CHAPTER 9
INSURANCE AND BONDS

OVERVIEW
City policy is to require contractors providing services, materials or construction to the City to indemnify and defend the City for claims arising from their performance of the contract and supply proof of insurance coverage to the City. The proof the City requires is usually in the form of certificates of coverage provided by the contractor’s insurance broker or carrier. All insurance requirements made of the contractor must appear in the contract, and in the case of a competitive bid, they should also be in the Invitation to Bid or Request for Proposal (RFP).

GENERAL INSURANCE REQUIREMENTS
Most agreements require general liability and workers compensation coverage. In addition, automobile liability, professional liability and/or some form of bond coverage may be required. As a rule, the insurance must be underwritten by a carrier admitted to transact business in California.

The carrier must be able to demonstrate sufficient financial strength to provide the protection the City seeks. Generally, insurers with an A rating in A.M. Best’s Guide and a financial size designation of VIII or higher will meet the City’s requirements. If departments need to determine the Best’s rating on a carrier, contact the Risk Management Division.

In some circumstances, the City may accept carriers with Best’s rating other than stated above. The approval of the City’s Risk Manager must be obtained prior to acceptance.

The City must also be named as additional insured on the general liability coverage. This provision must be stated in the Invitation to Bid or Request for Proposals. Occasionally, the insurance carrier will impose an additional charge on the insured to do this. If this becomes an unduly heavy burden on the contractor, contact the Risk Manager to obtain advice on the resolution of this issue. Additional insured coverage must be issued as separate endorsements to be valid.

Sole authority to waive insurance provisions and limits of liability rests with the City’s Risk Manager.

LIMITS OF INSURANCE

General Liability
The rule for minimum limits for general liability coverage is $1 million, per occurrence, combined single limit for bodily injury, personal injury and property damage, with an annual aggregate, if any, of at least $1 million. Any substantial, ongoing business should carry insurance with these limits. Any variance to these requirements be acceptable to, and must be approved by, the Risk Manager.

Automobile Liability
Contractors who will drive in the course of performing the service or who deliver and maintain a product must maintain auto liability insurance. The limits must be a minimum of $1 million per occurrence, combined single limit for bodily injury and property damage. Coverage should include any autos, owned autos and hired autos.

Professional Liability
Contractors who are required to be licensed by the State of California or by an agency designated by the State to perform their work must maintain professional liability insurance. Examples include doctors, nurses, psychologists, licensed clinical social workers, engineers, architects and attorneys. As a rule, the City requires limits of a minimum of $1 million per incident and an annual aggregate of at least $3 million.

Workers Compensation and Employer’s Liability
In accordance with the Labor Code of the State of California, every employer must provide workers compensation coverage for his/her employees. Therefore, all contracts with individuals or organizations who have employees must require workers compensation coverage. Many contractors are sole providers and have no employees. These contractors are not required to cover themselves with workers compensation. For that reason, the City has accepted contract provisions indicating the contractor must provide evidence of workers compensation as may be required by the State of California. If there is any question that this coverage may be needed, ask the contractor if he has such coverage, and if so, ask for a certificate of insurance from the workers compensation carrier. If you have any questions contact Risk Management.

Note: In the case of individuals performing services for the City, the contract must clearly state that they are not employees, that they are not entitled to any of the rights and benefits of City employees, that the City does not direct how they perform the work and that the contractor is expected to perform similar work for other individuals or organizations. If the City does not establish a clear "arms-length" relationship with these individuals through appropriate contract language, they could be deemed to be employees of the City for workers compensation purposes.

INSURANCE CERTIFICATES
Insurance certificates providing evidence of coverage must be provided by the following categories of persons:

• Any individual or non-City organization using a City facility.
• Any individual performing a service or delivering a product under contract to the City.
• Any individual or organization constructing something for the City.
• Any agency required to provide such evidence as a condition of participating with the City in any endeavor, such as a joint powers authority.

Responsibility for Obtaining Insurance Certificates
The department designated as contract administrator for each agreement is responsible for obtaining insurance certificates and forwarding them on to Purchasing for review and approval. When Purchasing enters contracts for use by multiple City departments, Purchasing has this responsibility

Basic Steps for Administering Insurance Requirements
Six basic steps should be followed to assure that each contract and contractor conforms to City policy regarding insurance coverage.

• Utilize the current insurance specifications in all contracts.
• Inform bidders and contractors of the insurance requirements early in the bid or negotiation process. Include in the information provided, the person and address to which the certificate is to be mailed.
• Upon execution of the contract, review the contractor’s certificates of coverage to be sure the coverage complies with contract requirements. Notify the contractor promptly if it does not and follow up to be sure that the terms are met before the contractor undertakes any of the work under the terms of the agreement.
• Note the expiration dates of the policies. If any expire during the term of the contract, replacement certificates must be obtained to assure continuity of coverage. While this may occur without action by the City, the contract administrator must be ready to require a new certificate. Notification of the need for replacement certificates should be directed to the contractor before the expiration date of coverage.
• File certificates with the contract so they will available for inspection and to use as evidence of coverage in the event of a loss. Copies should also be placed in the bid file.
• Notify Risk Management immediately in the event of claims or accidents arising from the work performed under the contract.

