Bidding Earthquake Insurance Coverage

& Public Agency Violations

by Bernard S. Kamine

ECA Legal Counsel

Many public agencies are issuing contract documents for public works projects that make illegal insurance demands.

Public Contract Code section 7105 limits a contractor's liability to 5% of the contract price for damage caused by either a 3.5+ magnitude
earthquake or a tidal wave. The statute allows agencies to require insurance coverage in excess of that 5% limit, but only "if the
insurance premium is a separate bid item."

The contract documents issued by some agencies demand insurance coverage in excess of the 5% limit, but without the corresponding
separate bid item in the bid form. The cost of that coverage, or not including the cost, can have a significant impact on bids, and may
determine who is the low bidder.

Neither the Greenbook nor the Caltrans Standard Specifications requires insurance for earthquake or tidal wave damages. The Greenbook
only requires liability and workers' compensation insurance (section 7-3 and 7-4). Caltrans only requires general liability, automobile
liability, workers' compensation and completed operations insurance (section 7-1.12B).

Caltrans self-insures for earthquake and tidal wave damage over the 5% limit, and may pay for some damage caused by storm, flood or
other natural disaster (section 7-1.165).

On the other hand, many local public agencies are requiring an "all risks" type of builder's risk insurance, with the agency as an
additional insured. That coverage does not normally run afoul of the statute, because earthquake and flood damages are usually
excluded from the risks covered (so, despite its label, the policy does not cover all risks).

To get coverage for earthquake and flood, a separate rider is required on the insurance policy. The problem arises when the contract
documents call for not only a builder's risk all risks type policy, but also demand that it cover earthquake or tidal wave without providing
a separate bid item for that rider.

Since the statute says a contractor can be held responsible for repair and restoration costs resulting from earthquake or tidal wave up to
5% of the contract price, the agencies probably can demand insurance coverage up to the 5% limit without a separate bid item for that
coverage. But, they cannot require coverage above the 5% limit without the separate bid item.

So, what should bidders do when contract documents call for earthquake or tidal wave coverage, but there is no separate bid item for
that coverage? The bidders should probably include in the bid the cost of a rider on the builder's risk policy for earthquake coverage up to
5% of the contract price. If the agency later demands earthquake coverage over the 5% limit, the contractor should show the agency the
statute.