contract risk assessment roadmap presentation
TRANSCRIPT
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Contract
Risk AssessmentRoad Map12/1/2004
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Where Does Risk Assessment,
Insurance, Bonding and
Indemnification Fit in the Contracting
Process?
At the inception of an idea, your agencyshould perform a risk assessment of theactivity.
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Use The Contract Documents
As Your First Tools
A Request for Information (RFI) can be veryuseful in determining the amounts ofinsurance your targeted contractors carry
and how much the coverage costs them. An Invitation to Bid (ITB) and a Request for
Proposal (RFP) are commonly used in thebidding process.
At the beginning of the process, use theRisk Assessment to decide types andamounts of Insurance and Bonding thatshould be built into the bid document.
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Dont Forget About History!
Has your agency, oversight
agency, or peers procuredthis type of service orproduct before?
Review solicitation orcontract files.
Review past practice.
Ask the old timers. Create your own
historical referencematerial for future use.
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Call Your Agency Area Experts
Who Are the Agency Area Experts?
Your Manager Program staff and managers
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What is the
specificactivity?
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What is Your
Agencys Appetitefor Risk?
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What is a Risk Appetite? Risk appetite is the degree of
uncertainty an agency is willing toaccept to reach its goals.
Risk appetite is a key factor in
evaluating strategic options. Risk Assessment helps
management consider riskappetite when setting goals thatalign with overall agency strategy,and managing risks related to thatstrategy.
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Work with your agencys management to
decide:
What is your agencys risktolerance?
How much or what are you
willing to risk to accomplishthe mission or activity?
How much can your agencyafford to lose in any oneoccurrence or in theaggregate?
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What Does YourAgency Do?(Mission, Goals,
Objectives)
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Does the activity
fit the Agencymission, goals,
objectives?
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NoIf the answer =
Take to management
for consideration
Management decides yes = Move on
Management decides no = Stop
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If the answer = Yes
What could go wrong?Who could be harmed?
Make a list - write it down.
These are your loss exposures.(See Risk Identification & Evaluation)
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What is Risk?
The danger or probability of loss.
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Loss ExposurePossibility of financial lossas
the result of a particular perilstriking a thing of value.
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Components of a Loss Exposure
The type ofvalueexposedto loss.
The peril that causes the loss.
The extent of the potential
financial consequencesof thatloss.
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Values Exposed to Loss
People
Property
Freedom from Liability(Alleged Wrongdoing)
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Perils Causing Loss
Natural Perils:
Human Perils:
Economic Perils:
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Potential
Financial Consequences
Make sure that you dont give away the farm!
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THINK ABOUTWHAT CAN GO
Wrong!
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Why is this important?
An un recognized loss exposu recannot, except by chance, be
effectively managed.State of Oregon
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Methods Of
Identifying Exposures: Previous contracts of similar type and their
outcomes.
Standardized surveys/questionnaires
Financial statements Records and files
Loss Reports/Claims
Flowcharts
Personal inspections
Experts
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What questions should we ask?
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What is the scope of the
contracted service or activity?
What is the overall serviceor activity?
What functions arenecessary to deliver oraccomplish this service oractivity?
When and where will theservice or activity takeplace(s)?
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Who will be performing the service or
activity? Will the contractor interact with
others, i.e., public, staff, etc?
Will there be any hazardousmaterials involved?
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What are the potential loss
exposures or risks associatedwith the contracted service or
activity?
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What could happen?
What could go wrong? Who could beharmed?
Could there be bodily injury,property damage or otherliability exposures causedby this service or activity?
Is there any impact on
workload? Could therebe any damage to oursystems?
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Remember..
Consider the values exposed toloss: People, Property, Freedom from
Liability. Consider the perils that could
cause loss: Natural, Human,
Economic.
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Rate the Risks of Loss and
Weigh the Value of
Opportunities
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Rate the severity of the risk of
each potential loss exposure.How bad can each loss be?
What could it cost?
