1. Insurance, Surety & Indemnification Why do we need it anyway? NJ Higher Education Purchasing Association Disadvantaged Business Development Fair August 17, 2005 James A. Breeding Director, Department of Risk Management & Insurance

2. NJHEPA2 Agenda  Why is Insurance Required?  What can and does go wrong?  Additional Insured  Indemnification  Types of Insurance Coverage Required  Why do we need Surety/Guarantee?  When is a Contract Guarantee Required?  Types of Guarantees Available  What is a Surety Bond?  Surety Bonds to Cover Supply & Construction Projects  Insurance vs. Surety Bonds  Letters of Credits vs. Surety Bonds

3. NJHEPA3 Why is Insurance Required?  Due Diligence  Responsible Ethical Business Practices  Protect University Assets  Minimize Disruption to University Operations  Effect a Risk Transfer

4. NJHEPA4 Additional Insured  Defense Costs  Indemnity Payments  Beneficiary of Vendor’s Insurance Coverage

5. NJHEPA5 Additional Insured (cont’d.) “Rutgers, The State University must be named as an additional insured in this policy. Such insurance shall be primary over other collectible insurance that may apply……”

6. NJHEPA6 Indemnification “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.”

7. NJHEPA7 Types of Insurance Coverage Available  General Liability Completed Operations Completed Operations Products Liability Products Liability Contractual Liability Contractual Liability

8. NJHEPA8 Types of Insurance Coverage Available (cont’d.)  Business Auto Liability Owned / Non-Owned Auto Owned / Non-Owned Auto Leased / Hired Auto Leased / Hired Auto Underinsured / Uninsured Motorist Underinsured / Uninsured Motorist  Worker’s Compensation Statutory Limits Statutory Limits Part B – Employer’s Liability Part B – Employer’s Liability

9. NJHEPA9 Types of Insurance Coverage Available (cont’d.)  Specialty Risk Coverage Bus / Transportation Vendors Bus / Transportation Vendors Asbestos Removal and Monitoring Contractors Asbestos Removal and Monitoring Contractors Chemical Waste and Pesticide Disposal Contractors Chemical Waste and Pesticide Disposal Contractors Construction and Major Renovations Contractors Construction and Major Renovations Contractors

10. NJHEPA10 Why do we need Surety/Guarantee?  Time Delay  Costs to Replace Vendor/Contractor  Missed Deadline (Construction)  Cost to Administrate Takeover  Legal Expenses  Liens Placed by Subs/Suppliers  Quality of Work

11. NJHEPA11 When is a Contract Guarantee Required?  Vendor/Contractor supplies critical service to University  Construction projects considered essential Roof replacements Roof replacements New facilities with time-sensitive opening New facilities with time-sensitive opening Water/wastewater management systems Water/wastewater management systems Large dollar – stadium, library Large dollar – stadium, library  Projects required specialized services Software outsourcing Software outsourcing Database conversion Database conversion  Vendors with long lead time or special order units Bleacher systems Bleacher systems Refrigeration units Refrigeration units  Vendors supplying long-term guarantee of workmanships Energy management contractors Energy management contractors

12. NJHEPA12 Types of Contract Guarantees  Vendor/Contractor Guarantee If written into contract, provides that materials supplied & workmanship will be satisfactory to buyer If written into contract, provides that materials supplied & workmanship will be satisfactory to buyer This form of guarantee is only as good as company supplying goods or service. This can be satisfactory if the reputation and experience of supplier is known to University. This form of guarantee is only as good as company supplying goods or service. This can be satisfactory if the reputation and experience of supplier is known to University. If this form of guarantee is used, check on company’s ownership. It may be necessary to obtain parent company guarantee. If this form of guarantee is used, check on company’s ownership. It may be necessary to obtain parent company guarantee. The acceptance of vendor/contractor guarantee puts the burden of qualifying the supplier on University The acceptance of vendor/contractor guarantee puts the burden of qualifying the supplier on University

13. NJHEPA13 Types of Contract Guarantees (continued)  Surety Bonds What is the role of Surety Bonds? What is the role of Surety Bonds? Bond Types Bond Types Bid Bonds/Consent of SuretyBid Bonds/Consent of Surety Performance BondPerformance Bond Payment BondPayment Bond Maintenance BondMaintenance Bond Supply BondSupply Bond

14. NJHEPA14 What is a Surety Bond?  Three Party Instrument  Surety bonds guarantee the obligation of one party to another  Surety bonds provide monetary or other recourse if the obligation is not performed

15. NJHEPA15 Suretyship vs. Insurance  Subject to state laws  Provides protection against financial loss  Risk remains with principal  Premiums charged with expectation of no loss  Subject to state laws  Provides protection against financial loss  Risk transferred to insurance company  Premiums include an allocation to cover expected losses

