Friday, January 5, 2007

Insurance Requirements for Contractors

What are the usual and customary insurance standards for contractors (including professionals, e.g., legal, engineering, financial auditors, etc.)?
A set of generic contractor insurance requirements [these would NOT apply to airport construction, high-rise construction, large construction projects (construction values greater than $1 million) marine construction, asbestos-related abatement, construction, hazard control, or removal contractor, disposition and development agreements (brownfields' redevelopment), environmental remediation services, garbage trucks, haulers, and refuse transportation and disposal, lead paint-related abatement, construction, hazard control, or removal contractor, crude oil sales broker, crude oil operating contractor, LNG-related facilities and pipelines, other pipelines and utilities, or aircraft, airport, seaport, or marine activities--I look at these separately] follows:
INSURANCE. Concurrent with the execution of this Agreement and as a condition precedent, Contractor shall procure and maintain the following insurance at Contractor's sole expense for the duration of this Agreement, including any extensions or renewals, from insurance companies that are authorized to write insurance in the State of California or from excess or surplus lines insurers or insurers that are authorized to transact insurance in the State of California by federal law and that have ratings of or equivalent to A:VIII by A.M. Best Company:
(a) Commercial general liability insurance equivalent in scope to ISO form CG 00 01 11 85 or 10 93 in an amount not less than One Million Dollars ($1,000,000) per occurrence and Two Million Dollars ($2,000,000) general aggregate. Such insurance shall not exclude or limit coverage for broad form contractual liability, cross liability protection, independent contractors liability, or products and completed operations liability. The City of Long Beach, its officials, employees, and agents shall be named as additional insureds by endorsement equivalent in scope to ISO form CG 20 10 11 85 or CG 20 26 11 85 and this coverage shall contain no limitations on the scope of protection afforded to the City, its officials, employees, and agents.
(b) Commercial automobile liability insurance equivalent in scope to CA 00 01 06 92 in an amount not less than Seven Hundred Fifty Thousand Dollars ($750,000) combined single limit covering Symbol 1 ("Any Auto").
(c) Professional liability or errors and omissions liability insurance in an amount not less than One Million Dollars ($1,000,000) per claim and in aggregate covering the services provided pursuant to this Agreement. If this coverage is written on a claims-made form, the Contractor must provide evidence of continuous coverage or an extended reporting endorsement for at least three years after the termination of the work under this contract.
(d) Workers' compensation insurance as required by the Labor Code of the State of California and employer's liability insurance in an amount not less than One Million Dollars ($1,000,000) per accident or occupational illness.
Any self-insurance program, self-insured retention or deductible must be approved separately in writing by City's Risk Manager or designee and shall protect the City, its officials, employees, and agents in the same manner and to the same extent as they would have been protected had the policy or policies not contained such self-insurance or deductible provisions.
Each insurance required hereunder shall be separately endorsed to provide that coverage shall not be canceled, nonrenewed, or materially changed in coverage or limits (other than exhaustion of limits by paid claims) except after thirty (30) days prior written notice to City (ten (10) days prior written notice for cancellation due to nonpayment of premium is acceptable).
Each insurance required hereunder shall also be separately endorsed to provide that coverage shall be primary and not contributing to any other insurance or self-insurance maintained by the City, its officials, employees, or agents. Each insurance required hereunder shall be written on an occurrence basis, with the exception that professional liability or errors and omissions liability insurance may be underwritten on a claims-made basis.
Contractor shall require any subcontractor or subcontractor that Contractor may use in the performance of this Agreement to maintain insurance in compliance with the provisions of this section, unless City's Risk Manager or designee otherwise agree in writing.
Prior to the commencement of this Agreement, Contractor shall deliver to City certificates of insurance and the endorsements required hereunder for approval as to sufficiency and form, including the certificates of insurance and endorsements of any subcontractor or subcontractor to Contractor. The certificates and endorsements for each insurance policy shall contain the original signature of a person authorized by that insurer to bind coverage on its behalf. In addition, Contractor shall, within at least thirty (30) days of expiration of such policies, furnish City with certificates of insurance and endorsements evidencing renewal of the insurance required herein, including the insurance of any subcontractors and subcontractors to Contractor. City reserves the right to require complete certified copies of all said policies at any time, including the policies of any subcontractors and subcontractors to Contractor.
Such insurance as required herein shall not be deemed to limit Contractor's liability relating to performance under this Agreement. The procuring of insurance shall not be construed as a limitation on liability or as full performance of the indemnification and hold harmless provisions of this Agreement.
City makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Contractor's liability or obligations under this Agreement.
Any modification or waiver of the insurance requirements herein shall be made only with the written approval of the City's Risk Manager or designee.