DEDUCTIBLE AND SELF-INSURED RETENTIONS
Any deductibles or self-insure retentions must be declared to, and approved by the City of Visalia. At the option of the City of Visalia, either: the insurer shall reduce or eliminate such deductibles or self-insured retentions as respects City, its officials, employees, agents, and contractors, or; the vendor shall procure a bond guaranteeing payment of losses and related investigations, claim administration and defense expenses in an amount specified by the City of Visalia.

SUBCONTRACTORS
Vendors shall include all subcontractors as insured under its policies or shall obtain separate certificates and endorsements from each subcontractor.

INDEMNIFICATION CLAUSES
Defense and indemnification clauses require the contractor to reimburse the City for any costs the City may incur to defend and/or pay damages to a third party because of the contractor’s actions. The City is not permitted to require the contractor to assume the responsibility for the City’s actions, but the City can require the contractor to defend it and reimburse it for any loss arising out of the contractor’s performance of the contract. See Appendix for the preferred wording of an indemnification clause.

Occasionally, a contractor will demand that the City defend and indemnify the contractor against losses arising from the City’s acts. Risk Management must be consulted in these instances.

BONDS
Bonds are policies issued by surety companies which guarantee that the contractor will meet the stated obligation. Except as stated below in the payment bond section, Purchasing decides whether to include bonds in the bid requirements or not.

Types of Bonds
The surety bonds which are most likely to be used by the City are:

• Fidelity Bond
  Reimburses an employer for loss sustained because of dishonest acts of employees covered by the bond.
  
• Bid Bond
  Guarantees that a contractor will enter into the contract under consideration if it is awarded to him/her and that he/she will comply with all terms and conditions of the bid or proposal.
  
• Payment or Labor and Materials Bond
  Guarantees that contractors will pay their subcontractors, employees and suppliers for labor, services and goods provided in performance of contracts for "public projects". Payment bonds should be required for all contracts valued at more than $25,000.
  
• Performance Bond
  Guarantees performance by the contractor of all work under the contract, including replacement or repair of any defective materials or faulty workmanship and compliance with all the terms and conditions of the contract.

City Standards for Acceptable Surety Companies

• For contracts under $250,000
  
  Either a California Admitted Surety OR current Treasury Listed Surety (Federal Register) to its specified dollar limitation. AND a current A.M. Best A:VIII rated surety

OR

In lieu of 1 and 2, a domestic or foreign company of equal stability that is approved by the City’s Risk Manager.

• For contracts in excess of $250,000
  
  Either a California Admitted Surety OR a current Treasury Listed Surety (Federal Register) to its specified dollar limitation AND a current A.M. Best A:VIII rated surety

OR

In lieu of 1 and 2, a company of equal financial stability that is approved by the City’s Risk Manager.

BASIS OF PAYMENT AND DELIVERY OF MATERIALS AND EQUIPMENT
Under the Uniform Commercial Code, absent any statements to the contrary, the presumed place of delivery is the seller’s place of business or the location of the goods. The implication is that title to materials as well as all related risks of loss and damage become the responsibility of the buyer at the location where the title transfers.

As a rule, the City requires that materials and equipment purchased be delivered "FOB Destination". This means the purchase price includes delivery of the item and the City takes title to it when it is received on City premises. If a seller insists on shipping "FOB Shipping Point" the City takes title to it when it leaves the sellers dock and assumes the risk of loss during transit. Should that occur, Purchasing and/or Risk Management should be consulted to determine the prudence of securing transit insurance.

NEED FOR WRITTEN PURCHASE ORDERS OR CONTRACTS
Under the Uniform Commercial Code, oral contracts for sums over $500 are generally unenforceable in court. This means that, absent a written contract, the City of Visalia may have difficulty enforcing the insurance provisions necessary to protect the City against loss. The Uniform Commercial Code has been adopted by all fifty states.

Annual contractual purchase order agreements provide an umbrella for all purchases and include appropriate risk transfer and liability statements

RECORD RETENTION
Insurance certificates must be retained for a period sufficient to assure their availability in the event of a claim. Some exposures have a longer discovery period than others. The following record retention schedule is recommended:

*Professional liability coverage is written on a "claims made" basis and must be in force when the City makes a claim against the contractor. Maintenance of certificates will be of value if the contractor uses the same carrier for long periods.