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[Code of Federal Regulations]
[Title 7, Volume 11, Parts 1600 to 1899]
[Revised as of January 1, 2000]
From the U.S. Government Printing Office via GPO Access
[CITE: 7CFR1788]

[Page 1035-1040]
 
PART 1788--RUS FIDELITY AND INSURANCE REQUIREMENTS FOR ELECTRIC AND TELECOMMUNICATIONS BORROWERS

               Subpart A--Borrower Insurance Requirements

Sec.
1788.1  General and definitions.
1788.2  General insurance requirements.
1788.3  Flood insurance.
1788.4  Disclosure of irregularities and illegal acts.
1788.5  RUS endorsement required.
1788.6  RUS right to place insurance.
1788.7-1788.10  [Reserved]

    Subpart B--Insurance for Contractors, Engineers, and Architects, 
                           Electric Borrowers

1788.11  Minimum insurance requirements for contractors, engineers, and 
          architects.
1788.12  Contractors' bonds.

    Subpart C--Insurance for Contractors, Engineers, and Architects, 
                      Telecommunications Borrowers

1788.46  General.
1788.47  Policy requirements.
1788.48  Contract insurance requirements.
1788.49  Contractors' bond requirements.
1788.50  Acceptable sureties.
1788.51-1788.53  [Reserved]
1788.54  Compliance with contracts.
1788.55  Providing RUS evidence.

    Authority: 7 U.S.C. 901 et seq.; 7 U.S.C. 1921 et seq.; 7 U.S.C. 
6941 et seq.

    Source: 64 FR 2, Jan. 4, 1999, unless otherwise noted.

               Subpart A--Borrower Insurance Requirements

Sec. 1788.1  General and definitions.

    (a) The standard forms of documents covering loans made or 
guaranteed by the Rural Utilities Service contain provisions regarding 
insurance and fidelity coverage to be maintained by each borrower. This 
**part** implements those provisions by setting forth the requirements to be 
met by all borrowers.
    (b) As used in this **part**:
    Borrower means any entity with any outstanding loan made or 
guaranteed by RUS.
    Irregularity has the meaning found in Sec. 1773.2.

[[Page 1036]]

    Loan documents means the loan agreement, notes, and mortgage 
evidencing or used in conjunction with an RUS loan.
    Mortgage means the mortgage, deed of trust, security agreement, or 
other security document securing an RUS loan.
    Mortgaged property means any property subject to the lien of a 
mortgage.
    RUS means the Rural Utilities Service and includes the Rural 
Telephone Bank.
    RUS loan means a loan made or guaranteed by RUS.
    (c) RUS may revise these requirements on a case by case basis for 
borrowers with unusual circumstances.

Sec. 1788.2  General insurance requirements.

    (a) Borrowers will take out, as the respective risks are incurred, 
and maintain the classes and amounts of insurance in conformance with 
generally accepted utility industry standards for such classes and 
amounts of coverage for utilities of the size and character of the 
borrower and consistent with Prudent Utility Practice. Prudent Utility 
Practice shall mean any of the practices, methods, and acts which, in 
the exercise of reasonable judgment, in light of the facts, including 
but not limited to, the practices, methods, and acts engaged in or 
approved by a significant portion of the electric utility industry in 
the case of an electric borrower or of the telecommunications industry 
in the case of a telecommunications borrowers prior thereto, known at 
the time the decision was made, would have been expected to accomplish 
the desired result consistent with cost-effectiveness, reliability, 
safety, and expedition. It is recognized that Prudent Utility Practice 
is not intended to be limited to optimum practice, method, or act to the 
exclusion of all others, but rather is a spectrum of possible practices, 
methods, or act which could have been expected to accomplish the desired 
result at the lowest reasonable cost consistent with cost-effectiveness, 
reliability, safety, and expedition.
    (b) The foregoing insurance coverage shall be obtained by means of 
bond and policy forms approved by regulatory authorities having 
jurisdiction, and, with respect to insurance upon any **part** of the 
mortgaged property securing an RUS loan, shall provide that the 
insurance shall be payable to the mortgagees as their interests may 
appear by means of the standard mortgagee clause without contribution. 
Each policy or other contract for such insurance shall contain an 
agreement by the insurer that, notwithstanding any right of cancellation 
reserved to such insurer, such policy or contract shall continue in 
force for at least 30 days after written notice to each mortgagee of 
suspension, cancellation, or termination.
    (c) In the event of damage to or the destruction or loss of any 
portion of the mortgaged property which is used or useful in the 
borrower's business and which shall be covered by insurance, unless each 
mortgagee shall otherwise agree, the borrower shall replace or restore 
such damaged, destroyed, or lost portion so that such mortgaged property 
shall be in substantially the same condition as it was in prior to such 
damage, destruction, or loss and shall apply the proceeds of the 
insurance for that purpose. The borrower shall replace the lost portion 
of such mortgaged property or shall commence such restoration promptly 
after such damage, destruction, or loss shall have occurred and shall 
complete such replacement or restoration as expeditiously as 
practicable, and shall pay or cause to be paid out of the proceeds of 
such insurance form all costs and expenses in connection therewith.
    (d) Sums recovered under any policy or fidelity bond by the borrower 
for a loss of funds advanced under a note secured by a mortgage or 
recovered by any mortgagee or holder of any note secured by the mortgage 
for any loss under such policy or bond shall, unless applied as provided 
in the preceding paragraph, be used as directed by the borrower's 
mortgage.
    (e) Borrowers shall furnish evidence annually that the required 
insurance and fidelity coverage has been in force for the entire year, 
and that the borrower has taken all steps currently necessary and will 
continue to take all steps necessary to ensure that the coverage will 
remain in force until all

[[Page 1037]]

loans made or guaranteed by RUS are paid in full. Such evidence shall be 
in a form satisfactory to RUS. Generally a certification included as 
**part** of the RUS Financial and Statistical Report filed by the borrower 
annually (RUS Form 7 or Form 12 for electric borrowers, RUS Form 479 for 
telecommunications borrowers, or the successors to these forms) is 
sufficient evidence of this coverage.

