I. Property and Casualty Insurance and Bonding Fundamentals
Before you can determine the appropriate type and amount of insurance for your contracts, it is important to understand the concept of exposure.
What is exposure?
Exposure is defined as any situation that can lead to a loss or claim against the University of Tennessee.
What are the different types of exposure?
Exposure can be categorized broadly into two types: (1) situations that can lead to property loss, or (2) situations that can lead to bodily injury, medical harm, or death to a person.
- Property exposure deals with potential damage to tangible things such as buildings, motor vehicles and personal items caused by the negligent acts by vendors, contractors, university officials, and other third parties.
- Personnel exposure deals with the potential harm, injury, or illness of any party resulting from the service, delivery, or use of goods that the University procures. Affected parties can include employees, contractors, sub-contractors, customers, and unrelated bystanders.
How is exposure related to insurance?
Exposure is present in any solicitation. It is common for more than one area of exposure to exist. For example, a building remodeling or construction contract should consider among other things the potential loss from fire (property exposure) and potential harm to construction workers (individual exposure) or pedestrians (personnel exposure). In almost all contracts, it is necessary to purchase property and casualty insurance to cover the potential financial loss to the University resulting from one or more exposures. Within any relevant bid request, it is important to stipulate the vendor/contractor’s responsibility to maintain various coverage types and limits
Do only high value contracts require insurance?
No, the need for insurance is not related to the value of the contract, but to the degree of exposure.
Why do vendors or contractors need to purchase insurance?
Insurance has two primary benefits:
- It ensures that vendors and contractors have the financial ability to pay for damages that result from their negligent acts.
- It protects the University from financial loss as a result of third party acts during the acquisition, delivery, or usage of purchased goods or services.
What are the different types of property and casualty insurance?
The eleven primary types of insurance referred to in this document:
- Automobile Liability: insurance that protects the insured against financial loss because of legal liability for automobile-related injuries to others or damage to their property by an auto
- Commercial General Liability (CGL): a standard insurance policy issued to business organizations to protect them against liability claims for bodily injury and property damage arising out of premises, operations, products, and completed operations; and advertising and personal injury liability
- Contractors Pollution Liability: provides third-party coverage for bodily injury, property damage, defense, and cleanup as a result of pollution conditions (sudden/accidental and gradual) arising from contracting operations performed by or on behalf of the contractor
- Fidelity Insurance: covers loss due to crime or dishonesty by an employee/contractor. Also known as “Fidelity Bonds.”
- Professional Liability: a type of liability coverage designed to protect traditional professionals (e.g., accountants, attorneys) and quasi-professionals (e.g., real estate brokers, consultants) against liability incurred as a result of errors and omissions in performing their professional services
- Workers Compensation (WC): provides medical, disability, and rehabilitation benefits to injured employees of the contractor
- Umbrella Liability: a liability policy that provides excess coverage above underlying policies and may also provide coverage not available in the underlying policies, subject to a self-insured retention.
- Environmental Impairment Liability: a specialized insurance policy that covers liability and sometimes cleanup associated with pollution
- Builders Risk: a property insurance policy that is designed to cover property in the course of construction
- Liquor Liability: type of policy that covers the insured if they are in the business of manufacturing, distributing, selling, serving or furnishing alcohol
- Aircraft Liability: coverage for the insured in the event that the insured’s negligent acts and/or omissions result in losses in connection with the use, ownership, or maintenance of aircraft
What are bonds?
Bonds are financial instruments that reimburse the University and certain third parties for financial losses due to a vendor/contractor non-performance of contract terms and conditions.
What are the different types of bonds?
There are two primary types of bonds.
- A fidelity bond protects against the financial loss that results from a dishonest act or crime committed by an employee of the vendor.
- A surety bond (bid, performance, or payment bond) ensures that a vendor fulfills certain terms and conditions of a contract.
For more information, please refer to the Bonding Guidelines section.
I have insurance – do I need a bond?
Insurance protects against a potential loss from property or personnel exposure. A bond provides additional coverage by protecting against a non-performance of contract terms and conditions by a vendor. For more information, please refer to the Bonding Guidelines section.
Are bond requirements related to the value of contracts?
For some types of contracts such as building construction, bonds are required above a certain dollar amount set by state law. For lower value contracts, one may consider requiring liquidated damages in lieu of bonds – please contact your Office of General Counsel for additional guidance.