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Home My WebLink About5.F.4. Contractor Insurance Requirements s. ~ 4. CITY OF SHAKOPEE Memorandum COt~SEt~T TO: Mayor and City Council Mark McNeill, City Administrator FROM: Judith S. Cox, City Clerk ~ SUBJECT: Contractor Insurance Requirements DATE: August 28, 2009 INTRODUCTION: City Council is asked to give direction on the amount of insurance coverage a contractor should carry to work in the city right-of-way. BACKGROUND: Effective July 1, 2009, the maximum tort liability applicable to municipalities was raised to $1.5 million. Many cities questioned whether they should now require contractors to have a minimum of $1.5 million in liability coverage. In response to these questions, Mr. Chris Smith, League of Minnesota Cities Insurance Trust Attorney wrote the attached article which appeared in the June- July 2009 Minnesota Cities magazine. Mr. Smith points out that whatever coverage a contractor carries, there is no assurance that the contractor's liability insurance will be enough to cover the full extent of the city's liability. Also, most liability claims are relatively small; few exceed $100,000. In addition, Mr. Smith points out that any additional cost to a contractor is likely to be passed on to the city and the higher limits might prevent some local contractors who do not meet the insurance requirements from bidding on projects. In Mr. Smith's article he is recommending that cities require a minimum of$1.0 million commercial general liability and $2.0 million aggregate insurance limits. Although the city should carefully consider how much liability insurance it will require contractors to carry, the change in the tort cap should have little effect on this decision. CONSIDERATIONS: 1. The city requires evidence of commercial general liability for street and utility projects, some constructed under a city contract and some constructed under a developer's contract. Since these are usually large projects, staff recommends requiring the $1.5 million coverage. 2. The city requires evidence of commercial general liability for work in the city's right-of-way when a right-of-way permit is taken out. A right-of-way permit is needed to make any excavation, opening, or tunnel in, over, across or upon a street, or other public right-of-way or easement. This includes failed utilities on private property that connect to city facilities in the right-of-way. These are usually small projects compared to street construction in #1 above. Staff recommends requiring $1.0 million coverage. 3. The city requires evidence of commercial general liability for other activities in the right-of- way or on public property, i.e.: sale of beer in a park, Derby Day's activities, rental of city park or city property for charities or non-profit events or city spoJlsored events (Movies in the Park), Downtown Partnership activities (Holiday Festival and Classic Car Cruise), etc. Staff recommends requiring $1.0 million coverage. In all cases identified above, the city requires that the City be named as an additional insured. Until July 1, 2009, the city has also required changes to the cancellation clause which puts responsibility on the insurance company to give the city notice prior to cancellation. A new law that took effect July 1, 2009 no longer allows the insurance agent to make changes to the standard cancellation clause which states that the issuing insurer will endeavor to mail 30 days written notice to the certificate holder (City of Shako pee). We will no longer be requiring changes to the standard cancellation clause, except for liquor licensing where the liquor laws require notice to the City. In this case, the insurance policies will probably need an endorsement added to the policy to insure the notice to the City. Our first experience with this will be with the July, 2010 liquor license renewals. RECOMMENDED ACTION: If Council concurs, make a motion to require commercial general liability insurance in the amount of $1.5 million from contractors for street and utility construction; require commercial general liability insurance in the amount of $1.0 million from applicants for a right-of-way permit to work in the right-of-way, and require commercial general liability insurance in the amount of$I.0 million for amusement and non-profit activities on right-of-way and park property. H:\judy\insurance-contractors 08 28 09 L M C I T LOS S CON T R 0 L Contractor Insurance Requirements By Chris Smith he League of Minnesota Cities limit of$1.5 million). Since there is no limits or to have an umbrella policy Insurance Trust (LMCIT) rec- statutory liability limit applicable to the that would provide additional limits ommends that cities require their contractor, this problem can exist regard- over the contractor's general liability contractors to show proof of at less of what limits the contractor carries. insurance. If the city does require an least $1 million in commercial Thus, the city can never be assured the umbrella policy, it is important the general liability insurance. contractor's liability insurance will be city specifically require it be endorsed UntilJan. 1, 2008, this enough to coVer the full extent of the as an additional insured on the umbrella $1 million recommendation city's liability. policy to make sure it will have access equaled the maximum tort liability However, most liability claims are to those additional limits. applicable to municipalities. The tort relatively small; few exceed $100,000. Cost issues. Another consideration cap has since risen, and on July 1, 2009, Requiring only a low liability limit of in deciding how much insurance a the tort cap will increase to $1.5 million. contractors will protect the city in most contractor should have is that requir- Many cities have questioned whether cases. Even a very low limit will take ing contractors to carry more liability they should now require contractors. care of most problems. insurance might increase the cost of to have a minimum of$1.5 million in Aggregate limits. Cities should also the contract to the city. The contrac- liability coverage. consider a contractor's aggregate insur- tor is likely to pass on the cost of any Cities can choose how much insur- ance limits. An aggregate limit is the increased premium to the city in the ance to require, and that decision may maximum amount a contractor's insur- price of the contract. Moreover, higher be influenced by many factors. The ance will payout for any number of limits might prevent some local con- increase in the tort cap, however, does claims that occur during the contract tractors who do not meet the insurance not change LMCIT's general recom- period. For example, let's assume a requirements from bidding on projects. mendation that cities require contrac- contractor has a $1 million liability There is no magic formula to estab- tors to have a minimum of$l million policy with a $1 million annual aggre- lish how much liability insurance a in liability coverage. gate. The most the policy will payout contractor performing work for the Additional insured. Cities should in one year is$l million. city should carry. Although the city require that the city be added as an If a prior claim for another client should carefully consider how much "additional insured" on the contrac- that year used up the $1 million, there liability insurance it will require con- tor's liability insurance. If someone is would be nothing left to pay the city's tractors to carry, the change in the tort injured as a result of the contractor's subsequent claim. Thus, a higher aggre- cap should have little effect on this activity, the injured party is likely to sue gate limit is often required. When a city decision. Accordingly, LMCIT has not both the city and the contractor. If the requires a contractor to have $1 million changed its general recommendation city is named as an additional insured, in liability coverage, LMCIT typically that contractors have a minimum of the contractor's insurance will respond suggests a $2 million aggregate. $1 million in liability coverage. to both of the claims. The city and the Umbrella I excess coverage. In deter- For additional information, see the contractor will share the limits. of the mining the amount ofliability insur- LMCIT information memo, Insurance contractor's insurance. ance to require of contractors, the city and Liability Considerations When Hiring Even if the contractor carried a liabil- should also consider the type of work Contractors, available at www.lmc.org/ ity policy with a limit of$1.5 million or to be performed. Some work is inher- medial documentlllinsandliability higher, there is no assurance this would ently more risky, and the city might conswhenhiringcontractors. pdf. ... be enough to fully protect the city. Both require higher insurance limits. It is the city and the contractor are insureds important to remember, however, that under the policy and both could have even with small or seemingly sim- some liability in a single occurrence. pIe projects, things can go wrong that Thus, if the contractor's liability used up might subject the city to significant some of the $1.5 million available under risks or liability. Chris Smith is risk management attorney the policy, there might not be enough For large projects or projects that with the League of Minnesota Cities. coverage to cover the full amount of the carry a lot of risk, the city may require Phone: (651) 281-1269. E-mail: city's liability (potentially up to the tort the contractor to have higher insurance csmith@lmc.org. JUNE-JULY 2009 MINNESOTA C I TIE S 15