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
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 state’s defense against a claim and
make the state subject to unlimited
liability.
 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
bonds.
• 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.
•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 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
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 contractor’s 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 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“
(continued)

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

Does not include "bodily injury" or "property

damage" arising out of:
(2) 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;
(8) The existence of tools, uninstalled
equipment or abandoned or unused
materials; or
 CGL Policy Definitions
"Products-completed operations hazard“
(Continued)

(1) 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 Bailee’s Customers.
 Important
CGL Exclusions
1) 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
1) 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
 Important
CGL Exclusions
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 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 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
Considerations
• 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
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?
 Automobile Liability Coverage
Considerations
• 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
Coverage
 The Terms Professional
Liability and Errors and
Omissions Coverage are used
interchangeably.
 Who Should Have Professional
Liability or Errors and Omissions
Coverage?
 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.
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 Bailee’s 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
carrier’s 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 buyer’s
once the goods are on the shipper’s loading
dock.
– 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
possession.
 Inland Marine Coverage
Instrumentalities of Communication
and Transportation
• 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.
 Other Types of
Inland Marine Coverage
• 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.
 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.
 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
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 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
project.
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
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.
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
building.
• 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
aircraft.
 When Do You Need
Aircraft Liability Coverage?
When the contractor is using an
airplane to provide the contracted
service.
 Aircraft Liability Coverage
Considerations
• If the contract involves the aerial application of
any chemical, fertilizer, seed, or bait
add Aircraft 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.
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 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
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 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
project.
 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
INSIGNIFIC MINO MODERA MAJOR CRITICA
ANT R TE L
ALMOS M H E E E
Likelihood

T
CERTAI
LIKELY M M H E E
N
POSSIB L M H E E
LE
UNLIKE L L M H E
LY
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
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 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
with.
 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-
renewed.
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.
 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
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 on-
site pollution exposure and maintains
regulatory compliance. Lottery has made
arrangements for appropriate disposal of
machines.
 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
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.
 What could go wrong?
Who could be harmed?
Liability:
• 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 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
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
INSIGNIFIC MINO MODERA MAJOR CRITICA
ANT R TE L
ALMOS M H E E E
Likelihood

T
CERTAI
LIKELY M M H E E
N
POSSIB L M H E E
LE
UNLIKE L L M H E
LY
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
Ratin Value Description (Opportunity)
g
1 InsignificMinor budgetary, funding, or
ant 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
machines.
• 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
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 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
project.
• 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
Liability:
• 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,
Trucker’s Coverage, Inland Marine
coverage for Domestic Goods in
Transit and Goods of Bailee’s
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.
• Trucker’s Coverage: $2 million per accident.
• Inland Marine:
– Domestic Goods in Transit: The value of the
shipment.
– 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
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