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Rating Severity Description (Risk)
1 Insignificant No injuries; low financial loss
2 Minor First aide treatment; minor financial loss
3 Moderate Injuries; loss of operations; moderate financial loss
4 Major Extensive injuries; loss of operations; major financial loss
5 Critical Death; major loss of operations; huge financial loss
Rating the Severity of Loss Exposures
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What is the likelihood that
each of these potential lossexposures will happen?
Rating the Likelihood of Occurrence
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Rating the Likelihood of Occurrence
Rating Descriptor Likelihood
(Probability)
Description
1 Rare 110% May occur only in exceptional
circumstances
2 Unlikely 11
25% Could occur at some time
3 Possible 2675% Might occur at some time
4 Likely 7690% Will probably occur in most
circumstances
5 Almost
Certain
91100% Is expected to occur in most
circumstances
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INSIGNIFICANT MINOR MODERATE MAJOR CRITICAL
ALMOST
CERTAIN
M H E E E
LIKELY M M H E E
POSSIBLE L M H E E
UNLIKELY L L M H E
RARE L L M H H
Determine the risk rating/level of risk
for each potential loss exposure.
Severity
L
ikelihood
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Risk Rating (RR) = Level Of Risk
E = Extreme Risk- involve seniormanagement immediately, emergencysituation, consider not doing the activity.
H = High Risk- management attention
required for business and policy decisions,risk control, insurance types and limits, etc.
M = Moderate Risk- management should bekept informed of risk control, insurance types
and limits, etc. L = Low Risk- manage by routine
procedures, insurance types and limits couldbe flexible.
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Now That You Have Rated The
Risks Of Loss.Think About The Value Of
OPPORTUNITIES
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EXPLOITING OPPORTUNITIES
What opportunities will be missed if theactivity is not done?
What is the upside and downside ofthese opportunities?
By considering the full range of potentialeventsrather than just risksthe riskassessment process ensures that
management can identify and takeadvantage of positive events quicklyand efficiently.
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Weighing the Value of Opportunities
Rating Value Description (Opportunity)
1 Insignificant Minor budgetary, funding, or 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; Goodpublic and/or client relations.
5 Critical Huge budgetary, funding, or resource gain;
Excellent public and/or client relations.
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If RR = E or H
Is theActivity
Necessary?
If the Answer = No
ManagementBusiness Decision
No = StopManagement Decides
Yes = Move On
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Statutory Immunities:Research Statutes
No = Move on to Loss
Prevention/Risk
Control Measures
Do any
immunities
apply to theactivity?
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Statutory Immunities
If the Answer is: Yes
What are the
limitations and/or exclusions?
Do you have alegal opinion
on statutoryimmunities?
No = Managementbusiness decision
on legal opinion
Yes = Move on to LossPrevention/Risk Control
Measures
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Loss Prevention/
Risk Control Measures
See Risk Control Methods and Measures
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Avoidthe risk altogether.
Preventthe frequency of loss.
Reducethe severity or cost of loss.
Segregate to prevent one event
from causing loss to the whole. Contractually transferthe risk.
What are Loss Prevention/
Risk Control Methods?
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Avoid Exposure
Entirely eliminatesany possibility of
loss. It isachieved either byabandoning ornever undertaking
an activity or anasset.
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Loss Prevention
Reduces the frequency or number oflosses.
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Loss Reduction
Lowers the severity or cost of a loss.
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Segregate Your LossesArrange your agencys activities and assets to
prevent one event from causing loss to the
whole.
- two methods -
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Separation
Separate activities and assets amongseveral locations.
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Duplication
Provide a duplicate or stand by for use incase assets or activities suffer a loss.
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Contractual Transfer of Risk
GOAL:
To insure that a contractor is
responsible for claims arising outof his or her acts, and has someway to pay for these losses.
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Principle #1
Contractually transfer the risk to thecontractor.
Indemnity is only as good as the assetsor insurance coverage backing it up.
Ask for appropriate insurance and
bonds to cover the risk.
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Principle #3
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Principle #3 Dont 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 arefar better risk control measures toprotect the states interests thaninsurance or bonds.
