smart contracting nuts and bolts

8/10/2019 Smart Contracting Nuts and Bolts

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Goods in Transit


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Goods in TransitContract Carrier

The liability of contract carriers isdefined by the contract between thecarrier and the shipper.

If contracts are initiated by thecarrier, they often release the carrierfrom substantial responsibility except

in the case of extreme negligence.

Goods in Transit


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Goods in TransitPrivate Carriers

Private carriers usually are carryingtheir own goods and are exposed forthe full value of those goods if theyare damaged or destroyed, subjectto the Terms of Merchandise Sale.

Goods in Transit


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F.O.B means free on board and indicates thepoint at which ownership and exposure to lossshift from the seller to the buyer. For example: F.O.B. shippers loading dock means that

the transit exposure would be the buyersonce the goods are on the shippers loadingdock.

F.O.B. destination means that the transitexposure would be the sellers until the goodsreach the buyers destination.

Goods in TransitPrivate Carriers

Terms of Merchandise Sale

Goods of Bailees Customers


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Goods of Bailee s Customers A bailment exists when goods are left to be

held in trust for a specific purpose andreturned when that purpose has ended.

The bailor is the owner of the goods. The bailee is the one in possession of the goods. Almost any person or enterprise that accepts

the property of the state for storage, service,repair, or processing needs to carry an InlandMarine Policy for the Goods of BaileesCustomers in order for this property to be

covered for loss or damage while in the baileespossession.

Inland Marine Coverage


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Instrumentalities of Communicationand Transportation

Exposures related totransportation (rolling stock,bridges, and tunnels) can be

insured using inland marineinsurance. Inland marine insurance can also

be provided on instrumentalitiesof communication such astelevision towers andtransmission equipment.

Other Types of


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Inland Marine Coverage Tractors, mobile equipment, cranes, and

backhoes. Computer equipment. Livestock.

Fine arts. Patterns, molds, and dies. Partially completed products that are

sent to another location for completion orprocessing. Valuable papers, records, records ofaccounts receivable.

Goods on exhibition.

When Should Your Agency


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When Should Your AgencyRequire Inland Marine Coverage?

When agency goods or property are beingtransported by another entity.

When agency goods or property are left in

the care, custody, and control of anotherentity. When a contractor is transporting state

equipment from one place to another. When state property is placed on

exhibition by another entity e.g. artwork,historical documents, artifacts, etc.

B ild Ri k C


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Builders Risk Coverage

Inland Marine Insurance that providesdirect damage coverage to buildings orstructures under construction.

Also covers foundations, fixtures,machinery, and equipment used to servicethe building, materials, and supplies usedin the course of construction.Fire, theft, and vandalism are the mostfrequent claims.

When Does Your Agency Need


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When Does Your Agency Needto Ask for Builders Risk

Coverage?When a building is being

constructed.When substantial alterations willbe made to an existing structure

i.e., bearing walls, liftingfoundations, extensiveconstruction.

When Your Agency Doesnt


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W e ou ge cy oes tNeed to Ask for

Builders Risk Coverage For construction to an existing building

that does not involve structuralmodifications, or substantial alterationof the building.

For construction of structures otherthan buildings e.g. tunnels, bridges,roads, culverts, etc.

Builders Risk Installation Floater


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Builder s Risk Installation Floater Usually an add-on to a Builders RiskPolicy, but may be purchasedseparately by subcontractors on theproject.Insurance that covers machinery andequipment of all kinds during transit,installation, and testing at thepurchasers premises. Theft and vandalism are covered.

h Sh ld i


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When Should You Require a

Builders RiskInstallation FloaterWhen a building is being constructed,

repaired, or remodeled and there willbe:More than $10,000 in building

materials and supplies at a storagelocation, or in transit that areintended to become a permanent partof the building.

Builders Risk Occupancy Clause


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An add-on to a Builders Risk Policy. Allows Builders Risk coverage tocontinue once the owner or tenants

occupy a building under constructionprior to substantial completion of thebuilding.

If not purchased, Builders Riskcoverage ends once the building isoccupied by the owner or tenants.

Builders Risk Occupancy Clause

Aircraft Liability


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yCovers liability for bodily injury andproperty damage to others (i.e., injuryto, or death of persons outside theaircraft as well as property damage ordestruction done with the aircraft),arising out of the ownership,maintenance, or operation of anaircraft.


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When Do You Need

Aircraft Liability Coverage?When the contractor is using an

airplane to provide the contractedservice.

