination)

•Employee Benefits Liability Insurance (Negligence)

•Fiduciary Liability Insurance (Negligence/Discretionary)

OTHERS

No standard Forms. Each insurer uses its own form.

POLLUTION LIABILITY INSURANCEPOLLUTION LIABILITY INSURANCEMost environmental policies are claims-made.

COMMERCIAL GENERAL LIABILITY INSURANCE (CGL)COMMERCIAL GENERAL LIABILITY INSURANCE (CGL) faced with extensive losses, the ISO developed a very comprehensive standard pollution exclusion. Very little, if any coverage.

POLLUTION LEGAL LIABILITY INSURANCEPOLLUTION LEGAL LIABILITY INSURANCE is designed to cover off-site third-party bodily injury/property damage caused by environmental impairment from pollution incidents at named sites. Modifications can include clean-up, liability.

CONTRACTOR’S POLLUTION LIABILITY INSURANCECONTRACTOR’S POLLUTION LIABILITY INSURANCE is a stopgap coverage for the CGL policy. Not all risk. Provides specific liability coverage for pollution conditions arising from contractor’s described operations.

Since the CPLI policy addresses only pollution claims arising from operations, it is necessary to have a companion CGL policy for other contracting exposures.

EXCESS AND UMBRELLA LIABILITY EXCESS AND UMBRELLA LIABILITY INSURANCEINSURANCE

EXCESS LIABILITY INSURANCE FORMS

1. “Following Form”

2. Self-contained, subject to own terms

3. A combination of the two

Tend to be on the same terms as underlying coverage.

UMBRELLA LIABILITY INSURANCE

1. A type of excess insurance broader than ordinary excess insurance policies.

2. Additional limits

3. Replaces primary insurance when aggregate limits are exhausted or reduced

4. Covers some claims not covered by primary policies.

NOTE: 2 & 3 are referred to as “drop-down” coverage”

 

 OCEAN MARINE AND INLAND MARINE INSURANCEOCEAN MARINE AND INLAND MARINE INSURANCE  

OCEAN MARINE insures the cargo of shippers and hull, freight and liability of ship owners. 

Voyage policy 

Open Cargo policy 

Strikes, Riot & Civil Commotion endorsement 

General Average and Particular Average 

Salvage 

Loss coverage includes “perils of the sea” and “Barratry”

 

 

 INLAND MARINE INSURANCEINLAND MARINE INSURANCE  

Inland Marine insurance evolved from Ocean Marine insurance

• Imports  

• Exports 

• Domestic shipments 

• Instrumentalities of transportation and communication 

(Bridges, tunnels, piers, docks, pipelines, power and telephone lines, radio and TV towers, outdoor cranes, loading equipment)  

• Various types of property owned or used by individuals 

(Jewelry, furs, musical instruments, silverware, coin collections)

• Various types of business, profession or occupation property 

(Mobile equipment, builders risk, property with bailees, live animals, property at exhibitions and EDP equipment) 

 

 INLAND MARINE INSURANCEINLAND MARINE INSURANCE

 

Inland Marine insurance covers Movable Equipment and Unusual Property, to include: 

• Agriculture equipment• Mobile equipment• Physician’s equipment• Computer equipment• Farm animals• Fine arts• Buildings under construction (Builder’s Risk)• Patterns, molds and dies• Partially completed products• Property on exhibition• Sales samples• Valuable papers and records• Records of accounts receivable• Musical instruments• Signs• Cameras

   

 

 

INLAND MARINE INSURANCEINLAND MARINE INSURANCE  

TRANSIT INSURANCE • Covers owners of property while in the course of transit by carriers. • Trip Transit policy • Annual Transit policy • Property valued at invoice if between buyer and seller, otherwise ACV.  MOTOR CARRIER OR MOTOR TRUCK CARGO INSURANCE Protects liability of a common or contract carrier for damage to the property it is transporting. 

  

 

COMMERCIAL PROPERTY INSURANCECOMMERCIAL PROPERTY INSURANCE

There are three specified causes of loss forms of property insurance:

•Basic Form

•Broad Form

•Special Form

BASIC FORMBASIC FORM provides the least amount of protection for property.

BROAD FORMBROAD FORM provides a great amount of protection or coverage and is the most commonly used form.

SPECIAL FORMSPECIAL FORM provides all risk coverage for risks of loss except those specifically excluded. This covers Broad Form perils plus theft and other perils not specifically excluded.

OTHER PROPERTY FORMSOTHER PROPERTY FORMS:

BUILDER’S RISKBUILDER’S RISK

BUILDER’S RISKBUILDER’S RISK

Provides some protection for new buildings under construction. Can be endorsed to cover renovations, additions or alterations.

The insured can include the owner and the building contractor.

Covered PropertyCovered Property:

•Foundations

•Temporary structures (Scaffolding, concrete forms)

•Property to be part of the building (lumber, uninstalled windows and doors, sinks, etc.) within 100 feet.

•Property under construction.

BUILDER’S RISKBUILDER’S RISK

Does NOT cover land or water, outside lawn, trees, shrubs or plants, radio or TV antennas, satellite dishes, signs not attached.