Insurance and bonds should bethought of as the safety net thatcatches us when everything else
goes wrong.
Develop Risk Control Measures
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Develop Risk Control Measures
Specific to the Situation
Personal protective equipment.
Housekeeping, repair, and maintenance.
Inspections.
Tools and equipment.
Policies, procedures, and process.Supervision.
Contract Management and Administration.
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Which
measures
best fit the
mission,activity, and
RR?
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How can themeasures be
implemented
? Who will
implement?
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Who will beresponsible
for making
sure the
measures
are
followed?
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Who will beresponsible
for ongoing
monitoring?
Did you
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Did you
choose
Contractual
Transfer?
Yes = Move on to select
appropriate Contractual
Transfer - ContractClauses
No = Go toStates Self Insurance or
Commercial Insurance
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Contractual Transfer
Contract Clauses
Independent Contractor
Indemnity/Hold Harmless
Insurance and Bonds
Warranties
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Will you
use a
contract?
Will you
use atemplate?
Will you
require
insuranc
e or
bonds?
No = How will the state be protected?
Re-evaluate the situation. Figure
out how the state will be protected.
Talk to management.
Yes = Move on to Contractual Transfer
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Independent Contractor
We use the Independent ContractorClause to support our assertion thatthe contractor is not our agent.
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What Does Indemnify
Mean in a Contract?It is an agreement to pay orreimburse another party for losses
you are legally obligated to pay.
I d it /H ld H l
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Indemnity/Hold Harmless
A method of contractually transferring therisk.
States that the contractor or serviceprovider will not hold us responsible for
any claims arising out of their negligentacts and that the contractor will payassociated claim costs.
Provides the state with claims protection.Most effective when used in conjunctionwith the appropriate insurance clauses.
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How do you contractually
transfer risk to a contractor?
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Four Steps
(1) Do a risk assessment.
(2) Determine the necessary actions for thecontractual transfer of risk, such as the
use of appropriate contract templates,contract language, insurance, bonds andrisk control measures.
(3) Review each contract.
(4) Follow-up to insure compliance with theinsurance and bonding requirements.
Step 1: Risk Assessment
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Step 1: Risk Assessment
(1) What is the scope of the contracted service oractivity?
(2) What are the potential loss exposures or risks?What can go wrong? Who can be harmed?
(3) What is the likelihood that each of thesepotential loss exposures will happen?
4) Rate the severity of each potential lossexposure. How bad can it be? Whatcould it cost?
5) Determine the risk rating for eachpotential loss exposure.
Step 2: Determine the
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Step 2: Determine the
necessary actions for the
contractual transfer of risk Use of standardized contract
templates.
Use of appropriate contractlanguage including indemnificationclauses and other non-insurancerisk transfer.
Use of appropriate insurance, bondsand coverage limits.
Use of appropriate risk controlmeasures.
C A t
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Coverage Assessment
What kind and
how muchinsurance or
bonds?(See Insurance
CoverageAssessment)
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Examples of Common Types of
Insurance and Bonds
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U b ll P li i
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Umbrella Policies
Provide excess coverage overanother underlying liability policy.
Many times provides broadercoverage than the primary(underlying) liability policy.
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Excess Liability
Pays after the primary (underlying)liability policy limits have been
exhausted.May not be as broad as primary
(underlying) liability policy.
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Aircraft Liability
Insurance covering liability and bodilyinjury to others arising out of the
operation of an airplane.
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When Do You Need To Require
Aircraft Liability Coverage?
When the contractor is using an
airplane to provide the service. If the contractor will carry
passengers, the contractor will also
need to have a per seat limit forbodily injury to passengers.
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Automobile Liability
Insurance that provides coveragefor third party bodily injury or
property damage arising out of theuse of an insured vehicle.
When Do You Need To Require
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When Do You Need To Require
Automobile Liability Insurance
Coverage? When the contractor needs to
use an automobile to provide
the services.
Usually, Personal Automobile
Liability insurance coverage is notsufficient to cover a contractorsbusiness operations.
What Does
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What Does
General Liability Insurance
Really Cover?