Aircraft Liability Coverage


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If the contract involves the aerial application ofany chemical, fertilizer, seed, or baitadd Aircraft Aerial Application LiabilityCoverage.

Check the qualifications and certifications ofthe pilot. If carrying state passengers on behalf of the

state, make sure that:

(1) The pilot is certified to carry passengersand(2) The Aircraft Liability provides coverage

for the passengers on a per seat limit.

y gConsiderations

Garage and Garagekeepers


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Garage and GaragekeepersLegal 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 the

operations of auto dealers, servicestations, auto repair shops, andparking lots.

Includes General Liability coveragefor garage operations.

Garagekeepers Legal Liability


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g p g yCoverage

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.

Wh t Ab t S lf I ?


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What About Self-Insurance?

Before Accepting Self-Insurance


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p g Make sure the contractor has the

financial stability to be self-insured. Askfor: Audited financial statements of their

self-insurance fund. Assurance that funds have been setaside in a funded reserve to pay claims.

Ask for policies, procedures, or otheradequate documentation demonstratingthe contractors ability to adjust, process,settle, litigate, and pay claims.

Tail Coverage


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Tail CoverageCan be purchased to extend theperiod of time a claim can bereported for a claims made policy. Should be required when acontractor provides insurancecoverage that is on a claims madebasis.


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What is a Bond?


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What is a Bond?


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A Surety Bond is a risk transfer

mechanism that performs the followingfunctions:Guarantees that the bonded project will becompleted according to the terms of thecontract and at the determined contractprice.Guarantees that the laborers, suppliers, andsubcontractors will be paid even if thecontractor defaults.Relieves the owner from the risk of financialloss arising from liens filed by unpaidlaborers, suppliers, and subcontractors.

What is a Bond?


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What is a Bond?(Continued)

Reduces the possibility of acontractor diverting funds from theproject.

Provides an intermediary (the surety)to whom the owner can air complaintsand grievances.

Lowers the cost of construction insome cases by facilitating the use ofcompetitive bids.

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 will seek fullreimbursement from the contractor.Premium is based on the contractors

loss experience, assets, and finances.


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What Are The Typical Kindsof Bonds Used in Contracts?

Bid Bond


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Bid Bond

Provides financial assurance that thebid is submitted in good faith and thatthe contractor intends to enter into the

contract at the bid price and if statedin the bid, provide the requiredperformance and payment bonds.

Performance Bond


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Performance Bond

Protects the state from financialloss should the contractor fail toperform 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.

Maintenance Bond


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Maintenance Bond

Protects the state against defectsin workmanship or materials (usuallyfor two years) after the contractor

has completed the work.

Additional Bond Information


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Additional Bond Information

Bond terms are usually 12 24months.The bond amount requesteddepends on the risk of thecontract.

In most cases, bonds cost about 1%- 3% of the contract amount.

Coverage Assessment


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Coverage Assessment

How muchinsurance?

Two Schools of Thought


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Two Schools of Thought

Traditional Contract


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Risk Assessment What is the activity? Who could be harmed? What could go wrong? How bad could it be? How much could it cost?

Assignment of insurance amounts basedon the Risk Rating.

Use the risk rating to set


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ginsurance 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 ERARE L L M H H

L i k e l i h o o d

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$1 million in coverage.

H = High Risk:


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Could a potential loss cost in

excess of $1 million? If so,ask for more coverage. Make sure your assessment

considers all costs ofpotential losses.

Risk Management would notrecommend limits of less

than $1 million for Highrated risks.

M = Moderate Risk:


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Standard limit ofinsurance is $1 million.

Assessment shouldconsider all costs ofpotential losses. If assessment revealspotential loss in excess of

$1 million, your risk mayactually be high (see H forHigh Risk.)

L = Low Risk:If i k i i i l thi i th h


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If risk is minimal, this is the area wherecoverage and limits may potentially beflexible.

Standard limit is still $1 million. In the case of minimal risks, the agency

could make a business decision to lower thelimits of coverage.

Risk Management would not generallyrecommend insurance limits of less than$500,000.

If the risk assessment reveals onlyminute risk, agency could make abusiness decision to waive coverage.


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OR

Try Backing Into theC A


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Coverage Amount

Coverage Assessment


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Coverage Assessment

Analyze the perilscovered by the type ofinsurance you will berequiring.

Looking at the perils,and analyze if theseperils exist in theperformance of thecontracted work.

Coverage Assessment


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For each peril that exists in thecontracted work, perform a riskassessment of: Who could be harmed? What could go wrong? How bad could it be? How much could it cost?

