CAIB 3 Summary Notes

CAIB III

Chapter 1: Commercial Liability – A Legal Perspective

Section 1: The Law

Two areas of law are Civil (harmful to society) and Criminal (harmful to the state).

Within Civil Law is a) Tort Law – a wrong/injustice either intentional or not

                                 b) Contract Law – suits that result from a breach

Common Law – Rule of Precedent (like old rulings) & Statute Law (written law overriding all)

Damages in Tort: 1) Compensatory Damages (general and special damages)

                             2) Exemplary/Punitive Damages (used to punish defendants)

                             3) Nominal Damages (just to prove a point, just 1$)

Remedies for breach of Contract

-          provide payment of damages to injured party

-          force performance

-          return parties to pre-contract positions

Section 2: Commercial or Business Liability Exposure

Liability in Common Law

Doctrine of Negligence: duty of all persons to exercise due care.  Negligence must be proven, and therefore must show fault (3 conditions):

-          defendants owed plaintiff a legal duty of care

-          duty was breached as result of defendants negligence

-          plaintiff suffered damages as a proximate result of defendants negligence

Liability in Statute

Doctrine of strict liability: guilty until proven innocent.  This in common law is used for inherently dangerous activities, and in statute law are subject to fines and penalties.

Activities imposing strict liability  - explosives                      - keeping of dangerous things

                                                        - lighting of fires             - operation of aircraft

Broker & the Law – must have knowledge, but avoid giving legal advice.

Analyzing Liability Loss Exposure

1) Premises & Operations Liability Exposure – ‘occupier’ based on control, not ownership

A) Duty owed to those who come on premises:  Occupier responsible for conditions of premises claims arise from physical conditions that allege neglect by occupier (slip & fall).  Operations exposes occupier to loss (hot coffee).

  Liability in Statute: Occupiers Liabilities Acts

  Common Duty Owed – care that visitor be reasonably safe using premises for purpose of visit

                                        (except if visitor assumes risk, like roofers)

  Liability of Occupiers Limited in Certain Instances

i)                    Liability for independent contractors, since they ‘control’ premises they have a legal duty owed, but shared liability if work is inherently dangerous.

ii)                  Liability for injuries resulting from condition of rented premises.  Single occupancy building landlords are generally not liable expect if repairs not done.  Multiple occupancy landlords are responsible for the common areas of the premises only.

   B) Duty owed those outside premises – may owe to those who suffer for occupancy/operations.

-          Nuisance: everything that endangers life/health or offends the senses (smoke, waste).  must prove injury to/interference with one’s person, property or rights.

-          Trespass: unlawful interference with one’s person, property, or rights. (e.g. If a part of a building interferes with another’s land)

2) Products Liability Exposure – consumers have the right to safe products

            Defective: contained something it shouldn’t

                            : something was omitted in its manufacture that should be there

            Claim only if: occurred away from premises of seller

                                 :  seller clearly relinquished possession of defective product.

  Action in Contract – from Sale of Goods Acts, contains implied warranties

-          The fitness of a business’s product for a particular purpose, buyer must exercise care to the suitability/quality of goods, unless relies on sellers skill/judgment.

-          Only parties to contract entitled to bring suit, so hard to go after manufacturer.

  Action in Tort – Snail in Bottle Case: extended rights to all users of defective shit.

Burden of Proof: manufacturer must prove it, owness on them.

Duties of Manufacturer: safe design, manufacture, construction, assembly, packaging

Duties of Sellers: are expected to be experts, and expected to tell the truth.

3)  Completed Operations Liability Exposure

-          Operation Complete When: incident occurred away from work

 : such work was completed/abandoned

-          Basis of Claims: bodily injury/property damage to those using the completed work

       : property loss because completed work doesn’t serve its purpose

4)  Personal Injury Liability Exposure – not physical harm, but liable/slander/interference

-          Those who have store detectives: wrongful detention

-          Landlords: wrongful entry

-          Newspapers/Broadcasters: libel/slander

5) Liability for Property in Business Care/Control/Custody

-          Real Property: if biz rents, then care is needed, liability usually in contract

-          Personal Property: as bailee for hire, biz has responsibility for others shit.

          : liability in tort: ordinary care, burden on bailee

          : liability in contract: establishes bailee’s liability

6) Employer’s Liability Exposure

-          Employers liability for torts of employees (if happened during biz)

-          Employers liability for injuries to employees (most covered by ‘no fault’ Social Insurance, but some need extra coverage like farms/sport/circus)

7) Contingent Liability Exposure when:

-          Work is done by persons who are not employees (subcontractors assume liability, by primary will be listed as contingent but will not be held responsible)

-          Employees work in another province longer than Workers Comp. plan allows.  If so no comp. and employee can sue company

8) Contractual Liability Exposure

-          Can assume liability of others through contract.

-          Construction contracts (during building, contractor assumes all liability)

-          Purchase orders & sales agreements: may contain terms intending to shift/transfer liability.

