Breakout Session #803 Tom Reid Chief Problem Solver Certified Contracting Solutions, LLC

2. Insurance for Contract Managers Breakout Session #803 Tom Reid Chief Problem Solver Certified Contracting Solutions, LLC Louisville, CO www.certifiedKsolutions.com Date: April 14, 2008 Time: 3 to 4 PM

3. Agenda • Definitions • What Insurance is NOT • Terminology • Concepts and Types • Clauses • Summary

4. Definitions Insurance A means for persons and businesses to protect themselves against the risk of loss. Insurance is a means of shifting an existing risk to an insurer who can absorb the risk because it is spread over a sufficiently large group

5. Three Elements • Risk is transferred • An uncertain (possibly large) loss is converted into a certain cost (the premium) for the insured • Risk is transferred to another entity • Risk is spread • Over a sufficiently large group to allow the “law of large numbers” to predict both the total losses and the probability of a single loss with some degree of accuracy • To an insurer • One engaged primarily in offering insurance

6. 2006 GAO Study • There is no universal agreement on a definition of insurance • Insurance regulation is primarily a function of state law • Most definitions have common elements • Non-pecuniary losses are usually not covered by insurance

7. No Universal Agreement • The insurance industry and state regulators develop definitions for different purposes • Subject areas • Types • Enforcement • The definitions are dynamic • Evolution of thinking in subject areas • Product innovations • Changes in statutes, regulations, and court interpretations

8. State Regulation • States use a variety of sources to help define what they are regulating • Statutory definitions • Court interpretations • Regulatory descriptions • Uniform Product Coding Matrices (UPCM) categories of insurance

9. Court Interpretation • Is the nature of the contractual relationship is such that the transfer or distribution of risk is its “principle object and purpose”? • Key elements: • A contract for a specific period • Insurable interest held by the insured • Consideration (the premium) • Assumption of risk by the insurer

10. Risk Assessment Risk = probability of occurrence X magnitude of result

11. What Insurance is NOT • Wager • Covers ONLY an “insurable interest” • May not provide a means to make a profit off of the misfortune of others • A lack of an insurable interest creates a moral risk that someone might be tempted to murder or destroy the property of another

12. Terminology • Players • Brokers – those who place insurance contracts with underwriters • Underwriters – the holder of the source of funds to pay claims • Adjusters – persons who assess nature and extent of damages in paying a claim • Reinsurers – parties who assume some of the risk from other insurers • Insured – the party who pays the premium for specific coverage from an insurance product • Insurer – The insurance company that underwrites the insurance

13. Terminology • Policy – the insurance contract that defines the insurance product • Premium – the money paid to the insurance company • Endorsement – an addition to an insurance policy that modifies it, usually adding coverage for a specific loss • Exclusion – defines the circumstances under which coverage will NOT be provided • Binders – Immediate granting of insurance coverage until the full policy can be issued

14. Insurable Interest • The party who purchases insurance must have some interest in the property or subject of the insurance policy. Failure to have an insurable interest converts the policy into an unenforceable wager • Under the UCC, typically a seller has an insurable interest when it either retains title to the goods or a security interest in the goods • A lessor has an insurable interest during the term of the lease • A buyer or lessee obtains an insurable interest in the goods when they are identified to the sales or lease contract

15. Reinsurance • A transaction whereby the assuming reinsurer, for a payment, agrees to indemnify the ceding insurer against all, or a part, of the loss which the latter may sustain under the policy or policies which it has issued. Reinsurance Association of America

16. Types - Life • Life insurance – (more appropriately called “death insurance” since the condition precedent is that someone dies!) a form of insurance where the insurer is obligated to pay a specific sum of money upon the death of the insured. • Beneficiary – the recipient of the proceeds when the insured dies

17. Types – Health and Welfare • Health insurance – covers medical treatment, surgery, or hospital care • Disability insurance – provides continuing income to an insured who is disabled in accordance with the terms of the policy

18. Types - Auto • Collision – covers the loss of the insured’s vehicle due to collision • Comprehensive – covers the loss or use of the insured’s vehicle for any other reason • Third Party Liability – covers the expense of returning an injured third party (not the insured or the insurer) to the condition they were in prior to an event that was the fault of the insured. • Uninsured motorists – provides coverage for the insured or a person authorized to be in the car when an accident occurs that involves a party that has no insurance, or when the cause is a hit-and-run driver.

19. Types - Business • Commercial General Liability • Business interruption • Worker’s compensation • Property • Fire and Casualty • Fidelity insurance • D&O • Product Liability

20. Types – Business (con’t) • Pollution • Patent • Unlawful Acts

21. Types - Other • Professional Malpractice • Title • Credit • Marine • Group • Umbrella

22. Concepts • Subrogation – when an insurer pays a claim to an insured for liability or property damage caused by a third party, the insurer succeeds to the rights of the insured to recover from the third party • Self Insurance – an arrangement where the financial capability of the insured is sufficient to cover any projected loses. NOTE: This is not true “insurance”

23. Concepts • Strict liability – an assessment of responsibility regardless of fault • Vicarious liability – an assessment of liability against a party due to its relationship to the party who proximately caused the injury • Additional Insureds – Other parties who are not an original party to the insurance contract who are named later to receive the same benefit of insurance coverage as the party to the contract

24. Sureties • Suretyship creates a relationship among three parties • Principal – the party required to act • Surety – the party who must act if the priciple fails in its obligations • Obligee – the party to which the duty is owed by the principle

25. Bonds • A written instrument that binds the surety to pay a sum certain upon the happening of a specified event • A Bond Contains two parts: • The obligation • The conditions

26. Bonds - Types • Performance • Payment (Miller Act) • Bid • Bail • Fidelity • Public Official • License and Permit

27. Clauses So now that you know ALL about insurance………. What do the Government Contract Clauses Say?

28. Summary • Insurance has no single universal definition, but definitions tend to have the common elements of risk transfer and risk spreading through an insurer • Insurance is regulated by the states • Reinsurance transfers risk from insurers to other parties • There are a great number of types of insurance products and the market changes to meet evolving needs

29. Summary (con’t) • The clauses are designed to protect the government’s interests • The clauses allow the purchase of insurance, but give the government the benefit of that insurance • The government may not approve the cost of additional insurance, preferring to remain “self insured” • Bonds are not truly insurance; they are a guarantee to fulfill the obligation of another

30. “The first responsibility of a leader is to define reality. The last is to say thank you.” Max DePree Author & Business Executive