Insurance.pps

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Contractual Insurance Provisions

Sponsored by:

The Department of Management Services

And

The Department of Financial Services

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Agenda

Welcome, Objective, Introductions

Section I-State Risk Management Trust Fund

Section II-Workers’ Compensation

Section III-Liability and Surety Bonds

Insurance Provisions

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Objective

The objective of this workshop is for each Stateprofessional to leave here with a betterunderstanding of:

State Risk Management Trust Fund New statutory Workers’ Compensation Liability insurance and surety bonds.

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Purpose of Contractual Insurance Requirements

Contractual insurance requirements provide two majorbenefits:

They ensure that a contractor has the financial ability to pay for damages that result from their negligence

Protect the State from the vicarious liability (the liabilitywhereby one person is held responsible for the actions ofanother) established by our contractual arrangements withcontractors.

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Section IState Risk Management Trust Fund

Presented by:

Ray Williams, State Liability Claims Bureau

Helen Neubauer, State Employees’ Workers’ Compensation Claims Bureau

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Division of Risk Management

Provides statutorily required coverages to state of Florida agencies:

Workers' compensation (state employees and volunteers). General liability (negligence of state employees, agents, and

volunteers). Automobile liability (negligence of state employees, agents, and

volunteers). Federal civil rights/employment discrimination. State buildings and property (fire and windstorm).

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Section 768.28 ‑ Waiver of Sovereign Immunity In Tort

State can be sued in tort for money damages due to negligent acts of employees, agents, and volunteers committed in course and scope of employment.

Limits of liability $100,000 per person, $200,000 per occurrence.

Breach of contract (by the state) claims or liability assumed by the state under any contract is not covered by Risk Management.

Risk Management does not cover claims based on delay or lack of performance.

State does not waive sovereign immunity or increase liability limits upon entering into a contract or obtaining insurance coverage for tortious acts.

Illegal for state to agree to indemnify another party or another State agency (s. 768.28(18)].

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State Risk Management Trust Fund’s Recommended Contractual Liability Provisions

At a minimum agencies should consider the following provisionsfor all contracts. General Liability coverage requirement for all contractors. The contractor’s General Liability policy should include the state

agency as an additional insured. Indemnification language for all contracts.

– 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. 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.

– 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.

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Advantages of Clear Contractual Liability Provisions

Protects state agencies from claim costs. Increases efficiency of claims handling

process. Increases efficiency of litigation process. Reduces unnecessary litigation and costs

between state and contractor. Eliminates benefit to claimant from state

and contractor "pointing fingers".

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State Risk Management Trust Fund’sWorkers’ Compensation Coverage

Who is covered by the State Risk Management Trust Fund

Program for workers‘ compensation?

• Employees and volunteers from all departments of the State of Florida.

• Other statutory employees.

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State Risk Management Trust FundGeneral Information & Potential Problems

Workers’ Compensation Coverage

General Information:When is workers' compensation insurance required?• Every employer coming within the provisions of Chapter 440 shall

be liable for, and shall secure, the payment to his or her employees, of the compensation payable under ss.440.13, 440.15 and 440.16.

• Employer includes the state and all political subdivisions, public and quasi public corporations, and any person carrying on any employment.

• Employment includes all private employment in which four or more employees are employed by the same employer, or with respect to the construction industry, all private employment in which one or more employees are employed by the same employer.

Potential Problems:Claims from individuals that are not State of Florida employees,volunteers or other statutory employees.

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Prepared For:DMS Insurance WorkshopTallahassee, FloridaDecember 3rd, 2003

Section II

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DIVISION OF WORKERS’ COMPENSATION

Mission: To actively ensure the self-execution of the workers’ compensation system through educating and informing all stakeholders in the system of their rights and responsibilities, compiling and monitoring system data, and holding parties accountable for meeting their obligations.