Causes of LossCauses of Loss:

•Fire, lightening, explosion, riot/civil commotion, aircraft

•Collapse during construction

•Theft of materials

•Property in transit

BUILDER’S RISKBUILDER’S RISK

Builder’s Risk terminates upon the earliest of:

1. The expiration date of the policy.

2. The date of cancellation

3. When the purchaser accepts the property

4. When the insured’s interest in the property ceases

5. When the insured abandons construction with no intent to complete

PrincipalPrincipal(the party bonded)(the party bonded)

SuretySurety(guarantees Principal)(guarantees Principal)

ObligeeObligee(party receiving benefit)(party receiving benefit)

SURETY BONDSSURETY BONDS

SURETY BONDS ARE:SURETY BONDS ARE:

• Three-party contracts.Three-party contracts.• Not for benefit of party or entity Not for benefit of party or entity

obtaining the bond.obtaining the bond.• For benefit of obligee.For benefit of obligee.• Guarantees performance of one party to Guarantees performance of one party to

a second party.a second party.• Guaranteed by surety.Guaranteed by surety.

Example:Example:

Local, state, and federal governments often Local, state, and federal governments often require contractors on public works projects over a require contractors on public works projects over a certain value to provide a certain value to provide a performance bondperformance bond and and a a payment bondpayment bond..

PERFORMANCE BONDPERFORMANCE BOND

Guarantees to the obligee that the contractor will complete Guarantees to the obligee that the contractor will complete the project;the project;

•According to specification,According to specification,

•On time,On time,

•Within budgetWithin budget

PAYMENT BONDPAYMENT BOND

Guarantees to the obligee that subcontractors an other Guarantees to the obligee that subcontractors an other suppliers will be paid.suppliers will be paid.

BID BONDBID BOND

Often required when a contractor submits a proposal or Often required when a contractor submits a proposal or bids on a contract.bids on a contract.

Guarantees to the obligee that the contractor, if Guarantees to the obligee that the contractor, if awarded the contract, will enter into it and provide awarded the contract, will enter into it and provide necessary performance and payment bonds.necessary performance and payment bonds.

EXAMPLES OF OTHER SURETY BONDSEXAMPLES OF OTHER SURETY BONDS

• Guarantee qualified self-insurers will pay Guarantee qualified self-insurers will pay claims.claims.

• Guarantee parties in judicial proceedings will Guarantee parties in judicial proceedings will appear at proceeding or pay money that is appear at proceeding or pay money that is assessed.assessed.

• Maintenance Bonds- guarantee faulty Maintenance Bonds- guarantee faulty work, defective materials will be work, defective materials will be corrected or replaced.corrected or replaced.

• Supply Bonds- guarantee supplies or Supply Bonds- guarantee supplies or materials will be furnished and delivered materials will be furnished and delivered according to specifications.according to specifications.

• License and Permit Bonds- hold public License and Permit Bonds- hold public entities harmless for damages arising entities harmless for damages arising from licenses and compliance with from licenses and compliance with statutes and regulations.statutes and regulations.

• Public Official Bonds- guarantee that Public Official Bonds- guarantee that public officers will perform the duties of public officers will perform the duties of office in good faith—guarantee honesty office in good faith—guarantee honesty and faithful performance of duty.and faithful performance of duty.

• Fiduciary Bonds- guarantee those Fiduciary Bonds- guarantee those entrusted with property or money of entrusted with property or money of others will exercise those duties others will exercise those duties faithfully, account for property and faithfully, account for property and reimburse any deficiency.reimburse any deficiency.

BOND LIMITBOND LIMIT

The The Bond LimitBond Limit or or Bond PenaltyBond Penalty is is the amount for which the bond is the amount for which the bond is written.written.

INDEMNITY AGREEMENTINDEMNITY AGREEMENT

• If principal defaults on obligations, If principal defaults on obligations, surety must see contract is fulfilled or surety must see contract is fulfilled or pay damages.pay damages.

• Principal must reimburse surety and Principal must reimburse surety and make surety whole. (common and state make surety whole. (common and state law)law)

VendorVendor

COVCOV

BrokerBroker

CGLCGL ALAL WCWC PROPRO

XcessXcess XcessXcess XcessXcess

RISK RULESRISK RULES

• Don’t risk more than you can afford to lose.Don’t risk more than you can afford to lose.

• Don’t risk a lot for a little.Don’t risk a lot for a little.

• Consider the odds of an occurrence.Consider the odds of an occurrence.

• Have clearly defined objectives.Have clearly defined objectives.

• Never depend solely on someone else’s insurance.Never depend solely on someone else’s insurance.

• Verify the accuracy of all relevant information you receive.Verify the accuracy of all relevant information you receive.

• Read every insurance policy or certificate of insurance Read every insurance policy or certificate of insurance carefully.carefully.

•Risks accepted under contracts are not always covered by Risks accepted under contracts are not always covered by contractual liability insurance.contractual liability insurance.

• Know the implications of “claims-made” and “occurrence” Know the implications of “claims-made” and “occurrence” based insurance.based insurance.

• Modify the “notice” provision on an insurance policy to Modify the “notice” provision on an insurance policy to mean a specific person.mean a specific person.

• Common sense is still the single most important ingredientCommon sense is still the single most important ingredient.

RISK RULESRISK RULES

Successful risk management in procurement Successful risk management in procurement requires trained people, using good judgment, requires trained people, using good judgment, working within a system of positive management working within a system of positive management support with well documented and understood support with well documented and understood procedures—and you have to want to do it!procedures—and you have to want to do it!

CONTACTCONTACTDon LeMondDon LeMond

Director,Director,

Division of Risk ManagementDivision of Risk Management

Department of the Treasury, Department of the Treasury,

Commonwealth of VirginiaCommonwealth of Virginia

(804) 225-4620(804) 225-4620

Don.lemond@trs.virginia.govDon.lemond@trs.virginia.gov