Tuesday, May 6, 2014

Insurance As Collateral (Part IV)

Unquestionably, a requirement in today’s world - insurance - can be so complex that it often leaves us with many questions. This is the fourth of several insurance blogs to address various vital components of your community’s health. Please scroll down to read the previous three insurance-related posts for more details. 

One of the fears an Association faces is whether or not a contractor will cancel his policy the day after presenting proof of insurance to the Association.  While in the past it was easy to require the insurance company to notify the Association about a cancellation, some insurers are now refusing to provide notice. To address this, if a contract involves a risk so substantial that cancellation or coverage reduction is heightened, a project-specific policy with the Association listed as an “additional insured” may be considered - although this is an added expense.

Another layer of financial security is via the use of bonds.  Here are a few different types:
  •          A Bid Bond guarantees that the bidder will undertake the job at the quoted price and replace the bid bond with a performance bond once the contract is awarded 
  •          A Performance Bond guarantees that if the bonded contractor fails to complete the job as quoted, the bond company assumes the contractor’s financial responsibility to have the work completed
  •         A Payment Bond or Labor and Material Bond guarantees that the contractor will pay all the bills incurred on the work to avoid liens (subcontractors, suppliers, laborers)
You should require the contractor to obtain a Performance and Payment Bond with penalties equal to 100% of the contract price.

When an incident does occur that requires you to tap into insurance or a bond, it is very important that the reporting requirements are met.   It is customary for many of us to report such claims to our insurance agent, and we depend on that agent to pass along the information to the insurer. While convenient, this practice does not technically fulfill the notification requirement and can be used as a reason to deny coverage. Typically, all insurance policies contain a "Notice" section that clearly addresses the correct and proper way to notify the insurance company about a claim or potential claim.The safest practice is to report the event directly to the insurer or bond holder, with secondary notification to your agent.  Written notification is best, and if you provide a verbal notification, be sure to document afterward, including things such as the date and person spoken to. Follow this up with a formal letter as soon as possible. And its always a good idea to report anything that could potentially develop into a claim - waiting until a later date, in some cases, can also be grounds for a denial of coverage.

Preventing loss of insurance coverage is so important that many require a clause in the vendor contract, stating that maintaining proper insurance coverage is a material element of the contract, and that failure to maintain or renew coverage or to provide evidence of renewal may be treated by the Association as a material breach of contract.  For large, ongoing projects you may want to include a provision allowing the Association to withhold payment, so that it can purchase insurance on behalf of the contractor to replace expired coverage.   

Bottom line - Insurance is important stuff!

No comments:

Post a Comment