9) Automobile/Aircraft Liability Exposure

-          Chapter 3

10) Pollution Liability Exposure

-          Any biz with waste, usually legislation deals with it

-          Can be expensive (Exxon Valdez)

11) Incidental Medical Malpractice Exposure

-          Render or fail to render proper medical services

           

Chapter 2: The Commercial General Liability Policy

Section 1: Developing the Policy Form

1980’s were fucked! Asbestos/High Court Awards/Bhopal/Aviation disasters = new form

I) Coverage A: Bodily Injury & Property Damage Liability

 Insuring agreement

1. Coverage for bodily injury/prop. damage only.  Bodily injury is physical only, property damage is for tangible property only.
2. Tort, Contract, & Statutory Liabilities all covered
3. Insurer liable for compensatory damages only (not punitive)
4. Coverage for losses which occur during policy period
5. Injury/Damage must be caused by an occurrence (an instance, or repeated events)
6. Loss/Damage must take place in coverage territory (USA/CAN, limited Globally)
7. Insurers right & duty to defend any action
8. Insurer reserves the right to investigate any claim & settle any claim it sees fit

Exclusions

1. intended losses from insureds standpoint, but will cover if action against customer was reasonable & used only to protect persons &/or property from injury/loss
2. Liability assumed under contract excluded (exceptions are lease contract, sidetrack agreement, easement license, elevator maintenance)
3. Any obligation of the insured under Workers Comp., disability benefit, or unemployment compensation law or any similar law (if payment missed, insurer won’t cover affected employees)
4. Bodily Injury to an employee arising out of & in course of employment (‘no fault’ Gov’t coverage kicks in)
5. Bodily Injury/Property Damage due to: auto, ski-do, any vehicle used in speed/demolition contest, any vehicle that would need separate coverage by law.  Bodily Injury/Property Damage from vehicle that is already covered or if its coverage was lapsed/terminated
6. Bodily Injury/Property Damage from ownership, maintenance, use operation, loading/unloading, or entrusting to others, by or on behalf of any insured of any watercraft. (coverage OK if boat onshore on your premises)
7. Same as above for aircraft, with no exceptions

Specific for Property Damage Claims: no coverage for:

8.   Property you own/rent (can’t sue yourself) Premises you sell, give away, abandon (if   

                  past comes back to haunt you, ur fucked) Property loaned to you (get bailee coverage)

            Personal Property in your care/custody, Real Property in your care/custody, & Part of

            any property that must be restored, repaired, replaced because ‘your work’ was shitty

9. Property Damage to ‘your product’  arising out of it or any part of it.
10. Property Damage to ‘your work’ arising out of it
11. Property Damage to ‘impaired property’ or property not injured, arising out of:

-          A defect, deficiency, inadequacy in ‘your work/product’

-          Delay/failure by you or once acting on your behalf to perform contract

12. Any loss, cost, or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:

-          Your product  - Your work  - impaired property if recalled

If a spike in claims, insured will be called to respond.  If such happens, those costs are not covered.

II) Coverage B: Personal Injury Liability

Personal injury: injury, other than bodily injury, arising out of one or more of the following:

1. False arrest, detention, or imprisonment: shop guard holding a person & holding for cops
2. Malicious Prosecution: if a complaint to police can be shown to be guided by dishonesty
3. Wrongful entry into, or eviction of a person from, a room/dwelling/premises
4. Oral & Written publications that libels 7 slanders a person/organization or their work
5. Oral & Written publication of material that violates ones right of privacy

Exclusions: if oral/written publication is know to be false, or anything deliberately done to injure

III) Coverage C: Medical Payments

Pays voluntarily for 3^rd party injuries happening on premises: Includes immediate first aid, ambulance, x-rays, medical/surgical/dental/funeral services

• fast action may reduce L-T medical costs
• potential for negligence is vastly reduced
• legal confrontation over said expenses is avoided

Exclusions: no payment to     - insured - insured’s employees - others working on insured’s behalf

                                                - any person participating in athletics

IV) Coverage D: Tenants Legal Liability

Tenants liable for: Tort Liability (negligence results in loss)

                              Contractual Liability (liability assumed in contract)

*This coverage needed because Coverage A excluded premises insured’s rent/occupy

When choosing limits, should be equal to building value, or portion of occupied piece.

Fire/Explosion/Smoke/Water leakage from system, or, All Risks.

Common Exclusions – Coverages A, C, D

1. Pollution Liability: exclusion is absolute for claims of injury & damage if located:

-          On insureds premises

-          At any waste disposal site used for/by insured or others

-          While being transported, handled, stored, treated, disposed of or processed as waste by or for an insured under the policy.

2. Nuclear Energy Liability: no coverage, except if isotopes are spent
3. War Risks: in event of war, all bets are off

Supplementary Payments - Coverages A, B, D

Primary purpose of liability insurance is to pay damages assessed against insured, declarations page shows coverage.  But in defending action other costs are incurred by insured/insurer, the following are covered:

1. insurers costs: payment for legal experts, legal costs
2. costs of bonds to release attachments: judge may seize insureds property during trial to ensure payment, these bonds are covered.
3. reasonable expenses incurred by insured to assist insurer & loss of earnings, 100$/day
4. all costs taxed against insured and interest accruing after judgment if within applicable limits.

