LMCIT Service Contract Insurance Recommendations

LMCIT Service Contract Insurance Recommendations The type and amount of insurance should be determined on a case-by case basis dependent upon various factors such as the scope of work and the potential risk. Cities should keep in mind that the size of the project is not necessarily indicative of risk. Cities should have a policy setting forth the minimum insurance requirements for contractors performing work for the city. Exceptions, however, may be granted in individual cases by the city council or an official authorized by the council to make such decisions. Types of Insurance Coverage To determine appropriate insurance requirements for contractors, it is helpful to have an understanding of the general types of insurance coverage. Workers Compensation Insurance. Workers compensation insurance provides wage replacement and medical benefits for employees injured in the course and scope of employment subject to the limitations in the Minnesota Workers Compensation Act, Minnesota Statutes, Chapter 176. To comply with the Workers Compensation Act, employers must purchase workers compensation insurance or self-insure with appropriate proof of financial responsibility. Employers Liability provides coverage for claims for work-related accidents, injuries, or illness that may fall outside of the Minnesota Workers Compensation Act. Claims may be made by the employee, the employee s family members, relative or third parties. Commercial General Liability (CGL) Insurance. CGL insurance provides coverage for third-party, negligence based civil liability claims, i.e., payment is not made to the insured, but rather to someone suffering a loss who is not a party to the insurance contract. Damage includes bodily injury, property damage and often personal and advertising injury. Personal injury includes specific offenses that include harm other than bodily injury such as slander, libel, false arrest, detention or imprisonment, wrongful eviction, malicious prosecution and invasion of privacy. Advertising injury includes offenses in connection with the insured s advertising of its goods or services, such as libel, slander, invasion of privacy, copyright infringement and misappropriation of advertising ideas. The CGL insurance should provide coverage for completed operations, i.e., bodily injury or property damage resulting from the work of the insured that has been completed as called for in the contract. The CGL policy should also provide for blanket contractual liability, i.e., the policy will pay any claims the insured is contractually obligated to pay. Commercial Automobile Liability Insurance. Automobile liability insurance provides coverage when an insured is legally liable for bodily injury or property damage caused by an automobile. Minnesota law requires the vehicle owner to maintain automobile liability coverage, personal

injury protections (no-fault coverage) and uninsured/underinsured motorist coverage or provide evidence of financial responsibility. The contractor s automobile liability coverage should include coverage for any auto which extends coverage to owned autos, non-owned autos, and hired autos (autos temporarily rented to the insured). Automobile liability coverage is usually expressed as a combined single limit. A combined single limit is the most the insurance policy will pay as a result of any one covered accident for bodily injury and property damage combined. Excess/Umbrella Liability Insurance. Excess or umbrella coverage is issued to provide limits in excess of the underlying liability policy. Policies are typically written to provide excess coverage over primary liability policies such as CGL insurance, automobile liability insurance and employers liability insurance. An umbrella policy serves three purposes: It provides excess limits when the limits of the underlying policies have been exhausted by payment if claims. It provides coverage when the aggregate limits of the underlying policies have been exhausted. It may provide protection against some claims not covered by the underlying policies. Professional Liability (Errors and Omissions) Insurance. Professional liability insurance covers errors and omissions or unintentional wrongful acts by covered parties in the performance of the contractor s professional duties. Also known as errors and omissions coverage, this coverage may include legal defense costs and resulting judgments up to the policy limits. Professional liability insurance provides coverage for professional service providers for claims that don t cause bodily injury or property damage that would be picked up by the contractor s CGL insurance. Special Insurance Requirements. Some contracted services may expose the city to risks for which other coverage may be necessary. Examples include pollution liability coverage, builders risk insurance, fidelity bond/crime insurance, and a performance/payment bond. Occurrence vs. Aggregate Limits The occurrence limit is the maximum amount an insurance company will pay in the case of loss for bodily injury or property damage caused by any one occurrence. Occurrence means an accident including a continuous or repeated exposure to the same general harmful conditions. The annual aggregate limit is the most the insurance company will pay for all covered losses sustained during the policy period. For example, let s assume a contractor has $1,000,000 in coverage per occurrence with a $2,000,000 annual aggregate. During the policy period, the contractor s insurance company two million dollar claims. If there is a third claim during the policy period, the contractor s insurance will not respond or pay any damages toward that claim. To alleviate this concern, a city may require the aggregate limit apply on a per project basis. Certificate of Insurance. The city should require the contractor to furnish an original Certificate of Insurance as evidence that the contractor meets the insurance requirements in the contract. 2