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Struck from the previous Statute

Exemptions Not applicableOn Commercial Building($250,000 project value)

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New Definitions

EmployeeIncludes Sole Proprietors, Partners, and Independent Contractors, working, or providing services in the construction industry

Home owners – Acts of construction on their own property not included

Corporate OfficerIncludes member of a Limited Liability Company who owns at least 10% of the Company

Construction Industry

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Exemptions (On orAfter January 1, 2004)

Limited to three in the construction Businesses. Members of Limited Liability Companies (LLC’s) are eligible for the construction exemption Officers must have an exemption on file or they are an employee. Officers must be share holders, each owning at least 10% of the total stock issued by the corporation.

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Exemptions (Continued)

Exemption Certificates apply only to the corporate officer named on the exemption, and apply only within the scope of the business or trade listed on the exemption. Exempt officers may not recover WC benefits, and, carriers may not consider an exempt officer as an employee for determining premium.

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Exemptions (Continued)

The DFS shall revoke an exemption if it determines the officer no longer meets the requirements of the exemption. (1/1/2004)

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Stop Work Orders (SWO’s)

A SWO is effective upon all sites for an employer. (10/1)

SWO’s and Penalty Assessments shall be in effect against any successor corporation or business entity. (10/1)

A violation of a SWO constitutes insurance fraud. (10/1)

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SWO’s and penalty assessments shall be in effect against any successor corporation or business entity

with the same principals or officers. (10/1/2003) A corporate officer is not eligible for an exemption if he/she is “affiliated” with a person who is delinquent in paying a SWO or penalty assessment. (1/1/2004)

Stop Work Orders (continued)

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Powers of the Department

Conduct InvestigationsEnter and inspect place of business at any reasonable time.Examine and copy business records.Administer oaths and affirmations.Certify to official acts.Issue and serve subpoena’s for attendance of witnesses or records.Issue SWO’s.Enforce terms of SWO’s.Levy and pursue actions to recover penalties.Seek injunctions.

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Submitting false, misleading, or incomplete information, on a workers’ compensation application for coverage with the purpose of avoiding or reducing the amount of premium constitutes a second-degree felony.If the DFS determines that an employer has provided materially incorrect workers’ compensation information to avoid proper premium calculations, the DFS must immediately inform the employers’ insurance carrier which then must commence an on-site audit of the employer within 30 days. If the carrier fails to commence an audit, the DFS may contract with an auditor to conduct the audit at the employer’s expense. The carrier is not required to conduct the audit if it gives notice of cancellation of the policy within 30 days after receiving notification from the DFS and an audit is conducted in conjunction with the cancellation.

Fraud on an Insurance Application

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Any employer that knowingly employs any person who has used false, fraudulent, or misleading oral or written statements as evidence of identity commits a first degree misdemeanor. (10/1)

Coverage

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A Contractor is required to provide evidence of workers’ compensation insurance or a valid exemption to from all subcontractors.A subcontractor is not liable for the payment of compensation to the employees of another subcontractor and is protected by the exclusiveness-of-liability provisions only if the subcontractor or contractor has secured coverage for the subcontractor’s employees, and if the subcontractor’s own gross negligence was not the major contributing cause of the accident.

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Every employer, when applying for and receiving a building permit must show proof and certify to the building permit issuer that it has secured coverage.

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In addition to not obtaining coverage, failure to secure payment of compensation also includes materially understating or concealing payroll; materially misrepresenting or concealing employee duties to avoid proper premium classification and materially misrepresenting or concealing information pertinent to the computation of an experience modification factor.

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Out of State Employers

Any employer with employees engaged in work in this State must obtain a Florida endorsement or purchase a Florida workers’ compensation policy. The coverage must utilize Florida class codes, rates, rules and manuals. Failure to do so constitutes a second-degree felony.

All Construction industry employees are assigned to Florida.

