To at least some degree, all contracts involve an allocation of risk between the parties to those contracts.
One of the most common methods for dealing with risk allocation in municipal contracting is by way of imposing insurance requirements on suppliers.
An insurance contract is a contract under which one person (called the insurer) agrees in consideration of money paid to him (called the premium) by another person (called the insured) to indemnify the latter, or person designated by the latter, against loss resulting to him or that other person on the happening of a certain event, or to pay a sum of money or some other thing of value upon the happening of a certain event.
The basic components of an insurance contract are as follows:
- The application, in which the applicant for insurance will disclose the details of the risk that is to be insured;
- the binder, which provides temporary coverage to the insured, pending the investigation of the risk by the insurer and the issue of the actual policy;
- the formal insurance policy, which is the written evidence of the terms of the insurance contract; and
- the premium, which is the consideration paid by the insured to the insurer for the issue of the policy.
- Where an insured requires supplementary insurance to that covered in the basic policy, such insurance is effected through the rider.
Where a contract of insurance is varied after its formation, the change is effected through an endorsement to the policy.
The ability and extent of insurance coverage from a supplier is an element that should be factored into the full-life costing of a supply.
Virtually all suppliers of materials or services to a municipality will involve a risk of death, damage or injury to property, persons or the environment.
It is essential that the supply contract properly assign those risks between the supplier and the municipality.
In addition, a specific requirement that insurers provide a specified range of insurance coverage greatly reduces the chance of an action against the municipality.
Key issues in drafting the insurance provisions of a tender document include the following:
- What kinds of insurance are relevant to the contract?
- What amount of insurance should be specified in each category?
- What evidence should the municipality require of the existence of insurance, and when?
- Should the municipality be a named insured?
The policies of insurance required of a supplier should be suited to the risks assumed by the municipality in dealing with that supplier.
Where professional services are being rendered, a policy of professional indemnity insurance is normally requested. Commercial general liability insurance protects against third party bodily injury and accidental property damage.
More specifically, such insurance is intended to provide coverage for non-professional tort liability that results in personal injury, property damage or economic loss.
It does not provide any kind of guarantee with respect to the work the contractor performs. To secure protection against substandard work, it is necessary either to have the supplier bonded or to insist upon professional liability insurance.
Commercial general liability policies often have specific exclusions for curtain types of operations. Construction related contracts raise additional concerns with the result that further specific types of coverage will be required, dealing with construction related risks, crane related risk, boiler insurance, hoist insurance, insurance against environmental risk and so forth.
Coverage for non-owned automobiles protects the municipality where vehicles belonging to an employee or subcontractor are used in carrying out part of the work that the supplier has contracted to do.
This type of coverage is particularly valuable in construction projects, both because of the widespread practice of subcontracting and also because very often vehicles will be held in the name of a different member of the same corporate group as the company that entered into the contract with a municipality as the nominal contractor.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
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