Insurance, Surety & Insurance, Surety & Indemnification Indemnification Why do we need it Why do we need it anyway? anyway? NJ Higher Education Purchasing NJ Higher Education Purchasing Association Association Disadvantaged Business Development Disadvantaged Business Development Fair Fair August 17, 2005 August 17, 2005 James A. Breeding James A. Breeding Director, Department of Risk Management & Director, Department of Risk Management & Insurance Insurance
Why do we need it anyway?Why do we need it anyway?
NJ Higher Education Purchasing AssociationNJ Higher Education Purchasing AssociationDisadvantaged Business Development FairDisadvantaged Business Development Fair
August 17, 2005August 17, 2005
James A. BreedingJames A. BreedingDirector, Department of Risk Management & InsuranceDirector, Department of Risk Management & Insurance
NJHEPANJHEPA 22
AgendaAgenda Why is Insurance Required?Why is Insurance Required? What can and does go wrong?What can and does go wrong? Additional InsuredAdditional Insured IndemnificationIndemnification Types of Insurance Coverage RequiredTypes of Insurance Coverage Required Why do we need Surety/Guarantee?Why do we need Surety/Guarantee? When is a Contract Guarantee Required?When is a Contract Guarantee Required? Types of Guarantees AvailableTypes of Guarantees Available What is a Surety Bond?What is a Surety Bond? Surety Bonds to Cover Supply & Construction ProjectsSurety Bonds to Cover Supply & Construction Projects Insurance vs. Surety BondsInsurance vs. Surety Bonds Letters of Credits vs. Surety BondsLetters of Credits vs. Surety Bonds
NJHEPANJHEPA 33
Why is Insurance Required?Why is Insurance Required?
Due DiligenceDue Diligence Responsible Ethical Business PracticesResponsible Ethical Business Practices Protect University AssetsProtect University Assets Minimize Disruption to University Minimize Disruption to University
OperationsOperations Effect a Risk TransferEffect a Risk Transfer
NJHEPANJHEPA 44
Additional InsuredAdditional Insured
Defense CostsDefense Costs
Indemnity PaymentsIndemnity Payments
Beneficiary of Vendor’s Insurance Beneficiary of Vendor’s Insurance CoverageCoverage
““Rutgers, The State University must be Rutgers, The State University must be named as an additional insured in this named as an additional insured in this policy. Such insurance shall be primary policy. Such insurance shall be primary over other collectible insurance that may over other collectible insurance that may apply……”apply……”
NJHEPANJHEPA 66
IndemnificationIndemnification
“The vendor/contractor agrees to Hold Harmless, Indemnify and defend Rutgers, The State University, against any and all claims, demands or suits by any persons and against related damages, liabilities, costs and expenses (including attorney’s fees) which may arise out of the performance of the contract.”
NJHEPANJHEPA 77
Types of Insurance Coverage Types of Insurance Coverage AvailableAvailable
Types of Insurance Coverage Types of Insurance Coverage Available (cont’d.)Available (cont’d.)
Business Auto LiabilityBusiness Auto Liability Owned / Non-Owned AutoOwned / Non-Owned Auto Leased / Hired AutoLeased / Hired Auto Underinsured / Uninsured MotoristUnderinsured / Uninsured Motorist
Worker’s CompensationWorker’s Compensation Statutory LimitsStatutory Limits Part B – Employer’s LiabilityPart B – Employer’s Liability
NJHEPANJHEPA 99
Types of Insurance Coverage Types of Insurance Coverage Available (cont’d.)Available (cont’d.)
Specialty Risk CoverageSpecialty Risk Coverage Bus / Transportation VendorsBus / Transportation Vendors Asbestos Removal and Monitoring Asbestos Removal and Monitoring
ContractorsContractors Chemical Waste and Pesticide Disposal Chemical Waste and Pesticide Disposal
ContractorsContractors Construction and Major Renovations Construction and Major Renovations
ContractorsContractors
NJHEPANJHEPA 1010
Why do we need Surety/Guarantee?Why do we need Surety/Guarantee?
Time DelayTime Delay Costs to Replace Vendor/ContractorCosts to Replace Vendor/Contractor Missed Deadline (Construction)Missed Deadline (Construction) Cost to Administrate TakeoverCost to Administrate Takeover Legal ExpensesLegal Expenses Liens Placed by Subs/SuppliersLiens Placed by Subs/Suppliers Quality of WorkQuality of Work
NJHEPANJHEPA 1111
When is a Contract Guarantee When is a Contract Guarantee Required?Required?