Determination of Premium

Coverage A: Premises – square footage, type of occupancy, size of payroll, geography

                     Products – types of products, sales volume, territories where sold

                    Completed Operations Liability – type of work preformed, gross receipts

Coverage B: Usually at no cost

Coverage C: Usually no charge, usually $2,500 per person

Coverage D: Usually 35% of Coverage A

Section II: Additional Policy Sections – Who is an Insured

Commercial General Liability Policy may cover: individuals, partnerships, organizations

Persons Insured  - owners, partners, spouses, directors and officers

                           - employees

                           - a non-employee or organization acting as insureds real estate manager

                           - those having temporary custody of property after death of insured

                           - upon death of insured, legal representative appointed in control of biz.

Insuring Business Formed or Acquired During Policy Period

1. When named insured purchases all, or majority of, an existing corp. or forms a new one, coverage is automatically provided unless other policy already does it.
2. Business which qualify are covered for 90 days, or until expiry of policy (whichever first)

Section III: Limits of Insurance

1. Aggregate Limit: stated on the dec. page, shows max policy will pay out for all claims
2. Each Occurrence Limit: shows limits per type of coverage A, C, D

Section IV: Commercial General Liability Conditions

1. Bankruptcy of insured or estate: even if debt dissolved, liability remains
2. Canadian Currency Clause: insurers get fucked in USA
3. Cancellation; First named insured needs signed release, or insurer sends cancellation notice to first named insured, 15 days notice
4. Changes: authority of First named Insured
5. Duties in Event of Occurrence, Claim, or Action

-          Promptly notify insurer

-          Provide written notice to insurer when action/claim has been filed

-          Insurer not liable for costs/obligations voluntarily assumed by insured

6. Examination of your Books & Records: even after 3 years beyond expiry
7. Inspections & Surveys: insurer has access
8. Legal Action Against Insurer: must be filed within 1 year after expiry
9. Other Insurance: insurance is primary, means insurer obligated for whole thing
10. Premium Audit: this condition shows method used to check correct premium
11. Premiums: shows about refunds to various insured’s
12. Representations: if insured misrepresent, the contract may be rescinded
13. Separation of Insureds, Cross Liability: policy acts as if separate for each named insured
14. Transfer of Rights of Recovery Against Other to Us: insurer can subrogate
15. Transfer of Your Rights & Duties Under the Policy: except by death, can’t transfer

Section V: Definitions

1. Products Liability – any goods/products (other than real property) handled, sold, made, distributed by you, others in your name, or organization you acquired.

                              - containers (other than vehicles) in connection with goods/products. includes warranties/representations

2. Completed Operations – “your work” by you, or one on your behalf, & materials, parts, equipment in connection with such work & warranties and representations.

Purchasing Liability Insurance: Factors to Consider

-          How much insurance is enough?  Must look at awards at similar types of business, inflation, territory of operations, an ability to absorb certain losses.

-          Effect of Judgment for Damages on Biz – even bankruptcy won’t dissolve court ordered damage

-          Fraudulent Claims – with insurance, insurers investigate & discourage such claims & defense costs are included

Section VI: Miscellaneous Policy Forms

1. Commercial General Forms (claims made forms)

When did occurrence happen? Coverage only if in policy period

-          Exposure Theory: occurred on initial contact

-          Exposure Residence Theory: disease continuous after exposure, so exposure continues.

-          Manifestation Theory: occurrence only when injury diagnosed

Solution: Claims Made Policy

-          Coverage triggers when claim made

-          Coverage limited by retroactive date

-          Reported period can be extended for more premium

2. Professional Liability: rendering bad service, or failing to render it

Health care workers, those who give advise to others, counselors

Action in Tort: professionals held to a higher standard

Action in Contract: Complete performance (everything OK)

                                Substantial performance (minor defaults)

                                Material breach (big fuck up)

3. Directors & Officers Liability: incase they fuck-up

4. Umbrella Policies: gives additional coverage over an existing policy, & can have broader coverage.

Chapter 3: Commercial Auto Exposure

Section 1: Insuring Owned Autos

Auto insurance not uniform, Alb/On/Alt. Can is private, the rest is public. 

B.C. has $200,000 3^rd party liability, accidental benefits, physical damage is optional

The General Commercial Liability Policy specifically excludes cars, so extra is needed.

Types of Autos Insured

-          Autos of private passenger type: same as private cars, but higher premium (more liability)

-          Commercial Vehicles (big trucks): Provincial reg.: need more than $200,000 minimum

: Federal reg.: inter-province at least $1mil.