16. NJHEPA16 Structure of Surety Bonds  Preamble Introduces parties Introduces parties PrincipalPrincipal ObligeeObligee SuretySurety  Conditions and qualifications Explains why bond is required Explains why bond is required Obligates principal and surety to a third party (obligee) Obligates principal and surety to a third party (obligee)  Obligatory clause Formalizes that if principal fails to perform duties as prescribed by conditions then surety will pay or perform Formalizes that if principal fails to perform duties as prescribed by conditions then surety will pay or perform

17. NJHEPA17 Structure of Surety Bonds (In comparison to a Letter of Credit)  Bond  Preamble  Conditions  Qualifications  Obligatory clause Pay on demand Pay on demand Fund principal Fund principal Replace principal Replace principal  Letter of Credit  Preamble  Conditions  Qualifications  Obligatory clause Pay on demand

18. NJHEPA18 Bond Forms  Bid Bond Evidence of the good faith & ability of the contractor; Evidence of the good faith & ability of the contractor; The purpose of the bid bond is to: The purpose of the bid bond is to: Eliminate unqualified or irresponsible contractors from competitive biddingEliminate unqualified or irresponsible contractors from competitive bidding To save University the expense of another bid letting should the successful bidder not qualifyTo save University the expense of another bid letting should the successful bidder not qualify To assure the completion of the lowest possible costTo assure the completion of the lowest possible cost

19. NJHEPA19 Bond Forms  Default under a Bid Bond When does a default occur? When does a default occur? Courts’ position Courts’ position Invoking a bid bond Invoking a bid bond

20. NJHEPA20 Bond Forms  Performance and Payment Bonds Used to guarantee the completion of construction projects Used to guarantee the completion of construction projects Provide for the benefit of laborers, subcontractors & material suppliers Provide for the benefit of laborers, subcontractors & material suppliers Require separate performance & payment bonds to equal 100% of the contract price Require separate performance & payment bonds to equal 100% of the contract price New Jersey, Senate Bill 305 New Jersey, Senate Bill 305 Can be provided for a single construction project with one or more sureties Can be provided for a single construction project with one or more sureties

21. NJHEPA21 Bond Forms  Performance and Payment Bonds (cont’d) Provides indemnity for costs & damages by reason of the contractors failure to deliver under the terms of the contract Provides indemnity for costs & damages by reason of the contractors failure to deliver under the terms of the contract Assures that persons supplying direct labor or material will be promptly paid under the terms of the contract Assures that persons supplying direct labor or material will be promptly paid under the terms of the contract

22. NJHEPA22 Bond Forms  Default under Performance Bond Upon a contractor default, the surety can complete the contract under these methods: Upon a contractor default, the surety can complete the contract under these methods: Offer financial support or other guidance to see the firm to the completionOffer financial support or other guidance to see the firm to the completion Obtain bids from other contractors to arrange to take over the projectObtain bids from other contractors to arrange to take over the project 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 is legally liable to pay up to the bond amountThe surety has the obligation to pay all verified bills which it is legally liable to pay up to the bond amount

23. NJHEPA23 Legal Obligations of University as a Bond Obligee  To ensure a mutual meeting of the minds  Notice to the Surety  Responsibilities of bond obligee  Duties of bond obligee

24. NJHEPA24 Letters of Credit and Bonds Letters of credit (LOC) are often viewed as substitutes for performance & 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 certain sum. 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 assure payments to subcontractors, laborers & suppliers. The surety bond company has duties & responsibilities to both the contractor & owner to be equitable to all parties. Before making payments, the surety assures that claims by subcontractors are for correct amount & are for the bonded contract. 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 contract, an owner must decide when to release the LOC since there is no recourse available after the release.

25. NJHEPA25 Surety Bonds vs. Letters of Credit Surety Bonds offer construction project owners greater protection than LOCs. Surety Bond guarantee the owner of the project that if the contractor defaults, the surety will complete the contract. A LOC is issued by a bank, usually for 10% of the total contract amount & callable by the owner upon demand. A LOC does not guarantee; sufficient funds to complete the project; administer contract completion; or assurance that rightful claims by subcontractors, suppliers & laborers will be paid. A surety bond assures all these things & more for less than 1-3 % of the contract amount.

26. NJHEPA26 Surety Bonds vs. Letters of Credit Construction Assurance Surety Bond Letter of Credit Prequalification of Contractor YesNo Continuous Independent Project Monitoring YesNo Extraordinary Protection/Indemnity to Avoid Loss YesNo Full Financial Protection YesNo Unqualified Forfeiture NoYes Required to Investigate Complaints YesNo Ability to Respond to Contract Problems by …………………………………… Financing Contractor YesNo Assuming Construction Responsibility YesNo Tendering Offer to a Competing Contractor YesNo Assisting Existing Contractor to complete Project (Assuming Responsibility) YesNo Forfeiting Financial Limit YesYes

27. NJHEPA27 References  Forms for Bonds http://www.aia.org/docs_family_adminmanagforms  Dept. of Treasury’s Listing of Approved Sureties http://www.fms.treas.gov/c570/c570.html# certified http://www.fms.treas.gov/c570/c570.html# certified http://www.fms.treas.gov/c570/c570.html# certified