A Certificate of Insurance provides written verification of insurance coverage. It includes the name of the insurance company, policy numbers, effective date of coverage, and the type and limits of coverage. By obtaining a Certificate of Insurance, the city can avoid discovering after the fact that the contractor does not have the type and limits of coverage required or that the contractor has no insurance at all. The Certificate of Insurance should indicate that the city has been added as an additional insured. However, the Certificate of Insurance does not override the policy terms. It is important that the contractor s insurance policy be endorsed to add the city as an additional insured. Sample Policy Contractor shall not commence work under the contract until it has obtained all the insurance described below and the City has approved such insurance. Contractor shall maintain such insurance in force and effect throughout the term of the contract. Contractor is required to maintain and furnish satisfactory evidence of the following insurance policies: 1. Workers Compensation Insurance Except as provided below, Contractor must provide Workers Compensation insurance for all its employees and, in case any work is subcontracted, Contractor will require the subcontractor to provide Workers Compensation insurance in accordance with the statutory requirements of the State of Minnesota, including Coverage B, Employer s Liability. Insurance minimum limits are as follows: $500,000 Bodily Injury by Disease per employee $500,000 Bodily Injury by Disease aggregate $500,000 Bodily Injury by Accident If Minnesota Statute 176.041 exempts Contractor from Workers Compensation insurance or if the Contractor has no employees in the City, Contractor must provide a written statement, signed by an authorized representative, indicating the qualifying exemption that excludes Contractor from the Minnesota Workers Compensation requirements. If during the course of the contract the Contractor becomes eligible for Workers Compensation, the Contractor must comply with the Workers Compensation insurance requirements herein and provide the City with a certificate of insurance. 2. Commercial General Liability Insurance Contractor is required to maintain insurance protecting it from claims for damages for bodily injury, including sickness or disease, death, and for care and loss of services as well as from claims for property damage, including loss of use which may arise from operations under the Contract whether the operations are by the Contractor or by a subcontractor or by anyone directly or indirectly employed by the Contractor under the contract. Insurance minimum limits are as follows: $1,000,000 per occurrence 3

$2,000,000 annual aggregate $2,000,000 annual aggregate Products/Completed Operations The following coverages shall be included: Premises and Operations Bodily Injury and Property Damage Personal and Advertising Injury Blanket Contractual Liability Products and Completed Operations Liability City must be named as an Additional Insured. 3. Commercial Automobile Liability Insurance Contractor is required to maintain insurance protecting it from claims for damages for bodily injury as well as from claims for property damage resulting from the ownership, operation, maintenance or use of all autos which may arise from operations under this contract, and in case any work is subcontracted the contractor will require the subcontractor to maintain Commercial Automobile Liability insurance. Insurance minimum limits are as follows: $1,000,000 per occurrence Combined Single Limit for Bodily Injury and Property Damage In addition, the following coverages should be included: Owned, Hired, and Non-owned Automobiles. 4. Professional/Technical (Errors and Omissions) Liability Insurance This policy will provide coverage for all claims the contractor may become legally obligated to pay resulting from any actual or alleged negligent act, error, or omission related to Contractor s professional services required under the contract. Contractor is required to carry the following minimum limits: $1,000,000 per claim or event $2,000,000 annual aggregate Any deductible will be the sole responsibility of the Contractor and may not exceed $50,000 without the written approval of the City. If the Contractor desires authority from the City to have a deductible in a higher amount, the Contractor shall so request in writing, specifying the amount of the desired deductible and providing financial documentation by submitting the most current audited financial statements so that the City can ascertain the ability of the Contractor to cover the deductible from its own resources. The retroactive or prior acts date of such coverage shall not be after the effective date of this Contract and Contractor shall maintain such insurance for a period of at least three (3) years, following completion of the work. If such insurance is discontinued, extended reporting period coverage must be obtained by Contractor to fulfill this requirement. 5. Additional Insurance Conditions Contractor s policies shall be primary insurance to any other valid and collectible insurance available to the City with respect to any claim arising out of Contractor s performance under this contract. 4

Contractor s policies and Certificate of Insurance shall contain a provision that coverage afforded under the policies shall not be cancelled without at least thirty (30) days advanced written notice to the City. Contractor is responsible for payment of Contract related insurance premiums and deductibles. If Contractor is self-insured, a Certificate of Self-Insurance must be attached. Contractor s policies shall include legal defense fees in addition to its liability policy limits, with the exception of the professional liability insurance. Contractor shall obtain insurance policies from insurance companies having an AM BEST rating of A- (minus); Financial Size Category (FSC) VII or better, and authorized to do business in the State of Minnesota; and An Umbrella or Excess Liability insurance policy may be used to supplement the Contractor s policy limits on a follow-form basis to satisfy the full policy limits required by the Contract. The City reserves the right to immediately terminate the contract if the Contractor is not in compliance with the insurance requirements and retains all rights to pursue any legal remedies against the contractor. All insurance policies must be open to inspection by the City, and copies of policies must be submitted to the City s authorized representative upon written request. The Contractor is required to submit a Certificates of Insurance acceptable to the City as evidence of the required insurance coverage requirements. 5