What is risk analysis?
The foundation for decisions about insurance and indemnification requirements in contracts is the analysis of the potential risk to the County and others when we purchase goods and services being provided. That is, what could go wrong and who could be harmed if it did? As you analyze these activities and their potential risks, it is important to be honest with yourself and yet use common sense. For example, a contract with an environmental testing company to do soil testing prior to the County constructing a building would have different risk than a contract for that company to write an informational brochure on water quality.
Sometimes, the dollar amount of a contract will provide guidance, especially about the extent of the risk. A contract to provide services to hundreds of clients, for example, may need higher insurance limits than a contract to serve ten clients, although the final determination is based on many factors. A $30 million contract to construct a new building will need higher limits and perhaps more kinds of insurance than a $30,000 contract to construct cubicles and conference rooms in a newly leased building. However, a $30,000 contract to demolish an old building and haul away potentially hazardous waste would need more and different insurance than the cubicle construction contract and perhaps as much as the $30 million construction contract.
It is also important to remember that the requirements for indemnification and insurance that you will develop through this risk analysis will provide protection for both the County and the contractor. At times, contractors (especially small companies and sole proprietors) may not understand the insurance they have and the coverage it does and does not provide. Without the right types of insurance and adequate limits, the contractor might find itself with no coverage for a loss. For example, if you contract with a mental health professional for client assessments and the contractor doesn't have professional liability insurance, the contractor would have no protection if a client filed a claim alleging improper diagnosis. In such a situation, the contractor may have no resources for claim investigation or defense, and the County could be responsible for the claim.
In Section IV of this manual, you will find descriptions of categories of contracts that will help guide you in defining insurance requirements and inserting the right insurance-related language in your contract.
As you analyze the risks associated with the services or goods being obtained, ask yourself these questions.
- What product or service is being provided? What could go wrong? What are the potential losses that could occur? How large are the risks? Who is the provider? (An assessment of the provider is important.)
Analyzing these five questions and reviewing the insurance provisions in Section IV will provide you with the framework for each contract's insurance and indemnification requirements.
- Is the contract one that could result in County employees, clients or property being harmed in any way?
If so, you will want to require commercial general liability insurance at levels adequate to cover the potential risk. If products are being provided, commercial general liability insurance will provide coverage for product liability claims.
- Does the contractor providing services have employees?
If so, there's a risk that those employees could be injured and you will need to be sure that the contractor provides workers' compensation insurance. If the work is being done by people who are not subject to the State workers' compensation coverage requirements (for example, sole proprietors), the contractor will need to certify this. See pages B-3 and B-4 of this manual for further information. If the services are being provided by a sole proprietor, be sure that this person is properly classified as a contractor. See Administrative Procedure CON#2 for an explanation of the differences between contractors and employees. If you call a service provider a contractor when s/he is really an employee, you may create workers' compensation and other liability for the County.
- Will the contractor be providing services that require professional expertise or advanced training?
If so, there are risks associated with errors (or allegations of errors) in their professional judgment. You will want to be sure that the County and the contractor have properly assigned responsibility for the acts of the contractor through the indemnification and insurance provisions. You will need to include professional liability insurance, because it is the only way to obtain coverage for their professional acts.
- Will people be driving as they provide services under this contract? Will anyone or anything be transported under this contract?
If driving will occur, auto liability insurance will provide protection for the contractor and the County. If clients or materials (for example, hazardous waste) is being transported you must require commercial auto liability with adequate limits. (Transport of hazardous waste may also require additional types of coverage.)
- What is the risk to the County if the contractor fails to provide the service in whole or in part?
If it is significant, you may want to require a performance bond or otherwise provide for guarantees in your contract language.
- Are there special risks (for example, construction, possible pollution risks, handling of County cash, etc.)?
Review Section IV A and C for insurance provisions that will be necessary in these situations.
As you work with this manual, you will become familiar with the kinds of risk and the appropriate insurance and indemnification provisions you will need to use. Sections III and IV contain detailed explanations of indemnification and insurance provisions and the actual language you will need to insert in your contracts. If you are using the contractor's boilerplate, you will want to compare it to the suggested boilerplate in these sections of the manual to be sure that your contract will provide the County with appropriate protection.
If you have questions about the risk analysis process, especially with new or unusual contracts, please call your Purchasing Section Senior Buyer or Risk Management for assistance.