General Liability Insurance
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y
Myths
Insurance covers theindemnification provided in thecontract.
FALSE
General Liability insurance willcover your entity if the contractorswork is done negligently.
FALSE
There is contractual liabilitycoverage in a General Liabilitypolicy.
MOSTLY FALSE
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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.
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CGL Policy Definitions
Bodily Injury: The injury of physicaltissue by an outside force, bodily harm,sickness, or disease.
Personal Injury: Libel, slander, falsearrest, and invasion of privacy.
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CGL Policy Definitions(Continued)
Products & Completed Operations:Insurance covering the contractor for
damage or injury to third partiesresulting from something the contractormade, repaired, or installed. Thedamage to third partiesresulting fromthe service would be covered not thecontractors actual product.
CGL Policy Definitions
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CGL Policy Definitions(Continued)
Contractual Liability: A portion ofCommercial General Liability coverage thatallows limitedcoverage for liability
assumed under the contract. The coverageallowed by Contractual Liability includes:
Liability assumed under an insuredcontract.
Liability that the insured would have inthe absence of the contract oragreement.
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Current Case Law
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Current Case Law
Id. at 479. A tort claim, where there is a
contract between parties, may only proceedwhere there is some kind of obligation owedby 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 andbeneficiaries. The court has called thesespecial relationships.
Jones v. Emerald Pacific Homes, 188 Or App 471, id at 477 & 479
Special Relationships
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Special Relationships
Only Exist When:
One party has relinquished control overthe subject matter of the relationship tothe other party; and
Has placed its potential monetaryliability in the others hands.
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CRIME COVERAGE
Employee Dishonesty, Third
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Employee Dishonesty, Third
Party Fidelity and (when
applicable) Money andSecurities
Insurance covering loss to money,securities, and other property (otherthan money) caused directly by
employee dishonesty.
Wh D Y N d T R i
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When Do You Need To Require
Employee DishonestyCoverage?
When the contractor is handling money,
securities, other valuable property, ordata.
Third Party Fidelity Bond
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Third Party Fidelity Bond
If the Employee Dishonesty coverage isnot specifically endorsed to include aThird Party Fidelity/Crime Bond, in mostcases, it will not be comprehensive
enough to provide coverage for a claimfor theft by your contractor or theiremployees that results in a loss for youragency.
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Professional Liability or
Errors and Omissions
Coverage
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Who Should Have Professional
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Liability or Errors and Omissions
Coverage?Licensed and accredited specialists suchas:
Doctors or medical practitioners.
Engineers.
Information technology specialists(computer programmers, etc).
And non-licensed professionals suchas interpreters, recorders, testingfacilities, and research laboratories.
Wh t D P f i l Li bilit
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What Does Professional Liability
or Errors and Omissions Cover?
Pays the financial loss of the state,when the covered person fails toperform their professional duty.
The coverage is specific to the nature ofthe profession.
Covers malpractice, misconduct,
negligence, errors, omissions, orincompetence in the performance of acovered act.
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Garage and Garagekeepers
Legal Liability Coverage
Garage Liability Coverage
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Garage Liability Coverage
Covers garage operators for liability,
medical payments, and automobilephysical damage arising out of theoperations of auto dealers, service
stations, auto repair shops, and parkinglots.
Includes General Liability coverage for
garage operations.
Garagekeepers Legal Liability
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Garagekeepers Legal Liability
Coverage
Coverage for autos left for service,repair, storage, or Safekeeping.
The limits of coverage should behigh enough to cover the total valueof any autos left for safekeeping
(yours and others) at any time.
Workers Compensation
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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 coveragefor all subject employees working in
Oregon.
When Should I Ask Questions
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When Should I Ask Questions
About Oregon Specific
Workers Compensation?
When the contractor has one ormore employees performingservices under the contract inOregon.
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Will you require
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y qAdditionalInsured andother clauses?
No
Re-evaluate the situation. Figure
out how the state will be protected.
Talk to management.
Additional Insured
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Additional Insured
Protects the state when named in an
action that is not its responsibility orfault.