Why is it appropriate to require contractors who are not hired for driving services to provide evidence of automobile liability insurance?
If use of a vehicle is involved in the provision of the scope of services, auto insurance should be required. This includes, but is not limited to, such actions as delivery of materials to job sites, transport of passengers or cargo, and use of specialty vehicles. If, for example, the sole use of a vehicle for an accounting auditor is to drive to your city hall and park in your public garage when she or he works at your site, auto insurance is irrelevant for purposes of the contract. If the same auditor uses a van to pick up or deliver large volumes of records, on the other hand, it should be required. If someone is hit or your property is damaged, you want to ensure that the taxpayers don't foot the bill.
Why do we insist on this even when they don't have any company cars?
The only reason to insist on a requirement is if it is included in an executed contract. In such a case, noncompliance with the requirement is a breach of contract. Also, as a public entity, consistency and impartiality in interpreting contracts is crucial to avoid allegations of economic discrimination.
For contracts under negotiation (where this is allowable), I wouldn't insist on any particular risk transfer template. However, the final requirements must be in conformance with the risk profile of the contracted goods or services.
If we're hiring professionals, why do we need them to provide evidence of commercial general liability insurance covering liability arising from premises, operations, independent contractors, products-completed operations, personal injury and advertising injury and liability assumed under an insurance contract (including the tort liability of another assumed in a business contract)?
For the auditor mentioned previously, her CGL with an additional insured in favor of my entity is going to pay for my entity's defense when Joe Public trips over her auditor bag in the lobby of City Hall. For many other professionals, the potential occurrences are more severe. In short, professionals already have this. Benefit from it.
These professionals are not going to be hiring subcontractors to do work we contract for, so why do we require this? Similar arguments for products-completed operations; they won't have any products or completed operations, etc., so why require that?
If your contracts bar subcontracting, then requiring insurance of subcontractors is superfluous. Ditto for products.
These professionals are not going to be issuing legal opinions or preparing drawings, so why do we require that they buy professional liability insurance "when none of their other clients require this"?
The "none of their other clients" and "you're the only" arguments are bogus. If the professionals deal primarily with the private sector, they can expect lesser insurance requirements (private sector firms are often less risk adverse and prefer not to inflate their contract values with risk transfer costs). Also, normally public sector insurance requirements are known to bidders prior to bidding such that responsible bidders should account for the increased costs of insurance in their bids. To remove insurance requirements post bid is effectively giving the professional an unfair advantage over those bidders who may not have had the lowest bid simply because they bid on a "fully loaded" basis.
Also, I realize there are no "standard" insurance requirements as what should be required depends upon the scope of work envisioned but I'd be interested to know how you address this constant request for some standardization.
Just as there are different types of agreements (e.g., permits, contracts, purchase orders, leases, grants), there are different scopes of services (e.g., suppliers, professionals, temps in differing venues (e.g., airports, seaports, food service, construction). Standardization lends itself well to the more common requests, but complete standardization is impossible in an ever changing world.
What do you do when Vendors wish to insert Limitation of Liability clauses in their contracts (this is happening more and more often, especially with Computer Software and Communications equipment vendors) that limit their liability in some fashion (i.e.. to the cost of the contract price; no coverage for consequential or special damages,

I would strongly discourage limitation of liability clauses. However, certain vendors and professionals provide unique services or goods that are necessary to your operation. That said, I cannot determine what these are (I would assume that there are few unique products and services--almost everything has acceptable substitutes). Our procedure for this determination is to have a signed memo from the department head or city manager describing the uniqueness of the good or service, stating the need for it, verifying that the vendor or professional does not maintain the required insurance, and waiving or delimiting it (this is the only case where the waiver or limitation does NOT come from risk management, but from the department head). Using this procedure, I get only a handful (or fewer) such waivers or limitations per year. It forces the department to think about both the "uniqueness" and risk.
... recently we have had two investment managers for our pension funds balk at signing a contract that required professional liability insurance. They would provide proof of coverage once a year, but would not sign the contract before lengthy negotiation. Has anyone else encountered this problem?
Investment advisors e&o liability is not as important as fiduciary liability, ERISA fidelity bonds (legally required), and employee benefit liability. If the investment manager has discretionary authority or control over the fund, it is a fiduciary. Otherwise, not. Due diligence is the key; insurance is helpful, but not the answer.

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