Vendor/Contractor supplies critical service to UniversityVendor/Contractor supplies critical service to University Construction projects considered essentialConstruction projects considered essential
Roof replacementsRoof replacements New facilities with time-sensitive openingNew facilities with time-sensitive opening Water/wastewater management systemsWater/wastewater management systems Large dollar – stadium, libraryLarge dollar – stadium, library
Vendors with long lead time or special order unitsVendors with long lead time or special order units Bleacher systemsBleacher systems Refrigeration unitsRefrigeration units
Vendors supplying long-term guarantee of workmanshipsVendors supplying long-term guarantee of workmanships Energy management contractorsEnergy management contractors
NJHEPANJHEPA 1212
Types of Contract GuaranteesTypes of Contract Guarantees
Vendor/Contractor GuaranteeVendor/Contractor Guarantee If written into contract, provides that materials If written into contract, provides that materials
supplied & workmanship will be satisfactory to buyersupplied & workmanship will be satisfactory to buyer This form of guarantee is only as good as company This form of guarantee is only as good as company
supplying goods or service. This can be satisfactory if supplying goods or service. This can be satisfactory if the reputation and experience of supplier is known to the reputation and experience of supplier is known to University.University.
If this form of guarantee is used, check on company’s If this form of guarantee is used, check on company’s ownership. It may be necessary to obtain parent ownership. It may be necessary to obtain parent company guarantee.company guarantee.
The acceptance of vendor/contractor guarantee puts The acceptance of vendor/contractor guarantee puts the burden of qualifying the supplier on Universitythe burden of qualifying the supplier on University
NJHEPANJHEPA 1313
Types of Contract Guarantees Types of Contract Guarantees (continued)(continued)
Surety BondsSurety Bonds What is the role of Surety Bonds?What is the role of Surety Bonds? Bond TypesBond Types
• Bid Bonds/Consent of SuretyBid Bonds/Consent of Surety• Performance BondPerformance Bond• Payment BondPayment Bond• Maintenance BondMaintenance Bond• Supply BondSupply Bond
NJHEPANJHEPA 1414
What is a Surety Bond?What is a Surety Bond?
Three Party InstrumentThree Party Instrument
Surety bonds guarantee the obligation of Surety bonds guarantee the obligation of one party to anotherone party to another
Surety bonds provide monetary or other Surety bonds provide monetary or other recourse if the obligation is not performedrecourse if the obligation is not performed
NJHEPANJHEPA 1515
Suretyship vs. InsuranceSuretyship vs. Insurance
Subject to state lawsSubject to state laws Provides protection Provides protection
against financial lossagainst financial loss Risk remains with Risk remains with
Conditions and qualificationsConditions and qualifications Explains why bond is requiredExplains why bond is required Obligates principal and surety to a third party (obligee)Obligates principal and surety to a third party (obligee)
Obligatory clauseObligatory clause Formalizes that if principal fails to perform duties as prescribed Formalizes that if principal fails to perform duties as prescribed
by conditions then surety will pay or performby conditions then surety will pay or perform
NJHEPANJHEPA 1717
Structure of Surety Bonds Structure of Surety Bonds (In comparison to a Letter of Credit)(In comparison to a Letter of Credit) BondBond PreamblePreamble ConditionsConditions QualificationsQualifications Obligatory clauseObligatory clause
Pay on demandPay on demand Fund principalFund principal Replace principalReplace principal
Letter of CreditLetter of Credit PreamblePreamble ConditionsConditions QualificationsQualifications Obligatory clauseObligatory clause
Pay on demandPay on demand
NJHEPANJHEPA 1818
Bond FormsBond Forms
Bid BondBid Bond Evidence of the good faith & ability of the Evidence of the good faith & ability of the
contractor;contractor; The purpose of the bid bond is to:The purpose of the bid bond is to:
• Eliminate unqualified or irresponsible contractors Eliminate unqualified or irresponsible contractors from competitive biddingfrom competitive bidding
• To save University the expense of another bid To save University the expense of another bid letting should the successful bidder not qualifyletting should the successful bidder not qualify
• To assure the completion of the lowest possible To assure the completion of the lowest possible costcost
NJHEPANJHEPA 1919
Bond FormsBond Forms
Default under a Bid BondDefault under a Bid Bond When does a default occur?When does a default occur? Courts’ positionCourts’ position Invoking a bid bondInvoking a bid bond
NJHEPANJHEPA 2020
Bond FormsBond Forms
Performance and Payment BondsPerformance and Payment Bonds Used to guarantee the completion of Used to guarantee the completion of
construction projects construction projects Provide for the benefit of laborers, Provide for the benefit of laborers,
subcontractors & material supplierssubcontractors & material suppliers Require separate performance & payment Require separate performance & payment
bonds to equal 100% of the contract pricebonds to equal 100% of the contract price New Jersey, Senate Bill 305New Jersey, Senate Bill 305 Can be provided for a single construction Can be provided for a single construction
project with one or more suretiesproject with one or more sureties
NJHEPANJHEPA 2121
Bond FormsBond Forms