-          Public Autos (taxi/bus): increased 3^rd party liability

Summary of Coverages

1. 3^rd Party Liability: private passenger type has $200k minimum (not enough for biz)
2. Accident Benefits: compulsory everywhere except Newfoundland

     : when policy holders are injured in auto incident, policy covers medical

       expenses, death benefit, funeral/rehab costs, loss of income

3. Physical Damage: 1/3 of all claims payments (cars getting expensive to fix)

    : all perils – collision and upset – comprehensive – specific perils

*Loss by theft is extra

Excluded Uses

1. The auto is rented/leased to another (but employees car used for biz & paid for is OK)

-          Avis/Hertz need special coverage to avoid this exclusion

-          Long term (over 30 days) used when biz has leased cars

-          Rented & Leased Auto – Lessee’s Exposure (short term)

long term needs SPFNo1 Owners Form, but short term users:

When rented in name of an individual coverage can be purchased from:

a)      the leassor (if individual has no own car insurance, this will cover ST liability)

b)      by endorsement (if individual has own car insurance, can add SEFNo.27 to cover

     When rented in name of business coverage can be purchased from:

            Leassor or Endorsement: 3^rd Party liability(SPFNo.6), Physical Damage(SEFNo.94)

2. The auto is used to carry explosives/radioactive materials:

Need: SEFNo.4a Permission to carry explosives

          SEFNo.4b Permission to carry Radioactive Material

3. The auto is used as taxi, public omnibus, livery, sightseeing or anything to carry passengers

-          Equal car pooling is OK

-          Servant/spouse is OK

-          Driving clients/customers is OK

-          Occasional use of the insureds auto for carriage is OK

-          Occasionally driving kids around is OK

Miscellaneous Endorsements

1. SEFNo30: Excluding Operation of Attached Machinery Endorsement

Section A: 3^rd Party Liability - Section B: Accident Benefit – Section C: Damage

 

2. SEFNo.31: Non-Owned Equipment Endorsement

3^rd Party Liability for thing owned by others

Underwriting Commercial Automobile Insurance

1. Scheduled Basis: each auto specifically identified (most are like this)

-          All vehicles catalogued by make/model/serial#

2. Fleet Basis: min. of 4 autos, under common control, fleet cars, used/rated as ‘pleasure use’ may be cheaper to do normally with SPFNo.1

-          SEFNo.21b Blanket Basis Fleet Endorsement, all vehicles automatically covered, advance premium charged, then refunded if necessary.

-          If Fleet is very inactive, use SEFNo.21a Monthly Reporting Basis

Section 2: Insuring Other Business Auto Exposures

SPFNo.6 Standard Non-Owned Auto Policy

Insuring Agreement: Insures 3^rd Party Liability arising from the use/operation of any auto not owned (in whole or part) by or licensed in the name of the insured.  Coverage can be done separately or by endorsement to Commercial General Liability Policy.

Auto Covered:

-          Owned by an employee (used for errands, or small shit…need coverage)

-          Hired Auto: hired/leased from others. SERNo.94 legal Liability for Damage to Hired Auto

-          Operated under contract for the insured: cars used in the biz, but not if insured &/or employees are named on license.

Persons Covered:

-          Named insured, every partner, officer, or employee

-          Exclusions: biz purposes only

Miscellaneous Endorsements: (used to make less coverage, save premium)

1.      SEFNo.90: Limitation of operation of auto by partners/officers/employees

2.      SEFNo.91: Limitation of operation of auto by named person

3.      SEFNo.92: Limitation of hired autos & autos operated under contract

4.      SEFNo.93: Limitation of autos owned by named persons

5.      SEFNo.99: Excluding L-T lease vehicle

6.      SEFNo.98: Excluding autos personally driven by named persons

SPFNo.4: Standard Garage Auto Policy

Types of Garage Risks: – auto dealers – service stations – repair/storage garages – parking lot

Garage Risks are excluded by Commercial General Liability Policy

-          Not bodily injury/property damage arising out of ownership /use/operation by or on behalf of any insured of an automobile

-          Coverage for personal property in care/custody/control of insured is excluded

Analyzing Policy Coverages

A: 3^rd Policy Liability

-          Owned autos: coverage applies to biz & pleasure use of owned autos driven by insured, or those with permission

-          Non-owned autos: customers autos (for a garage), or others autos

Exclusions: damage to customers’ car, loss/damage to property carried in/out an auto

Rating: Owned autos: rating based on payroll – dealers plates (active or inactive) – service autos

            Customers autos (2 Tables): 1) no road testing, pick-up, delivery

                                                          2) road testing, pick-up, delivery OK

            Endorsement: SEFNo.44 Family Protection: pays damages if at fault driver hasn’t enough

            coverage.

B: Accident Benefits: paid without regard to fault

                                    includes medical rehab, death/funeral expense, loss of income

Rating: Drives Customers Autos: flat rate per employee

            Active Owned Autos: flat rate per type of dealer plates

C:  Loss of, or Damage to Owned Autos

When all owned autos are not insured SEFNo.80: Specified auto physical damage coverage is used

4 Options (at least $250 deductible per occurrence)

1. Subsection 1; Collision or Upset
2. Subsection 2: Comprehensive
3. Subsection 3: Specified Perils
4. Subsection 4: Specified Perils Excluding Theft

When vehicles driven by designated people SEFNo.70 Named Chauffeur endorsement is used.

To lower premium, SEFNo.79: Fire/Theft Deducible is used to increase deducible.