Rate the perils and assign insuranceamounts based on the Risk Rating.

Coverage Assessment

Supplemental Clauses


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Supplemental Clauses

ICING ON THE CAKE


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Additional Insured


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Should be issued as anendorsement to the contractorsinsurance coverage.

The endorsement to thecontractors insurance coveragemay be issued on a blanket basisthat applies to any entity thecontractor enters into a contractwith.

Notice of CancellationCh


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or ChangeRequires the contractor or serviceproviders insurance company tonotify us if:

There is a possibility of the policylimits being exhausted.The policy is cancelled or non-renewed.

Certificates of Insurance


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Certificates of Insurance


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What Does SIR Mean?f f


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Stands for Self-Insured Retention.Works like a deductible.If you see this on a Certificate ofInsurance, it means the contractorwill perform all the functionsnormally undertaken by an insurancecompany for claims within the SIR.

Any losses must exceed the SIRamount before the insurancecompany will handle the claim.

What Document(s) areA t bl t V if


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Acceptable to Verify

Insurance Coverage?Certificate of Insurance.Letter from corporation stating theyare self-insured. This should beaccompanied by a financial statement,unless you are certain about the entitysfinancial stability.Letter from bank stating the amountheld in reserves to pay claims andlawsuits.

Make sure the coverage and policy limitsmatch the contract requirements


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match the contract requirements.Look at the policy effective date andexpiration dates to make sure they coincidewith the contract term. If not, requestanother certificate several months beforethe policy expires.

The State of Oregon or your agency isnamed as the certificate holder andadditional insured.What do the comments in the descriptionsection say? Contact the agent with anyquestions.Is there an SIR (self-insured retention)listed?

Reading Certificates of Insurance


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Contractual
http://localhost/var/www/apps/conversion/Training/Smart%20Contracting/2005/SampleCertificateofInsurance.pdf


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Risk Assessment ExampleLottery Purchase ofPoker/Slot Machines

What is the scope of thet t l ti it ?


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contractual activity?

What is the overall activity?Procurement of 325 Video Poker/Slot

Machines

What are the activitycomponents?


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components?

Design and development ofspecifications for themachines.

Manufacture of the machines. Quality control and testing. Transportation of the

machines to the LotteryWarehouse.

When and where does the activity


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When and where does the activity

take place(s)? Victoria B.C. 5/26/05 through 11/30/05

Who will be performing theactivities? Victoria Games, Inc. ABC Trucking, Inc. a Common Carrier,F.O.B. Shippers Dock

Will the contractor interact withthe public, staff, vendors, etc.?


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the public, staff, vendors, etc.?

There will be interaction between themanufacturer and various Lottery employeesduring design, development, manufacturing,and quality control.

The Common Carrier will have interactionwith Lottery employees during the deliveryof the machines to the Lottery Warehouse

Will there be any hazardous materials


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yinvolved? Only at the manufacturing site and related toproperty disposal of the machines when they

are no longer useable. The manufacturer hasall appropriate premises coverage for the on-

site pollution exposure and maintainsregulatory compliance. Lottery has madearrangements for appropriate disposal ofmachines.

What could go wrong?Who could be harmed?


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Who could be harmed?

Bodily injury and/or illness tocontractor employees on-site.

Bodily injury and/or illness toLottery employees on-site duringdesign, development, qualitycontrol, and testing.

Bodily injury to vendors or patronsof the machines if they aredefective and start a fire, causeelectrocution, sharp edges, etc.

Bodily Injury:



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Machines could be damaged at themanufacturers location or during

transport. Machines could be defective andcause a fire at the vendors location.

Machines could be stolen while intransit. Machines could improperly pay out

causing financial loss.

Property Damage:



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It is unlikely that theLottery would be heldresponsible for pollutionexposures during themanufacturing process ortransportation.

The Lottery has alreadymade arrangements forappropriate disposal ofmachines.

Environmental Damage:



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Faulty manufacturing due toimproper design.

Dangerous conditions inmachines due to faulty design.

Payouts of machines could be

defective, causing financialloss to the Lottery andvendors.

Design Flaws:



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Bodily injury and/or illness to thevendor or patrons using the machines.

Damage to property of vendor or nearor adjacent property owners due toconditions in machines that causes fire.

Financial loss to vendors if machinesare defective an cause improperpayouts. Financial loss to patrons if machines aredefective and dont pay out as much asthey should.

Liability:

Is there any impact on workload ordamage to our systems?