Performance and Payment Bonds (cont’d)Performance and Payment Bonds (cont’d) Provides indemnity for costs & damages by Provides indemnity for costs & damages by
reason of the contractors failure to deliver reason of the contractors failure to deliver under the terms of the contractunder the terms of the contract
Assures that persons supplying direct labor or Assures that persons supplying direct labor or material will be promptly paid under the terms material will be promptly paid under the terms of the contractof the contract
NJHEPANJHEPA 2222
Bond FormsBond Forms
Default under Performance BondDefault under Performance Bond Upon a contractor default, the surety can complete Upon a contractor default, the surety can complete
the contract under these methods:the contract under these methods:• Offer financial support or other guidance to see the firm to Offer financial support or other guidance to see the firm to
the completionthe completion• Obtain bids from other contractors to arrange to take over the Obtain bids from other contractors to arrange to take over the
projectproject• Forfeit the bond penalty (limit)Forfeit the bond penalty (limit)
Under Payment Bonds:Under Payment Bonds:• The surety has the obligation to pay all verified bills which it The surety has the obligation to pay all verified bills which it
is legally liable to pay up to the bond amountis legally liable to pay up to the bond amount
NJHEPANJHEPA 2323
Legal Obligations of University as a Legal Obligations of University as a Bond ObligeeBond Obligee
To ensure a mutual meeting of the mindsTo ensure a mutual meeting of the minds Notice to the SuretyNotice to the Surety Responsibilities of bond obligee Responsibilities of bond obligee Duties of bond obligeeDuties of bond obligee
NJHEPANJHEPA 2424
Letters of Credit and BondsLetters of Credit and BondsLetters of credit (LOC) are often viewed as substitutes for performance & Letters of credit (LOC) are often viewed as substitutes for performance & payment bonds. However, LOCs are not suited to guarantee performance of payment bonds. However, LOCs are not suited to guarantee performance of contractor which require more than a single delivery of goods and payment of a contractor which require more than a single delivery of goods and payment of a certain sum.certain sum.
At the time of default a LOC simply generates a sum of money to the owner. At the time of default a LOC simply generates a sum of money to the owner. Administering the completion of the contract is left to the owner. A LOC does not Administering the completion of the contract is left to the owner. A LOC does not assure payments to subcontractors, laborers & suppliers. The surety bond assure payments to subcontractors, laborers & suppliers. The surety bond company has duties & responsibilities to both the contractor & owner to be company has duties & responsibilities to both the contractor & owner to be equitable to all parties. Before making payments, the surety assures that claims equitable to all parties. Before making payments, the surety assures that claims by subcontractors are for correct amount & are for the bonded contract.by subcontractors are for correct amount & are for the bonded contract.
The duration of performance & payment remain in force subject to the terms & The duration of performance & payment remain in force subject to the terms & conditions of the bond & contract document. Since a LOC is not bound by the conditions of the bond & contract document. Since a LOC is not bound by the contract, an owner must decide when to release the LOC since there is no contract, an owner must decide when to release the LOC since there is no recourse available after the release.recourse available after the release.
NJHEPANJHEPA 2525
Surety Bonds vs. Letters of CreditSurety Bonds vs. Letters of Credit
Surety Bonds offer construction project owners greater Surety Bonds offer construction project owners greater protection than LOCs. Surety Bond guarantee the owner of protection than LOCs. Surety Bond guarantee the owner of the project that if the contractor defaults, the surety will the project that if the contractor defaults, the surety will complete the contract. A LOC is issued by a bank, usually complete the contract. A LOC is issued by a bank, usually for 10% of the total contract amount & callable by the owner for 10% of the total contract amount & callable by the owner upon demand. A LOC upon demand. A LOC does notdoes not guarantee; sufficient funds guarantee; sufficient funds to complete the project; administer contract completion; or to complete the project; administer contract completion; or assurance that rightful claims by subcontractors, suppliers & assurance that rightful claims by subcontractors, suppliers & laborers will be paid. A surety bond assures laborers will be paid. A surety bond assures allall these things these things & more for less than 1-3 % of the contract amount.& more for less than 1-3 % of the contract amount.
NJHEPANJHEPA 2626
Surety Bonds vs. Letters of CreditSurety Bonds vs. Letters of CreditConstruction AssuranceConstruction Assurance Surety BondSurety Bond Letter of CreditLetter of Credit
Prequalification of ContractorPrequalification of Contractor YesYes NoNo
Forms for BondsForms for Bondshttp://www.aia.org/docs_family_adminmanagformshttp://www.aia.org/docs_family_adminmanagforms
Dept. of Treasury’s Listing of Approved Dept. of Treasury’s Listing of Approved Sureties Sureties http://www.fms.treas.gov/c570/c570.html#http://www.fms.treas.gov/c570/c570.html#certifiedcertified
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