Ensures that the contractor or serviceproviders insurance company would
expend funds to have the states name
removed.
The state benefits by not having to use
its assets for litigation purposes.
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What Document(s) are
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What Document(s) are
Acceptable to Verify Insurance
Coverage?
Certificate of Insurance.
Letter from corporation stating they areself-insured. This should be accompaniedby a financial statement, unless you arecertain about the entitys financial stability.
Letter from bank stating the amount held inreserves to pay claims and lawsuits.
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What Do We Look For onthe Certificate of Insurance?
Make sure the coverage and policy limits
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match the contract requirements.
Look at the policy effective date and expirationdates to make sure they coincide with thecontract term. If not, request anothercertificate 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 anyquestions.
Is there an SIR (self-insured retention) listed?
Certificates of Insurance
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Certificates of Insurance
Did We Get What We Asked For?
Notice of Cancellation
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Notice of Cancellation
or Change
Requires the contractor or serviceproviders insurance company to
notify us if:There is a possibility of the policy
limits being exhausted.
The policy is cancelled or non-renewed.
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Certificate(s) of Insurance
Requires the contractor to prove to thestate 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.
Tail Coverage
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g
Can be purchased to extend theperiod of time a claim can bereported for a claims made policy.
Can be purchased on claims madebasis.
What Does Claims Made or
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What Does Claims Made or
Occurrence Mean?
Insurance policies are written on aclaims made or occurrence
basis. These terms address claimsreporting time periods.
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A Claims Madepolicy covers allclaims reported and filed during
the policy period.
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An Occurrencepolicy covers allclaims arising out of incidents
occurring during the policy
period, regardless of whether ornot the policy is still in effect atthe time that the claim is made.
What Does SIR Mean?
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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 aninsurance company for claims within theSIR.
Any losses must exceed the SIR amountbefore the insurance company will handlethe claim.
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Who Should We Call With
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Questions About
Certificates of Insurance?
The Contractor;
The Agent that issuedthe Certificate; or
The insurance company
that is listed on theCertificate.
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Bonds?
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Bonds?
Bonds are different from insurance.A bond is a simple guarantee. If there is a loss, the bonding
company (Surety) will pay but willseek full reimbursement from thecontractor.
Premium is based on thecontractors loss experience,
assets, and finances.
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What Are The Typical Kinds ofBonds Used in Contracts?
Bid B d
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Bid Bond
Provides financial assurance that thebid is submitted in good faith and that
the contractor intends to enter into thecontract at the bid price and if stated inthe bid, provide the requiredperformance and payment bonds.
P f B d
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Performance Bond
Protects the state from financialloss should the contractor fail to
perform the contract in accordancewith contract terms and conditions.
Payment Bond
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Payment Bond
(Labor & Materials Bond)
Guarantees that the contractor will paycertain subcontractors, laborers and
material suppliers associated with theproject.
M i t B d
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Maintenance Bond
Protects the state against defects inworkmanship or materials (usually
for two years) after the contractorhas completed the work.
Additi l B d I f ti
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Additional Bond Information
Bond terms are usually 1224months.
The bond amount requesteddepends on the risk of the contract.
In most cases, bonds cost about1% of the contract amount.
How Much Insurance Should
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Be Required?
Use the risk rating to set
i d b di li it
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insurance and bonding limits.
INSIGNIFICANT MINOR MODERATE MAJOR CRITICAL
ALMOST
CERTAIN
M H E E E
LIKELY M M H E E
POSSIBLE L M H E E
UNLIKELY L L M H E
RARE L L M H H
Lik
elihood
Severity
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E = Extreme Risk:
First, consider not doingthe activity.
If you must, you will needto decide how much apotential loss could cost?
In general, risks at thislevel warrant more than $1million in coverage.
H = High Risk:
C ld t ti l l t i
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Could a potential loss cost in
excess of $1 million? If so, askfor more coverage.
Make sure your assessmentconsiders all costs of potential
losses. Risk Management would not
recommend limits of less than
$1 million for High rated risks.
