Local Agency Certification Training The Nuts and Bolts of Insurance

1. Local Agency Certification TrainingThe Nuts and Bolts of Insurance March 12, 2010 Ronda Hollis, CPCU ODOT Intergovernmental Agreements and Procurement Risk Manager

2. What is the purpose of Insurance in a Contract? Insurance is a financial source to make claims against in the event a contractor is negligent and this results in a loss e.g. bodily injury, property damage, or personal injury.

3. Where Does Decision-Making about Risk, Insurance, and Bonding Fit in the Procurement Process? • At the inception of an idea that something needs to be procured. • This is an essential part of the procurement planning process. • Far down the road, the value is greatly diminished.

4. 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

5. How Do Contractor’s Get Insurance? • Usually from an insurance Broker that is licensed to do business in the State of Oregon. • Most insurance companies don’t sell insurance directly to the contractor. • The premium can widely vary and is based on: • Financial condition. • Previous claims. • Reputation (jobs gone good or bad). • Market Conditions.

6. What About Insurance Company Ratings? • Commonly referred to as Best’s Rating. • Denotes the insurance company’s: • Financial Condition and solvency. • Claims Payment timeframes and issues. • Complaints and lawsuits. • Quality of investments. • While the contractor’s insurance company’s rating is important, it is difficult for procurement offices to have the rating information readily available. • Many construction companies buy insurance coverage from what are called surplus lines companies. • These insurance companies are not rated.

7. Types of Insurance Companies • Insurance is provided by both admitted and surplus lines carriers. • Admitted insurers have Certificates of Authority to sell insurance in this state. • Surplus lines carriers are insurers that do not have Certificates of Authority in Oregon, but they can still insure contractors who cannot get coverage in the regular, admitted market. • 85% of the carriers that provide the majority of contractor liability coverage in Oregon are admitted insurers.

8. Are Contractors Required to Purchase Liability Insurance? • Oregon law requires building contractors to carry Commercial General Liability insurance. The State Construction Contractors Board will not issue or renew a contractor license without proof of insurance. • There is generally no requirement of insurance for other types of contractors. • Coverage limit requirements vary depending on the contractor’s license category. • Many contractors carry coverage in excess of CCB’s requirements.

9. What About Self-Insurance?

10. What is Self-Insurance? • A company or entity’s self-funded insurance program. • Some entities have funded self-insurance pools, others just pay losses as they happen. • For the most part, only very large companies or public entities self-insure. • Sometimes self-insurance has excess commercial insurance coverage for catastrophic events.

11. 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 contractor’s ability to adjust, process, settle, litigate, and pay claims.

12. The Insurance Market

13. What are the Current Issues Surrounding Contractor Insurance? • Premium rates for contractor liability insurance were greatly increasing from 2001 - 2003. The DCBS analysis from 2005 indicates contractor premiums are flattening out or possibly even decreasing. • More insurers are entering the market, and capacity has increased. • Insurers’ criteria for issuing policies has grown much tighter. • In some cases contractors find that while they are readily able to get or renew coverage, that coverage is more limited and thus leaves them with increased exposure to liability risk.

14. How Much Has the Cost of Contractor Insurance Increased? • Rate filings submitted to the DCBS Insurance Division in 2004 by admitted carriers show overall average premium rate increases of 19 percent. In the 2005 analysis premium increases had greatly declined. Some premiums have been decreasing. • The more dramatic rate changes experienced by many individual contractors has decreased. • Insurance availability has increased. • Coverage continues to be less extensive than in the past (more exclusions).

15. Why Have Costs Increased? • The insurance industry and others frequently cite a variety of factors that contribute to increased premiums and tighter underwriting standards, including: • Increased claims and losses stemming from the introduction of new building products that resulted in water damage, mold, and other problems. • Increased litigation stemming from contractor performance issues. • Lower than expected investment return due to the recent recession.

16. Insurance Policies

17. Common Insurance Policy Parts & Pieces • Declarations Page – Outlines the coverage types and limits under the policy. • Coverage – The Insuring Agreement. • Exclusions – What isn’t 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.

18. Important Terms Used in Insurance Policies

19. 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.

20. A Claims Made policy covers all claims reported and filed during the policy period.

21. 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.

22. 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.

23. What Do “Project Policy,” “Per Project Aggregate Endorsement” and “Policy Aggregate” Limits of Coverage Mean?

24. “Project Policy” • A policy purchased specifically for the project. • Coverage only applies to the project and events that arise out of the project. • Limits of coverage are dedicated to the project and can’t be diluted elsewhere in the contractor’s operations. • Premiums reflect the exclusive coverage and are substantially more than “Per Project Aggregate Endorsements.”

25. “Per Project Aggregate Endorsements” • Means that the limits of insurance coverage apply to your project only – they are not shared with other customers of the contractor. • More reliable means of assuring insurance limits will be available. • Important coverage on projects where negligent acts, errors and omissions can result in catastrophic losses or claims.

26. “Policy Aggregate” Limits of Coverage • Sometimes referred to as “practice” policies. • Means you are sharing the limits of coverage with all other customers of the contractor. • Less reliable than “Project Coverage” or “Per Project Aggregate Endorsements”. • Limits of coverage could be exhausted by another claimant and not available if needed by your entity. • May increase the chance your entity will be sued if claimant cannot get satisfaction from contractor for harm done.

27. Coverage Assessment What kind of insurance or bonds?

28. What Does Insurance Really Cover?

29. Common Types of Insurance Coverage • Commercial General Liability • Automobile Liability • Professional Liability • Workers’ Compensation

30. 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

31. Commercial General Liability(CGL)

32. We Aren’t Ignoring the Exposures Other than Construction… • General Liability (CGL) coverage is most applicable to the construction industry. • It is the most common type of insurance required in contracts and sometimes can be thought of as a catch-all. • “Professional” types may find little actual coverage under their CGL policies because the bulk of their work “arises out of professional judgment.”

33. 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.

34. General Liability Insurance Myths • General Liability insurance covers “the indemnification provided in the contract”. • 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. • MOSTLY FALSE

35. Summary of the Case Emerald Pacific Homes (Emerald), Inc. contracted to build a custom home. Satisfied with neither the quality nor the speed of construction, plaintiffs brought legal action against Emerald and its owners for negligence and breach of contract. The court withdrew the negligence issue from the jury by instruction, ruling that the only duties the defendants allegedly breached derived from the contract and not from independent source of law.

36. 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 owed 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

37. 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.

38. What Does this Really Mean? • Claims for defects in workmanship are generally not covered by Commercial General Liability coverage because they arise from a contractual obligation rather than negligence. Contractual disputes or obligations are excluded. • Performance Bonds are the best tool to protect against faulty workmanship and time delays.

39. 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.

40. 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

41. 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.

42. 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.

43. What Does This Really Mean? A CGL Policy will not pay for losses due to a contractor’s work on or damage to your agency’s electronic data!

44. 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."

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

46. CGL Policy Definitions"Products-completed operations hazard“(Continued) 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.

47. CGL Policy Definitions"Products-completed operations hazard“(Continued) (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.

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

49. CGL Policy Definitions"Products-completed operations hazard“(Continued) • 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.

50. 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.