SIX & GEVING

Insurance Requirements and Practicality for

Fed Gov Contractors

Presented to NCMA

22 April 2015

SIX & GEVING

Six & Geving Insurance, Inc.• 3,000+ Business Clients

– Business Insurance is 98% of what we do– Local, Regional, National and International Clients

• Broad Market Access– 40 Direct Insurance Contracts– 15 Surety Contracts

• Responsive – 99% of calls returned same day

• Our existing clients are our best advertisement ask them about us!

SIX & GEVING

Your Presenter

NASBP “Football” Award

F-15C Eagles at Langley, VA

• Chris Rea– MILITARY

• Graduate of the USAF Academy• Retired USAF Reserves (22 yrs)

– CONTRACTING• Task Lead – NUMAS/N2A2S (Ciber under L-3/SY Coleman)

– INSURANCE / CONSTRUCTION• VP of Surety for Six & Geving Insurance• “Commercial Lines Coverage Specialist”• Extensive Work with Gov Contractors

– Surety

– Insurance

– Construction and Non-Construction

SIX & GEVING

Overview

• This is an “Undergraduate Level” Seminar– Assumptions:

• You are involved in government contracting• You are familiar with the purchase of Business

Insurance and Risk Management Programs

– Topics:• Federal Requirements• Different “worlds” within Federal Contracting• Federal Requirements vs. Realistic Programs

– Question & Answer

SIX & GEVING

Why This is Interesting To Me?

• My Story– Military/Civilian Aviation– Contractor/Reservist– Bond Guy (Construction)– Insurance Agent to FGC’s

• Lost in Translation…

SIX & GEVING

The Different Worlds Within

• Construction

• Non-Construction– Supply– Personal Services– Non-Personal Services

SIX & GEVING

Hard Construction

• Hard Insurance Environment– Litigious– Rules Based– One-Sided towards the Government

SIX & GEVING

Non-Construction Contractors

• Soft Insurance Environment– Non-Litigious– “Rather fire you than sue you”

• Unfortunately – the insurance industry has not yet fully recognized this reality

– That is changing…

SIX & GEVING

Federal Requirements

• FAR Subpart 28– Basic Requirements (for most contracts)

• FAR Subpart 52– Contract inclusion terms

There is a handout for FAR Subpart 28.3

SIX & GEVING

FAR 28.1 and 2 “Bonding”

• Beyond the discussion today – we’ll talk about that at a subsequent meeting

• Normally related to hard construction only

SIX & GEVING

Federal Requirements– Contracting officer can always raise limits with 52.228-9 clause

– WORK COMP• Compliant with State (of work) and Federal Rules / Min EL limit $100,000

– LIABILITY• Bodily Injury $500,000 per occurrence• Property damage none specified “only…special circumstances…”

– AUTO LIABILITY (in the US) – including leased vehicles• Bodily Injury $200,000 per person and $500,000 per occurrence• Property Damage $20,000 per occurrence

– AIRCRAFT PUBLIC AND PASSENGER LIABILITY• Bodily Injury $200,000 per person and $500,000 per occurrence• Property Damage $200,000 per occurrence• Passenger Injury $200,000 per pass (limits = 200k x number of seats)

– VESSEL• “as determined by the agency”

– CARGO• Required but at limits set by the contracting officer

SIX & GEVING

Federal Requirements• These are woefully inadequate

A Telltale Hint from the FAR’s (FAR 28.306)

“…the Government is not ordinarily concerned

with the contractor’s insurance coverage …”

• Why is that?– Because the Gov’t is:

• Generally Self-Insured• Generally Uninterested in “Risk Transfer”• Generally Confident they could Transfer Risk

“After the Event” or Rely on Gov Immunities

SIX & GEVING

So If That’s Inadequate?

• What should I buy?

• Required vs. Desired

“Tell me what will happen and I’ll

tell you how much insurance to buy…”

• What Could Happen (worst case)

• What’s Likely to Happen (probable case)

• What is the impact in each case?

SIX & GEVING

Risk Management Decisions

“Business insurance is the one decision a business owner makes on an annual basis that is unlike all other purchase decisions. If they get it right, their costs might fluctuate a bit, but if they get it wrong it could mean the end of their business altogether.”