Rating: Section 1- collision & upset is based wholly on payroll

            Section 2,3,4 – since values in stock change, many methods:

1)      Monthly Average basis: based on maximum value, refunded later

2)      Co-Insurance basis: must have 80% insured at any time

Exclusions:

-          Caused by any dodgy shit committed by employees permitted to use auto

-          Caused by voluntarily parting with auto induced by fraud/trick

-          In open lot, any theft except theft of entire car

D:  Uninsured Motorist Coverage

-          Although all provinces require $200k liability, uninsured/unidentified drivers r out there.

-          Maximum available is minimum required ie $200k

-          Coverage available only if other party would have been legally liable

* Provinces have funds to pay such claims

E:  Legal Liability for Damage to Customers Auto while in Care/Custody of Insured

            Act as bailee for hire, many exposures for loss

Garage must be legally liable before payment made under policy

Locked door warranty – deadbolt – keys kept in a lock-box

-          Collision or upset: must choose a limit, maximum exposure at any time is best

rating: off-premises rates higher, other factors are values, deductible, payroll

-          Specified Perils: fire/theft/explosion.  Exclusions: open lot theft, contents

rating: based on max. aggregate of customers vehicles & insure needs raw #’s of autos at any one time

Other Endorsements

-          SEFNo.77: Legal Liability for Comprehensive Damage to Customers Auto

replaces specified/perils in subsection2: loss from any peril except collision

-          Waiver of Legal Liability

Waived if have specified perils or SEFNo.7

Don’t have to wait for court decisions, will pay quick and save ‘goodwill’

Miscellaneous Endorsements

-          SEFNo.71: Excluding Owned Auto (used if said auto already have SPFNo.1)

-          SEFNo.76: Additional Insured (item 12c of general provisions excludes coverage for pleasure use when auto is provided for regular/frequent use to a non-active partner, this kills that exclusion)

Chapter 4: Oceanic Marine & Aviation Insurance

Section 1: Marine Insurance

Most policies insuring property away from premises exclude property while waterborne

Determining Insurable Interest

Sellers and buyers, carriers and financial institutions may have an interest.

A: Terms of Sale

Must check INCOTERMS, which is the terms of the sale/contract and where the seller and buyers interest begins and ends.

INCOTERM	BUYER	SELLER
Ex-works	Buyer pays invoice cost & arranges insurance & from works to destination is responsible	Seller sells at invoice cost
f.o.b. (free on board)	Buyer is responsible once on vessel & must arrange for insurance	Seller responsible for carriage/loading costs, insurance until on vessel
f.a.s. (free along side)	Buyer responsible for insurance when goods on quay/alongside the vessel	Seller responsible for all until on quay/alongside the vessel
f.o.q. (free along quay)	Same as f.a.s.	Same as f.a.s.
f.o.r. (free on rail) f.o.t. (free on trailer)	Buyer responsible when loaded on rail/trailer	Seller responsible until on rail/trailer
C&F (CFR) {cost of goods & freight until port of discharge}	Buyer responsible for goods once loaded onto carrying vessel	Seller responsible for goods until on carrying vessel
C.I.F. (cost + Insurance + Freight)	Buyer not responsible for fuck-all	Seller responsible for insurance, usually follows buyers instructions

The Method of Payment for the Goods: when on credit, the following have insurable interest:

-          Financial institutions: part of any loan deal

-          Sellers: -cash in advance – open account (intervals) – sight/time drafts

             -letter of credit (most common, banks do the transaction)         

            *Customary for sellers to arrange for buyers instructions

B: Bills of Landing:

Papers/contracts issued by carriers showing extent of liability, between shippers and ship-owners

1) Functions: 1. Description of person to whom goods are delivered (order bill of landing for

                       overseas shippers)

                  2.  Description of how goods are valued (release  = no $ value, valued = specific $)

                  3.  Other conditions (on-deck bill is less premium, stowage bill means they can put

                       anywhere on boat)

2)  As a receipt for the goods:

-          Received for shipment bill of landing: issued by carrier as evidence

-          Clean bill of landing: indicates no problems with goods received

-          Count bill of landing: shows amounts of goods received

-          On board bill of landing: confirms they were loaded on board

  3)  As the document of title to the goods: will show consignee who will receive the goods

How to Insure – Types of Cargo Policies

1. Individual Policy (certificate): shows coverage in place for single shipment
2. Open Policy: contract in general terms showing coverage for large volume shippers

                                  Sums insured not stated (but limit, & on-deck limit are stated)

                                  Can be extended to insure goods of every description anywhere globally

                                  Coverage is automatic

                                  Can be served with no expiry date

                                  Premium rate stated on policy

How much to Insure – insurer-insured allowed to agree in advance on fair value amount

                                    Value of cargo (starting point)

                                    Shipping/freight cost (adds to value)

                                    Other expenses & packing fees

                                    Duties & Taxes

                                    10% addition (to avoid underinsurance)

* Percentage of Value Lost: if 50% of stock value lost, 50% insurance payout

Marine Cargo Insurance Policies

Institute Cargo Clauses: no standard policy, 3 clauses

1. Institute Cargo Clause A: All risks
2. Institute Cargo Clause B: Named Perils        
3. Institute Cargo Clause C: Named Perils (just different ones)