Payroll of executive supervisors who occasionally visit a Florida location, but are not in direct charge of a Florida location may be assigned to the headquarters state (except construction, who are assigned to Florida)

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DFS may require any employer who is found to be non-compliant to file periodic reports for two years. (10/1/2003)

DFS may impute payroll for penalty calculation purposes, when an employer fails or refuses to provide business records. (10/1/2003)

Any subsequent violation of compliance within 5 years after the most recent violation, shall constitute insurance fraud. (10/1/2003)

Fines and Penalties

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A $1,000 penalty shall be assessed against an employer for each day of non-compliance. In addition, the non-compliant employer shall pay 1.5 times the manual premium the employer would have paid during the period of non-compliance or $1,000, whichever is

greater. (10/1/2003) In addition to other penalties, $5,000 per employee for each employee of the employer who the Division determines not to be an independent contractor as defined in 440.02. (10/1/2003)

Fines and Penalties (continued)

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Sub Plan D

An assessable policy - meaning that if the premiums collected are insufficient to cover the claims, the employers who are insured in the Sub Plan will be assessed additional premium to make up the difference.

No more than 15 employees, or they will be moved out of the plan

“Experience Mod” 1.1 or less

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All employers must update an application for coverage within 7 days of any change of information. (10/1/2003)

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Section IIILiability and Surety Bonds

Jack Swisher, Office of Insurance Regulation

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What is insurance?

One definition: Insurance is the pooling of fortuitous losses by

the contractual transfer of the risk of such losses to insurers, who, in exchange for a premium, agree to indemnify the insured for such losses and associated expenses or to render other services connected with the risk.

An operational definition:Pooling of lossesPayment of fortuitous lossesTransfer of riskIndemnification

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Requirements of an Insurable Risk:

There must be a large number of exposure units The loss must be accidental and unintentional The loss must be determinable and measurable The loss should not be catastrophic The chance of loss must be calculable The premium must be economically feasible

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Basic parts of an insurance contract:

Declarations Definitions Insuring agreement Exclusions Conditions Miscellaneous provisions

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What is liability insurance?

One brief definition:

Insurance to protect one from the possibility of legal liability.

Each person in the U.S. has legal rights. A Legal Wrong is a violation of a person's legal rights in the form of a failure to perform a legal duty owed to a certain person or to society in general.

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Three broad classes of Legal Wrongs:

Crime (a legal wrong against society - punishable by fine, imprisonment, or death)

Breach of Contract (a legal wrong based on a violation of an agreement between individual members of society – punishable by specific performance or money damages)

Tort (a legal wrong other than a crime or a breach of contract – punishable by money damages

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Three classifications of Torts:

Intentional Torts (e.g., assault, battery, trespass, libel, slander, etc.)

Absolute Liability – aka Strict Liability (e.g., ownership of wild or dangerous animals, manufacturing medicines, blasting operations, etc.)

Negligence

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Elements of a Negligent Act:

Existence of a legal duty Failure to perform that duty Damage or injury to the

complaining party Proximate cause relationship

between negligent act and the infliction of damages

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Liability Insurance

Liability insurance primarily protects a policyholder from money damages arising from a tort, however, most liability policies also protect the policyholder from additional costs including, but not limited to, the cost of investigation and defense of a claim. It should be noted that most liability insurance policies are primarily designed to protect the policyholder from money damages arising from the negligence of that policyholder.

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What is Commercial General Liability Insurance?

The word 'general' denotes the fact that the policy does not cover those legal wrongs which are insurable under more specific policies such as an automobile liability policy, an aircraft liability policy, or surgeon's professional liability policy. It does cover those occurrences which are 'general' in nature and are not specifically insurable under another type of policy.

The word 'commercial' denotes the fact that the policy is specifically designed to cover commercial ventures and does not contain an exclusion for commercial activities. (Note that a personal auto policy excludes commercial activities as does the liability section of a homeowners policy.)

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It is worth noting that an older version of the Commercial General Liability Policy was the Comprehensive General Liability Policy. The word 'comprehensive' was deleted from many insurance policies because some people held that name to be misleading in that the word 'comprehensive' implied the policy covered everything. Whether the policy is called Commercial General Liability or Comprehensive Liability, it is often referred to by the acronym 'CGL'.