-Wayne Six

SIX & GEVING

The Goose that Laid…

• Good Risk Management– First protects the Goose

• Identify Risks• Avoid Risks if Possible (isolate the goose)• Mitigate Known Risks (minimize damage)• Transfer Risks

– Including use of Insurance

• If the Goose Dies…

SIX & GEVING

Cost vs. Premium Market Conditions+ Claims Experiencex Rating Basis = PREMIUM

SIX & GEVING

Cost vs. Premium

Premiums+ Deductibles+ Costs of Uncovered Losses= TRUE RISK MGT COSTS

Market Conditions+ Claims Experiencex Rating Basis = PREMIUM

SIX & GEVING

FGC Construction

Cost vs. Premium% of Gross Receipts

0%

Premiums+ Deductibles+ Costs of Uncovered Losses= TRUE RISK MGT COSTS

All BusinessNormal Range

(all lines of Coverage)

1% (Insurance Agency)

3% (Roofing Contractor) Market Conditions+ Claims Experiencex Rating Basis = PREMIUM

SIX & GEVING

Cost vs. Premium% of Gross Receipts

0%

Premiums+ Deductibles+ Costs of Uncovered Losses= TRUE RISK MGT COSTS

All BusinessNormal Range

(all lines of Coverage)

1% (Insurance Agency)

3% (Roofing Contractor) Market Conditions+ Claims Experiencex Rating Basis = PREMIUM

FGC Services

SIX & GEVING

Where are you?

Cost vs. Premium% of Gross Receipts

0%

Premiums+ Deductibles+ Costs of Uncovered Losses= TRUE RISK MGT COSTS

All BusinessNormal Range

(all lines of Coverage)

1% (Insurance Agency)

3% (Roofing Contractor) Market Conditions+ Claims Experiencex Rating Basis = PREMIUM

SIX & GEVING

How Premiums are Developed

PLUMBERS (hypothetical)

CLAIMS

PREMIUM

• Law of Large Numbers

– Assume there are 100 plumbers in Colorado Springs• 4 will cause a leak each year w/ average claim cost of $40,000• There are 100 cities our size in the US (10,000 plumbers)• So the average annual claim cost is $8,000,000• Premium for Plumbers is average $800 per plumber

– Plus Administrative Overhead and Profit (if any)

SIX & GEVING

How Premiums are Developed• Law of Large Numbers

– Assume there are 100 plumbers in Colorado Springs• 4 will cause a leak each year w/ average claim cost of $40,000• There are 100 cities our size in the US (10,000 plumbers)• So the average annual claim cost is $8,000,000• Premium for Plumbers is average $800 per plumber

– Plus Administrative Overhead and Profit (if any)

PLUMBERS (hypothetical)

CLAIMS

PREMIUM

SIX & GEVING

A Side Note About:“Individually Rated Risks”

• The Insurance Industry– Is exempt from certain anti-trust rules– They aggregate claims information for the actuarial

science of “rate making”

• Some Companies Don’t Fit– Very large (5,000+ employees, $1B Rev)– Very Unique

• Few (or none) other similar risks to aggregate

• These are “rated” on an “experience of one”• Your premium = your potential claims + overhead

SIX & GEVING

Strategies for Minimizing Costs

• Three broad concepts– 1st – Get & Follow Good Advice– 2nd - Have Proper Coverage– 3rd – Have No Claims

SIX & GEVING

Get & Follow Good Advice• Big Business has a Board

– And frequently an on-staff Risk Manager

• Small Businesses still need Advice– Informal Board

• Legal, Finance, Accounting & Risk Management– Attorney– Banker– CPA– Insurance Agent (that knows FGC)

• If we’re not already your agent– We’d like to be your agent

SIX & GEVING

Have Proper Coverage

• What is the cost of an uncovered loss?– Liability– Property– Auto– Worker’s Compensation

• Avoid the “unanticipated uncovered loss”– Gambling with losses may be reasonable

• But only with your “eyes open”

– Count the cost if you’re rolling the dice

SIX & GEVING

Proper Coverage Basics

• Every Business that Operates…

– General Liability– Property & Mobile Property– Auto– Worker’s Compensation– Umbrella (higher liability limits)

SIX & GEVING

Proper Coverage Peripherals• Many Businesses Also Need

– Errors & Omissions– Worldwide Coverage Extensions– Directors & Officers Liability– Employment Practices Liability Insurance – Employee Dishonesty– Pollution– Cyber Liability– Intellectual Property

SIX & GEVING

Have No Claims

• The best way to keep your overall cost of risk management as low as practical is to have NO CLAIMS AT ALL

• This may not be possible…– However

SIX & GEVING

Where Do We See Claims?• CONSTRUCTION

– Normal Places• Accidental Injuries• Accidental Damage

– US Corps of Engineers• Breech of Contract• Construction Defect (note – no fed SOL)

• NON-CONSTRUCTION– Generally never see liability claims - just

occasional work comp or auto accident – Some “unfair business practices” claims

SIX & GEVING

Hiring & Firing Decisions• The vast majority of serious claims arise

out of a faulty relationship (bad apples)– Poor hiring– Delayed firing– Poor sub relationship– Poor prime relationship

• DECIDE: “I will only work with good people!”

• BAD PEOPLE create liabilities– Choosing who you work with is your

single most controllable risk factor

SIX & GEVING

QUESTIONS???

• Please feel free to ask any questions you may have.

SIX & GEVING

BACKUP QUESTIONS• Can a Contractor “self-insure?”

• What kind of policy do I need to insure against an “unfair business practices” claim?

• What if a contractor works both inside and outside of government contracting – does that change anything?