A	B	C
Sinking & Capsizing	X	X
Overturning/derailing on land	X	X
Ship/Craft bumping something	X	X
Discharge at Port of Distress	X	X
Fire & Explosion	X	X
Earthquake/Volcano/Lightning	X	0
Malicious Damage	0	0
Theft/Pilferage	0	0
Washing Overboard	X	0
Ship/Craft colliding	X	X

Common Coverage Clauses: Institute Cargo Clauses

1) Transit Clause: - not only on sea, but from start-to-finish (even on land)

                             - ‘warehouse-warehouse’ only with cosignee takes it within 60 days

                             - covered during any delays not in control of insured

2) Termination of Contract Carriage Clause

                        - terminated at port/place other than final destination

                        - transit is otherwise terminated before delivery (weather)

            *Forwarding Charges Clause in each ICC provides for extra $ need to move goods

3) Change of Voyage Clause - if the destination of cargo changed by insured, the insurer aggress                                                              to continue coverage so long as prompt notice given

4) Claims

-          Insurable interest clause: only parties with interest at the time of loss indemnified

-          Lost or Not Lost Provision: since u may not know cargo is lost at time of signing, you’re covered if in good faith

Exclusions

-          Unseaworthiness & Unfitness exclusion

-          Strikes exclusion (riots, strikes, lock-outs)

-          War exclusion

Warranty

-          Express warranty: insured swears facts are true

-          Implied warranty: legality of venture, no delay in venture, no deviation of venture

Claims Settlement: no co-insurance, need to cover total loss

Total Loss:

-          Actual Total Loss: total loss/damage results in no value for goods

-          Constructive Total Loss: cost of recovery bigger than value of goods

-          Total Loss of Part: loss of one shippers cargo without loss of others

Partial Loss

-          Particular Average: partial loss to specific shipment

-          General Average: payment voluntarily incurred for safety of the entire venture.  (parties that didn’t lose all chip in for those who did)

Selecting Policy Coverages

-          Total Loss only: Institute Cargo Clause C

-          Total Loss with provision to cover partial loss caused by perils of the sea ICC B

-          All Partial & Total Losses: ICC A

Underwriting Cargo Insurance (the following affect rates)

1. carriers to be used (insurer wants to know names & types of ships used)
2. Experience of ship-owner (as it applies to cargo)
3. Route the shipper will take (some places riskier than others)
4. Condition of the harbors that calls will be made
5. Type of cargo & any inherent hazards of the cargo
6. Perils to be insured against
7. Methods of packing cargo

Oceanic marine Hull Insurance: very specialized market, from all-risks for total loss… or less

Marine Liabilities – ship-owners have huge liabilities

                - when responsible for collision, their own policy will pay

                - if hull policy doesn’t cover collision loss, P&I will get the rest

            * Ship Repairer & Chartered’s need specialized coverage

Section 2: Aviation Insurance

Insuring Exposures to Loss

1. Hull Insurance

- privately owned - commercial aircraft - commercial aircraft including rentals

Coverages:

-          Hull Coverage A: All risks

-          Hull Coverage B: Ground and Taxi

-          Hull Coverage C: Ground (no motion)

Endorsements

-          Lay-up endorsement – premium refunded if craft not used

-          Detached Undercarriage Endorsement: covers if on wheels/floats

2. Liability Insurance

·    Public liability/property damage: based on max. weight

·    Passenger liability: after 2,268kg, $3,000 per passenger must be bought

·    Liability coverage F: bodily injury & property damage to 3^rd parties

Insurer pays all amounts legally owed to anyone (except passengers)

·    Liability coverage G: bodily injury to passengers

Insurer pays all amounts legally owed passengers

            Exclusions: - war – seizure – hijacking – unapproved pilot

           

            Terms and Conditions to All Coverage: - Territory USA/CAN – Cancellation (10 days)

            Underwriting Risks: Brokers have no binding authority, need Pilots Record & Report

           

3. Cargo Insurance

·         Liability of air carrier limited by the law ($27/kg)

·         Valuation (invoice, freight, +10%)

·         Coverages (normally all risks)

·         Exclusions (no war, strikes)

·         Rating (no standard rates)

Associated Aircraft Exposures

1.      Premises, property, or operations liability (airport liability)

Since Comm.Gen.Liab. Policy doesn’t cover, this policy was made

2.      Employers Liability: pilots, ground crew, clerical staff

3.      Products Liability (selling aviation shit)

4.      Hangerkeepers liability (like a bailee)

5.      Cargo Liability (property of others in your control)

§  Non-owned liability (don’t own aircraft but use it)

§  Contingent Liability (don’t own plane, but rent/lease it for biz)

Chapter 5: Surety Bonds

Section1: The Meaning of Surety

Is the state of being sure, certain, and secure.  Personal suretyship involves individuals vouching for each other and assuming the shortfalls.  Corporate suretyship involves fidelity bonds which ensures honest employees, and surety bonds, where the surety is accountable to principal in regard to an obligee.

