Chapter 4 Flashcards
Important Supporting Lines
- Suretyship
- Builders risk insurance
- Wrap up insurance
- Support the construction industry
- Warranty insurance
- Supports retail activity
- Inland marine insurance
- Supports all commercial activity
Suretyship
- Guarantees the debt or the performance of an obligation of one party to another.
- Is not technically insurance, though related.
- Insurance is a contract between two parties.
- Suretyship involves three parties.
Three Parties
- Principal
- Obligee
- Surety
Principal
The party whose obligation is guaranteed
Obligee
The beneficiary under the terms of the surety bond
Surety
The guarantor, who guarantees fulfillment of the principal’s obligation
Bond
The surety’s guarantee is expressed as a bond.
A legally enforceable promise by a surety to an obligee that the principal of the bond will carry out a specific obligation or else the surety will assume the principal’s obligation to the obligee.
Differences between Suretyship and Insurance
Insurance
- Two way contract
- Carries a duty of utmost good faith
- Cancellable
- Calculates premium based on losses
- Involves transfer of risk
- Does not require reimbursement form the insured
Suretyship
- Three way contract
- Is subject to ordinary contract law with respect to disclosure
- Usually non cancellable
- Presumes no losses to occur, the fee is charged for a service
- No risk transfer
- Principal reimburses the surety
Miscellaneous Bonds
- Bonds used outside of construction industry.
- Purpose is to guarantee compliances with obligations imposed upon principals by law.
Sub Categories
- License and permit bonds
- Customs and excise bonds
- Court and fiduciary bonds
- Lose document bonds
- Financial guarantee bonds
License and Permit Bonds
Guarantee obligations imposed by consumer protection acts and regulations
Customs and Excise Bonds
Satisfy compliance with respect to federal and provincial tax acts and regulations
Court and Fiduciary Bonds
Are required by the judiciary as security for court release, to release liens, and to comply with probate and bankruptcy laws.
Lost Document Bonds
Are required by corporations that are asked to reissue securities, certificates, or other valuable documents and want some security in case the originals should be presented for payment later.
Financial Guarantee Bonds
Include any type of bond that specifically guarantees repayment of a loan, payment of rent, or other similar commitment.
Suretyship and the Construction Industry
Includes
- Bid bonds
- Performance bonds
- Labour and material payment bond
Bid Bonds
Guarantees the quoted contract price to project owner.
Performance Bonds
Follows the awardance of the contract.
Protects project owner up to the amount of the bond should the contractor be unable to complete the project and be in default of the construction contract.
Presents the greatest risk - underwriter commits the insurer (the surety) to pay damages to complete the project if the contractor fails to perform its obligations.
Maintenance Bond
Contract may include maintenance period of 12 months, where the contractor must correct and deficiencies that is not discovered until the certificate of acceptance has been issued. Maintenance bond may be used if this exceeds 12 months.
Labour and Material Payment Bond
Guarantees that the suppliers of the materials and labour to a construction project will be paid.
Bonding in Quebec
Quebec contractors must provide a bond to the government in addition to other types of bonds.
Underwriting Surety Bonds
- Background information on the contractor through a narrative report - history, type and magnitude of work, geographical area covered, how many jobs in progress and completed.
- Site Inspection
- The Principal: reputation and experience, subsidiary companies, references, previous bonds, experience of bonds.
- Business: management and employees, plan and performance record, changes in company, employees with relevant experience.
- Finances: credit record, financial statements, relationship with bank(s), amount of available credit, accounting controls, billing figures.
Objective: Determine that the principal has adequate working capital for its projects and the ability to recover from the principal if the contractor were to default on its obligations.
Builders Risk Insurance
Exposure to risk of loss of damage to buildings in the course of construction.
Applies not only to the structure being erected, but also the materials to be incorporated into the structure.
Coverage for contractors equipments and tools are excluded, and are better insured under another form of insurance such as an equipment floater.
Two Common Forms
- Builders risk named perils
- Builders risk broad form
Named Insureds
Common to name both the owner and the general contractor.
Contractor includes all subcontractors under broad form, excluding the need to list them all separately.
Varies by Projects
Can be done on a reporting basis to cover COC on various projects, or can be issued singly to cover just one project (usually for higher limits)
Termination of Policy
When the owner takes possession of the building, or once the building is occupied, whichever comes first.
Elements of Builders Risk Policy
- Indemnity Agreement
- Replacement Cost
- Property Insured
- Exclusions
- Extensions of Coverage
- Cessation of Coverage
- Loss Adjustment
- Subrogation
- Amount of Insurance and Premium Adjustment
- Verification of Values
Indemnity Agreement
What the insurer agrees to pay in the event of loss or damage by an insured peril.
Replacement Cost
Cost of replacing, repairing, constructing or reconstruction the property on the same project site of like kind and quality for the same occupancy that was intended.
Property Insured
Property in the COC, installation, reconstruction or repair.
Exclusions
Same exclusions that are typically found in all risk wording, and other specific exclusions (loss or damage to contractors tools and equipment)
Extensions of Coverage
Are offered as part of the amount of insurance, not in addition to it.
7 day removal clause.