Most of the policy forms used in commercial property/casualty insurance are copyrighted products created by the Insurance Services Office (ISO). The CGL policy used in this discussion is an ISO policy. I know of no independently filed general liability policies.

What is Commercial General Liability Insurance? (cont)

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TheISO Commercial General Liability

Coverage Form

What is covered? Who is insured?

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What is covered?

Insuring Agreement – Coverage AWe will pay those sums the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies. We will have the right and duty to defend the insured against any suit seeking those damages. However, we will have no duty to defend the insured against any suit seeking damages for bodily injury or property damage to which this insurance does not apply. We may, at our discretion, investigate any occurrence and settle any claim or suit that may result.

(Italicized words or phrases are defined within the policy.)

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Insuring Agreement – Coverage BWe will pay those sums the insured becomes legally obligated to pay as damages because of personal and advertising injury to which this insurance applies. We will have the right and duty to defend the insured against any suit seeking those damages. However, we will have no duty to defend the insured against any suit seeking damages for personal and advertising injury to which this insurance does not apply. We may, at our discretion, investigate any occurrence and settle any claim or suit that may result.

Insuring Agreement – Coverage CWe will pay medical expenses (as described below) for bodily injury caused by an accident.

(Italicized words or phrases are defined within the policy.)

What is covered? (cont)

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Who is insured?

In general, only those named in the Declarations of the policy, but also:

If the insured is an individual – the spouse is insured. If the insured is a partnership or joint venture – the

partners are and their spouses are insured. If the insured is a limited liability company – the

members and managers are insured. If the insured is a corporation – the officers, directors,

and stockholders are insured. Also insured are employees and volunteer workers –

regardless of the form of the business. However, insured status is limited to the scope of the

business insured and the role of the individuals involved.

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How does a contractor's CGL policy cover the State of Florida?

By requiring that the contractor name the State of Florida as an additional insured. This is done by means of an endorsement to the CGL. (An endorsement is a written provision which modifies the provisions of the original contract. An endorsement is sometimes called a rider.)

Endorsements developed by the ISO give an additional insured a very limited status. The intent of the coverage is to provide the additional insured a sort of "tag along" status. The coverage only applies to the extent that the named insured is involved in the claim and the policy applies to the particular claim. Most claims involving an additional insured end up with the additional insured being dismissed from the suit while the cost of the dismissal is borne by the named insured.

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Historically, insurers looked very skeptically at requests for additional insured endorsements. Individual underwriting consideration was given to each request, so the cost for the endorsement was based largely on the time spent on a very specific underwriting effort. As time passed, more requests were received and less time was spent on any individual request; the cost for the endorsement was based more on the cost of the creating the endorsement than on the underlying risk. Now, some insurers have developed independent (i.e., not developed by ISO) products generally called Blanket Additional Insured endorsements. These endorsements provide Additional Insured status to any entity which requires the named insured to provide that entity Additional Insured status as a condition of a contract between the named insured and that entity. The Blanket Additional Insured endorsement greatly reduces the amount of paperwork for the insurer, the named insured, and the named insured's agent.

How does a contractor's CGL policy cover the State of Florida? (cont)

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By requiring reasonable limits of liability. Reasonable limits of liability are a judgmental compromise between the cost of the worst liability situation which could possibly happen to a contractor and the limits of liability which will normally be available to the contactor in question. Some of the common limits which are usually available are $100,000, $250,000, $500,000, and $1,000,000 per occurrence.

How does a contractor's CGL policy cover the State of Florida? (cont)

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How could the State of Florida be held liable for something a

contractor did?

The legal doctrine of imputed negligence means that under certain circumstances, the negligence of one person can be attributed to another. The particular doctrine of the most interest is vicarious liability.

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Surety Bonds

There are always three parties to a surety bond: Principal Obligee Surety

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For the sake of a simple introduction, there are some rough similarities between a surety bond and a liability insurance policy. Consider that the Principal has roughly the same status as the named insured in a liability insurance policy. Consider that the Obligee has roughly the same status as a claimant in a liability insurance policy. Consider that the Surety has roughly the same status as the insurer in a liability insurance policy.