Qualifying: - Character - Capacity - Capital

Characteristics of Surety Bonds

2.      3^rd Party Contracts (Principal, Obligee, Surety)

3.      Principal liable to Surety (surety must pay immediately after default of principal)

*Methods to recoup from principal: assignment of obligee’s rights/subrogation

 3.   No losses expected: a fee is paid, not premium

 4.   Of indeterminate length and non-cancelable

 5.   Statutory or Non-Statutory in Form (statutory means needed by law)

 6.   Bond Limit/Penalty: amount of credit given

 7.   Bond Premium: not true! It’s a fee

 8.   Written Contract: written with seal of surety

Section 2:  Types of Surety Bonds

A: Contract Bonds

Mostly for construction bid, performance, labour & material payment, and maintenance.

Who Requires Construction Bonds:

• Owners risks: refusal/inability of successful bidder/failure to complete at cost
• General Contractors: need ongoing relationship with surety
• Subcontractors: need based on terms of contract, relationship with contractor, value of 

                          subcontract, price relative to other bids.

Types of Construction Bonds

1        Bid Bonds:

Bid Bond: Assure principal has been pre-qualified, and bid is in good faith

Surety guarantees the obligee that the principal can and will enter the contract to perform the work at the tendered price & provide whatever security is specified.

Certified Cheque: ties up contractors capital, usually gets this because can’t get bonded (less than desirable means of security)

Surety Consent: letter indicating if principal wins contract, bonds will be forthcoming

            Reasons For Default: error in judgment, mistake in arithmetic

            Effect of Default: compensate owner, pay the difference with next lowest bid

            The Bond Penalty: % of contract price with maximum value stated

            Bond Premium: annual service fee, usually no less than $500.00

  2.       Performance Bond: once bid accepted

Guarantees: 1) The actual performance of the contract in accordance with the terms

                    2) That faulty work will be corrected & defective materials be replaced

            *important to understand all aspects of the contract as it relates to all parties

The Bond Penalty: often not equal to 100% of contract price, 50% is common

            e.g. If default a) at the beginning, owner has contract in hand

                                   b) in middle, owner has ½ contract in hand, plus 50% bond

                                   c) at the end, owner has 50% bond to complete & maintenance

Modifications to Contract

·         Bond allows for changes up to 10% of value, but such changes don’t increase the bond limit, therefore owner has a false sense of security

Reasons for Default under Performance Bond

·         Involuntary default: insolvency/incompetence/labour & weather delays/no credit

·         Voluntary default: improper estimate of costs/cash flow problems

Making a Claim

·         Surety must be notified by obliges as required by the bond & within the time limit specified

·         Obligee must satisfy the surety that default has occurred

·         Obligee must show that terms of the contract with principal have been observed

Effect of Default on Contractor: if surety agrees principal in default, it may:

·         Complete the contract: use same contractor if incompetence not caused the default

·         Obtain bids for submission to the obligee for completion

Bond Premium: payable in advance, $4.25/$1000 on a 50% performance bond

      3.   Labour & Material Payment Bond: ensures subtrades/suppliers get paid for work/materials

·         Reduces cost of construction: better terms with good credit rating

·         Eliminate/Reduce delays in construction: when payment assured, access chop-chop

·         Frees up credit for business related activities

The Bond Penalty: rated 4.25/1000 on 50% bond, when in default, surety’s liability is

                               limited in the contract

Making a Claim:

·         Direct contractual relationship: claimants must have direct contract

·         Written notice: contractor, owner, surety must be advised via reg. letter

·         Time Limits: within 120 days of work done, materials supplied

·         Project identification: claimant must prove owed shit was for project

4.        Maintenance Bond: covers warrantee (performance bond covers for 1 year, this is extra)

      Surety does not like these because:

·         The longer the guarantee, the bigger the risk

·         Determining cause of defect is difficult as time goes by

·         Judgments tend to go against contractors

Qualifying the Contractor: surety must check the following:

financial strength of owners	completed work record	work in progress record
history	organization chart	business plan
key personnel resumes	banking information	accounting information
surety information	insurance carried	principal suppliers
fixed asset schedule	corporate structure	receivables & payables

Determining the Bond Limits: The Importance of Financial Statements

• Working Capital: Cash available to pay business operations

            Current Assets-Current Liabilities=Working K

      *for bonding purposes current assets=cash in under 60 days

      *current liabilities, must remember to include current part of LT debt

      Labour/Material ratio: labour eats $ faster than materials (bi-weekly payments)

• Net Worth: Total Assets-Total Liabilities (check to see if growing or not)

• Profitability: Working K + Net Worth shows profitability levels

Interpreting Financial Statements: biggest issue is income earned for work in progress

1. Completed contract method: profit/loss not recognized until complete.  Good way            

          to distort books to deter taxes, confuses underwriter

2. Percentage of Completion method: earnings recorded at an on-going basis.  Can     

          easily see under/over billings.