Cessation of Coverage
Cease with the expiry of the policy period, or if the project was used for purposes other than for construction. when the project is left unattended for more than 30 days.
Loss Adjustment
Claim is to be adjusted with the contractor or owner, not subcontractors.
Subrogation
Waives all rights of subrogation.
Amount of Insurance and Premium Adjustment
Amount of insurance is the same as the estimated completed value of the project.
Verification of Values
Gives the insurer the right to examine the insured’s books at any reasonable time during the policy or within a year after termination of the policy.
Underwriting Considerations
- Background information of all parties involved
- Potential exposures to loss
Wrap Up Insurance
- Form of liability insurance
- Insures against exposure to liability for loss or damage to third parties on the part of participants in a commercial construction project, a new building, or a renovation.
- Extends to include owners, project manager, contractors, subcontractors, architects, engineers, consultants.
- Amends insurer’s standard liability wording.
Advantages to Wrap Up
- Eliminates disputes.
- Reduces adjustment expense.
- Assures uniformity of coverage for all parties (minimum limits)
Disadvantage to Wrap Up
- Premium may be reduced
- Coverage not as broad as under contractors liability policy
- Does not eliminate the need for parties to maintain their own separate policies for work unrelated to the policy.
Underwriting Wrap Up
- Standards are strict.
- Must have established record of financial and business competence.
- Must have general liability policy in place as well.
- Must have familiarity in contractors projects.
- Background info on owner, general contractor, construction manager.
- Copies of all other policies must be obtained.
- Prior use of land
- Methods of construction
- Surrounding area
- WCB plans in place
- any part of the project to be occupied before completion
Warranty Insurance
A written guarantee or assurance that a product is fir for its intended use.
Is given to the purchaser of the product.
States that if the product is defective, the manufacturer will repair or replace the product or its defective parts free of charge, subject to specified conditions for a specified period of time.
Basic Warranty
Almost all manufactured products have this.
Extended Warranty
Continues to protect the purchaser after the manufacturers basic warranty expires.
Coverage may differ from basic warranty.
Extended Warranty Insurance
Typically offered by an insurance company or dealer.
Underwriting Extending Warranty
- Looks at predicting the future cost of claims.
- Is difficult.
Forms of Extended Warranty Insurance
- Financial Guarantee
- Direct Sale of Extended Warranty
Financial Guarantee
A party that issues an extended warranty buys a performance bond from an insurer.
The bond obligates the insurer to pay and legitimate claims against the warranty if a financial failure prevents the party that issued the warranty to do so.
Direct Sale of Warranty From an Insurer to the Product Purchaser
Insurer collects premium from the purchaser, and the purchaser can claim against the insurer’s warrant for any defects that are covered by the warranty.
Exclusions
- Wear and tear
- Misuse of product
- Failure to painting the product according to manufacturer’s directors
- Bylaws that increase the cost of repairing, replacing a damaged covered item as a result of municipal ordinance
Underwriting
- Depends on the nature of the product.
- Typically prefer products of proven quality.
Inland Marine Insurance
Refers to insurance covering loss, damage, or delays to property in transit (except exclusively by oversea voyage) as well as multi-peil coverage on moveable property.
- Includes broad coverage on fixed real property, i.e. instrumentalities of transportation, such as bridges, dams, tunnels, pipelines, power transmission lines
In Canada
Not a distinct class.
Multi-Peril Insurance
- Data Processing Policy
- Jewellers Block policy
- Furriers block policy
- Contractors equipment floater
- Bailees policies
- Inland transportation insurance
Data Processing Policy
Unique nature and high values create need to be insured separately.
Broader coverage needed then office equipment floater.
Not standard, varies from insurer to insurer.
Jewellers Block Policy
Lengthy list of specialized exclusions.
Includes stock usual to jewellers business, including property of others in custody for sale, repair, approval or consignment.
Furriers Block Policy
All risk insurance on the stock and retail of furriers.
Coverage extends to Canada and the USA
Contractors Equipment Floater
Covers equipment by construction contractors that are away from one specific premise and used in multiple locations.
Bailees Policies
Cover loss or damage to clients’ property while it is in the bailees possession.
Ex. Drycleaner
Bailment
The delivery of property by one person to another for some purpose other than sale.
Inland Transportation Insurance
Includes transportation floaters, trip transit policies, truck cargo policies, and express floaters.
Concerned with property in different stages of motion.
Other Special Policies
- Parcel post insurance
- Registered mail insurance
- Armoured car and messenger insurance
- Travellers samples or salesmen floaters
- No single way to underwrite.
Parcel Post Insurance
Covers shipments of merchandise by mail from the time they pass into the custody of the post office, to when they arrive at the stated address.
Registered Mail Insurance
Designed primarily for banks, credit unions, financial institutions.
Covers shipments by registered main of bonds, stock certificates, jewellery and other valuables from the time they leave the senders premise, to the time they are delivered.
Armoured Car and Messenger Insurance
Covers shipments of currency and securities by armoured cars and messengers.
Travellers Samples or Salesman Floaters
Insure the owners of samples while such goods are in the charge or control of travellers or salesmen on the road.