Surety Bonds

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Differences between liability insurance and surety bonds

There are three parties to a surety bond (principal, obligee, and surety) while there are only two parties to a liability insurance contract (insurer and named insured).

Under a liability insurance policy, the insurer expects to pay losses. Under a surety bond, the surety, in theory, does not expect any losses.

Under a liability insurance policy, the insurer does not normally have the right of recovery of a loss payment from the insured. Under a surety bond, the surety has the right of recovery of a loss payment from the principal.

Under a liability insurance policy, the covered event is generally a fortuitous event outside the control of the insured. Under a surety bond, the covered event is generally something within the control of the principal.

Frequently, liability insurance and surety bonds are sold by a property/casualty insurer which is licensed to sell both lines of business. However, within most insurers, the commercial liability insurance business and the surety bond business are two very distinct and separated operating divisions.

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Types of Surety Bonds

Contract BondsBid BondPerformance BondPayment BondMaintenance Bond

License and Permit Bonds Public Official Bonds Judicial Bonds

Fiduciary BondCourt Bond

Federal Surety Bonds Miscellaneous Surety Bonds

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Contract bonds guarantee that the principal will fulfill all its contractual obligations. In selling a bond to cover a specific contract, the surety must consider the obligations required by the contract and the ability of the principal to fulfill those obligations.

Under a bid bond, the obligee is guaranteed that the party awarded a bid on a contract will be able to secure and furnish a performance bond.

Under a performance bond, the obligee is guaranteed that work will be competed in accordance with the contract specifications.

Under a payment bond, the obligee is guaranteed that suppliers and subcontractors will be paid when the bills are due (thus avoiding a lien against the contractor and work stoppage).

Under a maintenance bond, the obligee is guaranteed that defective materials used by the principal will be replaced and poor workmanship performed by the principal or its subcontractors will be corrected.

Contract Bonds

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Insurance Provisions

Providing and maintaining adequate insurancecoverage is a material obligation of the Contractorand is of the essence of the Contract. Upon request,the Contractor shall provide a certificate of insurance.

The Contract shall not limit the types of insuranceContractors may desire to obtain or be required to obtain bylaw. The limits of coverage under each policy maintainedby the Contractor shall not be interpreted as limiting theContractor’s liability and obligations under the Contract. Allinsurance policies shall be through insurers authorized towrite policies in Florida.

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Workers’ CompensationContractual Language Suggestion

During the Contract term, the Contractor at its sole expense shall providecommercial insurance of such a type and with such terms and limits as may bereasonably associated with the Contract, which, as a minimum, shall be:workers' compensation and employer's liability insurance in accordance withChapter 440 of the Florida Statues, with minimum employers' liability limits of$100,000 per accident, $100,000 per person, and $500,000 policy aggregate.Such policy shall cover all employees engaged in any Contract work. Employers who have employees who are engaged in work in Florida must useFlorida rates, rules, and classifications for those employees.  In theconstruction industry, only corporate officers of a corporation  or any group ofaffiliated corporations may elect to be exempt from workers‘compensation  coverage requirements. Such exemptions are limited to amaximum of three per corporation and each exemption holder must own atleast 10%  of the corporation or be a member of a limited liability companyowning at least 10% of the company.  Independent contractors, soleproprietors and partners in the construction industry cannot elect to be exemptand must maintain workers‘ compensation insurance.

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Contractual Language Suggestion

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:

Commercial general liability coverage 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.

Automobile liability insurance covering all vehicles, owned or otherwise, used I

the Contract work, with minimum combined single limit of $500,000, including

hired and non-owned liability and $5,000 medical payment.

Suggested language for all other lines of coverage will be provided prior to internet

posting:

Professional Liability, Garagekeepers, Environmental Liability, Aircraft Liability and

Ocean Marine.