Agencies with suppliers delivering products and services to support critical operations, as well as on-site contractors repairing facilities and building new structures, open the door to potential risks. Meanwhile, a key role for government contracting professionals is to minimize any liability and risk for their organization.
As a result, these professionals must protect the contracting entity from accidents, non-performing, and failure to complete by securing certificates of insurance to indicate adequate coverage and bonds for performance, general liability, etc.
Guidance for Insurance
The federal government’s Acquisition.gov website, within its Federal Acquisition Regulation (28.301 Policy), outlines the circumstances in which contractors shall carry insurance. It also provides any exceptions where the government might agree to relieve the contractor of liability for loss or damage.
However, these exceptions are not the norm. In fact, in addition to federal and state requirements, local municipalities and school districts often have their own terms and conditions, with specific indemnification language for insurance requirements.
Insurance plays a crucial role in safeguarding public assets from dozens of risks, from property damage to cyberattacks. Non-compliance with insurance requirements can lead to severe consequences, including disqualification from the bidding process, termination of the contract, or financial penalties.
A specific example of the growing need for additional coverage is cyber insurance, which is intended to protect an entity from losses resulting from data breaches, network interruptions, and ransomware. Cyber insurance has become more relevant with a surge in the number of cyberattacks in recent years. The State of Ransomware in State and Local Government 2023 Report from Sophos revealed that ransomware attacks have become a growing threat to government organizations, with 58 percent of state and local government agencies being hit – a 70 percent increase from the previous year.
Advisory roles such as architects, consultants, designers, and contractors are another area for concern. Requiring these contracted individuals to maintain professional liability insurance offers protection against allegations of professional negligence or mistakes made during work.
General liability insurance is another essential insurance policy for government contractors. It can provide coverage for third-party bodily injury and property damage claims that may arise. For instance, a contractor may have an accident while performing work, with injuries to themselves and other people. General liability insurance provides an additional layer of protection for the entity, which is often seen as having “deep pockets” as a government agency, against future litigation.
Bonding Requirements
States, local municipalities, schools, and higher education agencies cumulatively award billions of dollars in contracts each year to a variety of businesses. However, with the potential for financial losses and legal liabilities that may arise from government construction projects, bond requirements are put in place to guarantee financial protection for all parties.
A bond is issued at a specific price, which is the maximum compensation that a surety company will provide if the specific work is not completed by the general contractor. It serves as a financial guarantee that the contractor will fulfill their contractual obligations. Surety bonds can also offer protection to the contractor in the event of contract disputes or non-payment.
Issues Concerning Insurance or Bonds
When a contract is negotiated and awarded, the awarded supplier or contractor may initially be required to provide an insurance certificate as part of the contract. Procurement generally handles that process when the initial contract is put in place.
However, many contracts have a term of up to three to five years, and insurance needs to be renewed and certificates need to be submitted for each year of the contract. That doesn’t always happen. The contract may no longer be managed by procurement, having been handed off to be managed at the user department level.
Many of those individuals have not been formally trained in contract management and can leave the entity legally exposed when insurance is not collected for subsequent years of the contract. As contracts renew on the annual anniversary, there can be lapses in coverage.
Submitted bond paperwork and certificates can also present an issue. On the surface, submitted paperwork may seem adequate or correct. However, the agency may not mandate checks back to the issuing surety company on paperwork’s accuracy and legitimacy. As a result, there may be a certificate on file, but if it’s a copy from another project or an invalid bond document, it will not be helpful when an emergency occurs and the bond is pulled. Unfortunately, that is a bad time to for the agency to discover the submitted bond does not cover the situation.
Both situations can be addressed through automation, with a system that automatically sends reminders and updates records, like the Insurance Certificate Management module of the PB System from PlanetBids. With this automation, an agency can ensure that a contract will not automatically renew on the option year unless an updated insurance certificate is provided.
In addition, a real-time check can be performed on eBonds to ensure they are viable, accurate, and up to date. This process takes place constantly and in the background, and only the anomalies are highlighted for procurement to manually review and address as needed. This automation will ensure that an entity is protected and will free personnel up from performing these manual tasks, streamlining operations and promoting efficiency within the organization.
To learn more about how PlanetBids Insurance Certification Management module can help agencies manage insurance and eBonds, check out our case study with the City of La Mesa, California.
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