M = Moderate Risk:
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Standard limit of insuranceis $1 million.
Assessment shouldconsider all costs of
potential losses. If assessment reveals
potential loss in excess of$1 million, your risk mayactually be high (see H forHigh Risk.)
L = Low Risk: If risk is minimal this is the area where
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If risk is minimal, this is the area wherecoverage and limits may potentially be flexible.
Standard limit is still $1 million.
In the case of minimal risks, the agency couldmake 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 onlyminute risk, agency could make abusiness decision to waive coverage.
For More Details on
Insurance Types and Limits
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Insurance Types and Limits
See Smart Contracting Toolkit at:
http://www.oregon.gov/DAS/SSD/
Risk/SmartContractingToolkit.sht
ml
Dont Forget!
http://www.oregon.gov/DAS/SSD/Risk/SmartContractingToolkit.shtmlhttp://www.oregon.gov/DAS/SSD/Risk/SmartContractingToolkit.shtmlhttp://www.oregon.gov/DAS/SSD/Risk/SmartContractingToolkit.shtmlhttp://www.oregon.gov/DAS/SSD/Risk/SmartContractingToolkit.shtmlhttp://www.oregon.gov/DAS/SSD/Risk/SmartContractingToolkit.shtmlhttp://www.oregon.gov/DAS/SSD/Risk/SmartContractingToolkit.shtml -
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Don t Forget!
About all of the other non-insuranceways to manage risks. Rememberthat insurance should be the safetynet when everything else goeswrong.
Contractual Transfer of Risk
Fi l St
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Final StepsStep 3:
Review each contract to insure thatclauses are up-to-date and the languageis appropriate.
Step 4:
Insure that you collect and reviewCertificates of Insurance. Keep a
tracking system to insure that coveragesdo not expire.
The States Self Insurance or
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The States Self-Insurance or
Commercial Insurance
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Evaluation of State Self-Insurance orCommercial Insurance Coverage
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Which kind
of coverage
and what
are thelimits?
What are the
exclusions
and
coveragerequirements
?Does the
agency meet
the coverage
requirements?
For Self-
Insurance
Coverage, seethe State of
Oregon Self-
Insurance
Handbook
For
Commercial
Insurance,Contact
Andrea
Peters in
Risk Mgmt
If Your Agency:
Has no statutory immunity for the activity
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Has no statutory immunity for the activity.
Has not decided to use loss prevention/riskcontrol measures to minimize or mitigatethe risks.
Has not contractually transferred theliabilities associated with the activity toanother party.
Does not have self-insurance coverage forthe activity.
Has not purchased commercial insurancecoverage for the activity.
How will the agency pay for losses resulting
from the activity?
The Point?
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Knowing the risks associated with youragencys operations that should bekeeping you awake at night.
This insight provides your agency with theability to plan for proactive lossprevention actions rather than just
reactive loss reduction reactions.
Risk Assessment is Not
Rocket Science
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Rocket Science
At times, people tell us that theRisk Assessment Road Mapprocess is too simple..
Our Answer . . .
If Risk Assessment is so
simple, why arent you doingthem?
One More Tool
Ri k A t i j t t l
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Risk Assessment is just one more tool
to enhance your agencys businessdecision-making tool box.
This tool also gives your agency
a method of documenting therationale for your businessdecisions.
Risk Assessment Roadmap Toolkit:http://www.oregon.gov/DAS/SSD/Risk/RiskAsse
ssmentRoadmapToolkit.shtml
http://www.oregon.gov/DAS/SSD/Risk/RiskAssessmentRoadmapToolkit.shtmlhttp://www.oregon.gov/DAS/SSD/Risk/RiskAssessmentRoadmapToolkit.shtmlhttp://www.oregon.gov/DAS/SSD/Risk/RiskAssessmentRoadmapToolkit.shtmlhttp://www.oregon.gov/DAS/SSD/Risk/RiskAssessmentRoadmapToolkit.shtml -
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Future
Expectat ions
Your Goal
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Your Goal
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The End
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The End