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Minimum Insurance Requirements

Rolf Neuschaefer | January 1, 2003

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The principal's financial stability is vitally important to the surety underwriter. Rolf Neuschaefer explains what to look for when risk of loss is transferred to others by contract.

Managing risk is a critical component of operating any business. Nowhere is this more apparent than in construction where the product is seldom cloned. Each project is unique as to one or more of the following factors.

  • Owner
  • Location
  • Plans and specifications
  • Trade or subcontractors performing the work
  • Project management
  • Inspectors

Because each project is, to some degree, a new venture, managing the associated risks becomes more important. Much of the contract surety underwriter's focus when evaluating a contractor is on how well does the applicant/client manage risk.

Insurance Risk Transfer

Risks can be avoided, controlled, mitigated, retained, and/or transferred to others. The transfer of risk to others is usually by contract and incorporates an indemnification provision. A contractor will usually purchase some level of insurance to provide indemnify for insurable events. Where the risk of loss is transferred to others by contract, as in the case of a subcontract, it will also include an insurance requirement to "back-up" the insurable hold harmless provisions in the contract.

The surety underwriter today will pay particular attention to both the insurance carried by the applicant/client and the parties with whom they contract since any uninsured loss could have a material adverse affect on the financial condition of their bonded principal. The underwriter will also examine how effectively risk is transferred to others vis-à-vis contracts and what risks are assumed by contract.

Financial Stability

Before moving on in this discussion, it is important that everyone understand why the principal's financial stability is so important to the surety underwriter. The surety underwriter approves the bond based on certain representations including the financial condition of the principal. Once the bond is issued, the bond cannot later be recalled if the principal's financial condition deteriorates because of an uninsured loss.

If the surety suffers a loss, they are entitled to be indemnified by their principal and any guarantors, which are usually the owners of the business. Thus, an uninsured loss may not only adversely impact the principal's financial condition but also that of the guarantors.

Underlying Premise. It is an axiom of risk management that the party best able to control and manage the exposure should be the responsible party. On most construction projects, that party is the trade or subcontractor performing the work. Therefore, it is vitally important to the owner, general contractor, and others that all trade or subcontractors carry insurance. Actual coverages and limits appropriate to a particular project have to be evaluated on a case-by-case basis. Nonetheless, I thought it might be of some benefit to outline a sample or template of basic insurance specifications.

Summary of Basic Insurance Requirements
The following summarizes basic insurance requirements for Trade (Sub) Contractors. Trade Contractor shall at his expense, procure and maintain required insurance coverages on all its operations in companies acceptable to the Owner and/or Contractor.
  1. Workers Compensation (Statutory) and Employer's Liability:

    $1,000,000 each accident for bodily injury by accident; $1,000,000 each employee for bodily injury by disease; $1,000,000 policy limit for bodily injury by disease.

    If there is an exposure of injury to Trade Contractor's employees under the U.S. Longshore and Harbor Workers Compensation Act, the Jones Act, or under laws regulations or statutes applicable to maritime employees, coverage shall be included for such injuries or claims.

  2. General Liability Insurance (CGL):

    Commercial general liability on an occurrence coverage form. The limits of liability shall not be less than:

    $1,000,000 each occurrence (combined single limit for bodily injury and property damage);

    $1,000,000 for personal and advertising injury liability;

    $1,000,000 aggregate on products and completed operations;

    $2,000,000 general aggregate.

    Additional Insured Endorsement: Blanket additional insured coverage should be requested to include the Contractor, his officers, directors and employees, the Owner, and any other party, as may be required.

  3. Automobile Liability Insurance:
  4. $1,000,000 Combined single limit each accident for bodily injury and property damage. Include coverage on all owned, hired, and nonowned automobiles.
  5. Certificates of Insurance:
  6. Trade Contractor shall furnish certificates of Insurance and applicable endorsements to Contractor before Trade Contractor commences any work.
  7. Insurance Requirements for Sub-Trade Contractors:

    Trade Contractor shall ensure that all tiers of his Sub-Trade Contractors shall maintain insurance in like form and amounts, including the Additional Insured requirements. Each Sub-Trade Contractor shall provide Certificates of Insurance and applicable endorsements to the Trade Contractor prior to the start of the Sub-Trade Contractor's work on this project.

  8. Acceptance/Compliance:

    The required insurance shall be subject to the approval of the Contractor, but any acceptance of insurance certificates by Contractor shall in no way limit or relieve Trade Contractor of the duties and responsibilities stipulated in the Trade (Sub) Contract Agreement. If higher limits or other forms of insurance (e.g., professional liability, aircraft insurance, builders risk, hazardous materials or pollution liability) are required by the Owner, the Trade Contractor will comply with such requirements. Owner or Contractor may take such steps as necessary to assure Trade Contractor's compliance with insurance requirements. In the event Trade Contractor fails to maintain minimum insurance coverage as required or provide written evidence of required Certificates and/or endorsements, Contractor may maintain such coverage and charge the expense to Trade Contractor, terminate this agreement and/or withhold payment.

Conclusion

It must be emphasized that the foregoing is only a "sample" of basic insurance requirements. There may be unique exposures or issues for a particular project that might dictate additional coverages and/or different limits. The reader should consult with their insurance agent/broker and other risk advisors to determine what additional requirements may be needed.

The important thing to remember is that the owner or general contractor has the primary exposure if there is bodily injury or property damage growing out of the construction activities. By communicating upfront what your minimum insurance requirements are, it will allow the trade and subcontractors time to secure and price the needed insurance. Ability to obtain the insurance may become a competitive factor in evaluating bids from various trade or subcontractors.

The insurance requested of others is intended to defend and indemnify you for claims and losses caused by others. It is a risk management tool to, in part, backup the indemnification obligation to you. Protecting yourself from unexpected insurable losses will provide stability to your financial balance sheet and enhance your attractiveness to a surety.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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