3. A work in progress report is usually used which shows:

contract location/description	contract amount
% complete to date	amount billed to date
estimated cost to complete	Estimated date of completion

Contractors Must Provide Own Guarantees: a back-up position sought by the surety

1.      indemnity agreements: surety can go after principal signator

2.      3^rd party indemnity

3.      collateral security: cash/letters of credits surety keeps in hand until bond finished

4.      subordination agreements: contractor must pay bills before investors, or surety can sue

Making an Underwriting Decision: not all contractors eligible

1.      New Contractors: No track record hurts, even with large capital base

     New guys must use whatever bonds they get to full advantage

2.      Contractors with Poor Records: If can show they learned from mistakes, surety

               might issue

Issuing the Bond: surety will review specifics of contract & see if it fits the bond, and will check:

• Nature of the work: does it fall within the contractors expertise
• Project location: some riskier than others
• Bond limits required: will proposed contract impact existing work
• Completion date: long-term contracts need more capital, and more risk
• Conditions & Communication: conditions of contract and accurately communicate costs

B: License & Permit Bonds: required by government

1. Compliance Guarantee: these bonds ensure principal will comply with law
2. Financial Guarantee: surety protects gov’t against $ damages from failure of principal to comply with laws (especially remitting tax earnings)
3. Indemnity Guarantee: extends #2 to 3^rd parties suffering damage
4. Good Faith Guarantee: ensures principal will not be fraudulent
5. Credit Guarantee: for people who sell property of others

*covers all statutory/regulatory obligations (not needed to be worded on bond)

*bond term coincides with license/permit

C: Judicial Bonds

1)  Court Bonds: required in matters of litigation

• Plaintiffs/Defendants Bonds: cover court cost is action failed/keep property in question
• Attachment Bonds: for plaintiffs who attack property of defendants
• Release of Attachment Bonds: when its filed, property returned to defendant
• Injunction Bond: to ensure a party does/doesn’t do some act before the court
• Appeal Bond: required of a plaintiff who did not obtain remedy and appeals judgment

2)  Fiduciary Bonds: Fiduciary is one who, in trust, handles $ or property of others

• Administrators & Executors: this bond guarantees faithful performance of estate after death
• Guardians & Committees: manage affairs of minors who have property
• Trustees in Bankruptcy: ensures faithful performance of liquidation

D: Miscellaneous Bonds:

• Customs & Excise Bonds: ensuring tax/duty payment
• Lost Document Bonds: for paper securities lost.  If found later & redeemed, the surety will pay.  Either open value (variable) or fixed value (face value)
• Consignment Bond: when goods left with 3^rd party for sale.  #rd party needs the bond
• Utility Bond: utilities providers may require a bond before service starts
• Land Restoration Bond: ensuring municipal land is restored after work done

Chapter 6: Risk Management

Risk management has two dimensions: 1) Decision Process 2) Management/Admin Process

1) Developing a Risk Management Program

Step1: Identify & Analyze Loss Exposure

Classifying Exposures to Loss

1) Type of value exposed by loss

• Property values: tangible and intangible
• Net Income values: decreased revenues, reduce rental income
• Liability Loss: who is duty owed, what is source of duty
• Personal Loss: employee issues

2) The Peril Causing Loss

• Natural Perils: weather, animal, geological
• Human Perils: arson, leakage, failure of equipment, sabotage, embezzlement
• Economic Perils: inflation, r-rates, recession, markets

3) The Financial Consequences to a Loss

·         Frequency X Severity = Total Costs.  Frequency and severity have an inverse relationship, and can range from: Nil- Slight- Moderate- Definite (Severe)

Method of Identifying & Analyzing Loss Exposures

·         Standard Survey/Questionnaire: try to be more involved with client with this

·         Financial Statements/Records: Balance sheet ( current assets most important)

  Profit/Loss (find sources of gain/loss and try to max. profit)

  Statement of Changes in Financial Position: (Cash Flow)

  Opinion Letter (by auditor)

·         Other Records/Docs: minutes of meetings, sales/purchase contracts

·         Flow Charts: data flow, work flow, product cycle

·         Personal Inspections: first hand looks, compliments surveys

·         Consultation with Experts: internal and external people

Step 2: Examine Alternate Risk Management Techniques

How to combine Risk Control with Risk Financing

A. Risk Control Techniques (to control severity and frequency)

• Exposure Avoidance: either avoid or eliminate exposure (no car, no car losses)
• Loss Prevention: focusing on possible causes (like an alarm)
• Loss Reduction A) Pre-loss Measures: things done to lower value of things that r exposed

- property values: safe storage of flammables, fire walls

- net income values: reducing values of any single shipment

- liability loss: establishing max. speed company cars can drive

                                      B) Post-loss Measures: emergency procedures and salvage

·      Segregation of exposure units: so that no single loss stops the whole business

·      Contractual Transfer: make the lease/tenant responsible for shit

B. Risk Financing Techniques

1.    Retention: generating $ within the biz. to cover losses. Current expensing will pay as loss happens, funded/unfunded reserves will establish a fund for such losses.

2.    Contractual Transfer: $ from outside business.  Non-insurance transfer (held harmless clauses in contracts) or  commercial insurance

Step 3: Select Risk Management Techniques

1.    Forecasting a) forecast frequency/severity

b) forecast effects of risk control measures

c) forecast the cost of those techniques

2.    Selection Criteria: chose based on effectiveness and economy

Step 4: Implement Techniques: Technical Decisions, Managerial Decisions

Step 5: Monitor Results: must monitor and adjust, if not then the plan is useless