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damage to our systems?

- Delay in installation andimplementation of marketingprogram for machines in vendorlocations.

- Additional costs for repair or re-design of machines.

What are the potentiall i d


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loss exposures associatedwith this activity?

Bodily injury Property damage Design flaw Liability

Rate the Severity of EachPotential Loss Exposure.


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Potential Loss Exposure.How bad can each loss be?

What could it cost? Bodily Injury : Minor, Hundreds to

Thousands Property Damage : Major, Thousands toMillions

Design Flaw : Critical, Thousands toMillions Liability: Major, Thousands to Millions

What is the Likelihood ThatEach of These Potential


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Each of These Potential

Losses Will Happen? Bodily Injury - Unlikely Property Damage - Possible Design Flaw Possible Liability Possible

Use the Risk Rating to SetInsurance Limits


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Insurance Limits

INSIGNIFICANT MINOR MODERATE MAJOR CRITICAL

ALMOSTCERTAIN

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

L i k

e l i h o o d

Severity

Determine the Risk Rating


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Determine the Risk Ratingor Level of Risk for EachLoss Exposure.

Bodily Injury : Low RiskProperty Damage : Extreme RiskDesign Flaw : Extreme Risk

Liability: Extreme

Weighing the Value of OpportunitiesRating Value Description (Opportunity)


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g p ( pp y)

1 Insignificant Minor budgetary, funding, or resource gain; Little orno gain in public and/or client relations.

2 Minor Low budgetary, funding, or resource gain; Somegain 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.

What Could Be The OpportunitiesOn This Project?


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Funding for government. Good public perception for theeffective negotiation with vendors,

effective installation of machines. Good vendor relations for effectivelymanaging implementation of the

machines. Economic stimulation from additionalfunding sources.

Determine Non-InsuranceRisk Control Measures


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Include safety protocols and trainingrequirements in the contract.

Verify that all of the contractors employeesare properly trained and/or certified asrequired for the scope of work.

Verify that all Lottery employees going to themanufacturers location are properly trainedand/or certified as required for the dutiesthey will perform. Require the contractor to log all incidents andto include mitigation strategies for preventingthe incident in the future.

Risk Control Measures Bodily Injury:



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Contractual terms that hold the contractorresponsible for damage to the machines whileon their premises.

Contractual terms that hold the contractorresponsible for defects in the product thatare not discovered during quality control ortesting.

Negotiation of contract with manufacturerand/or common carrier for responsibility formachines during transit and security protocol.

Property Damage:



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Lottery review of manufacturers design workprior to production.

Use of best practices in design work. Require high levels of knowledge, skills, and

experience of manufacturers design staff. Lottery oversight of design work and

manufacturing application during all phases ofproject.

Contractual warranty of design work andretention of manufacturer compensation untilwork is inspected and found to be satisfactory.

Design Flaws:


Li bili


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In depth review and supervision ofmanufacturers quality control andtesting of machines for electrical

components and other parts that couldcause bodily injury, property damage, orfinancial loss to vendors, patrons, orothers (as appropriate).

Warranties on the machines that coverpotential defects found afterinstallation.

Liability:

Assignment ofInsurance Coverage


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Insurance Coverage Bodily Injury : Low Risk CGL.Property Damage : Extreme Risk CGL,Truckers Coverage, Inland Marine

coverage for Domestic Goods inTransit and Goods of BaileesCustomers.Design Flaw : Extreme Risk Professional LiabilityLiability: Extreme Risk - CGL

Assignment ofInsurance Amounts


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Commercial General Liability (CGL): $2 millionper occurrence with $5 million aggregate. Truckers Coverage: $2 million per accident.

Inland Marine: Domestic Goods in Transit: The value of theshipment.

Goods of Bailees Customers: The value of the

product at completion. Professional Liability: $1 million peroccurrence with $2 million aggregate.

Did We Forget Something?


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Doesnt this project have a pre -determined timeframe forcompletion and detailedspecifications?

Lottery should consider requiringPerformance Bond for the

amount of the contract or theirmaximum probable loss if thecontractor does not perform.

Bonding Related Questions to Ask How much will it cost to find another


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ow uc w t cost to d a ot econtractor e.g. RFP, staff time, etc. andcomplete the project if this contractor doesnot complete?

If the contractor does not complete theproject within the specified timeframe, howmuch will it cost the Lottery and/orvendors?

If the product is completed, but not asspecified, how much could it cost theLottery if another vendor has to fix themachines?


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The End

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