Sec. 1788.3  Flood insurance.

    (a) Borrowers shall purchase and maintain flood insurance for 
buildings in flood hazard areas to the extent available and required 
under the National Flood Insurance Act of 1968, as amended (42 U.S.C. 
4001, et seq.) The insurance should cover, in addition to the building, 
any machinery, equipment, fixtures, and furnishings contained in the 
building.
    (b) The National Flood Insurance Program (see 44 CFR **Part** 59 et 
seq.) provides for a standard flood insurance policy; however, other 
existing insurance policies which provide flood coverage may be used 
where flood insurance is available in lieu of the standard flood 
insurance policy. Such policies must be endorsed to provide:
    (1) That the insurer give 30 days written notice of cancellation or 
nonrenewal to the insured with respect to the flood insurance coverage. 
To be effective, such notice must be mailed to both the insured and RUS 
and other mortgagees if any and must include information as to the 
availability of flood insurance coverage under the National Flood 
Insurance Program, and
    (2) That the flood insurance coverage is at least as broad as the 
coverage offered by the Standard Flood Insurance Policy.

Sec. 1788.4  Disclosure of irregularities and illegal acts.

    (a) Borrowers must immediately report, in writing, all 
irregularities and all indications or instances of illegal acts in its 
operations, whether material or not, to RUS and the Office of the 
Inspector General (OIG). See 7 CFR 1773.9(c)(3) for OIG addresses. The 
reporting requirements for borrowers are the same as those for CPA's set 
forth in Sec. 1773.9
    (b) Borrowers are required to make full disclosure to the bonding 
company of the dishonest or fraudulent acts.

Sec. 1788.5  RUS endorsement required.

    In the case of a cooperative or mutual organization, RUS requires 
that the following:

    Endorsement Waiving Immunity From Tort Liability'' be included as a 
**part** of each public liability, owned, non-owned, hired automobile, and 
aircraft liability, employers' liability policy, and boiler policy:
    The Insurer agrees with the Rural Utilities Service that such 
insurance as is afforded by the policy applies subject to the following 
provisions:
    1. The Insurer agrees that it will not use, either in the adjustment 
of claims or in the defense of suits against the Insured, the immunity 
of the Insured from tort liability, unless requested by the Insured to 
interpose such defense.
    2. The Insured agrees that the waiver of the defense of immunity 
shall not subject the Insurer to liability of any portion of a claim, 
verdict or judgment in excess of the limits of liability stated in the 
policy.
    3. The Insurer agrees that if the Insured is relieved of liability 
because of its immunity, either by interposition of such defense at the 
request of the Insured or by voluntary action of a court, the insurance 
applicable to the injuries on which such suit is based, to the extent to 
which it would otherwise have been available to the Insured, shall apply 
to officers and employees of the Insured in their capacity as such; 
provided that all defenses other than immunity from tort liability which 
would be available to the Insurer but for said immunity in suits against 
the Insured or against the Insurer under the policy shall be available 
to the Insurer with respect to such officers and employees in suits 
against such officers and employees or against the Insurer under the 
policy.

Sec. 1788.6  RUS right to place insurance.

    If a borrower fails to purchase or maintain the required insurance 
and fidelity coverage, the mortgagees may place required insurance and 
fidelity coverage on behalf and in the name of the borrower. The 
borrower shall pay the cost of this coverage, as provided in the loan 
documents.

[[Page 1038]]

Secs. 1788.7-1788.10  [Reserved]

    Subpart B--Insurance for Contractors, Engineers, and Architects, 
                           Electric Borrowers

Sec. 1788.11  Minimum insurance requirements for contractors, engineers, 
          and architects.

    (a) Each electric borrower shall include the provisions in this 
paragraph in its agreements with contractors, engineers, and architects, 
said agreements that are wholly or partially financed by RUS loans or 
guarantees. The borrower should replace ``Contractor'' with ``Engineer'' 
or ``Architect'' as appropriate.

    1. The Contractor shall take out and maintain throughout the period 
of this Agreement insurance of the following minimum types and amounts:
    a. Worker's compensation and employer's liability insurance, as 
required by law, covering all their employees who perform any of the 
obligations of the contractor, engineer, and architect under the 
contract. If any employer or employee is not subject to workers' 
compensation laws of the governing State, then insurance shall be 
obtained voluntarily to extend to the employer and employee coverage to 
the same extent as though the employer or employee were subject to the 
workers' compensation laws.
    b. Public liability insurance covering all operations under the 
contract shall have limits for bodily injury or death of not less than 
$1 million each occurrence, limits for property damage of not less than 
$1 million each occurrence, and $1 million aggregate for accidents 
during the policy period. A single limit of $1 million of bodily injury 
and property damage is acceptable. This required insurance may be in a 
policy or policies of insurance, primary and excess including the 
umbrella or catastrophe form.
    c. Automobile liability insurance on all motor vehicles used in 
connection with the contract, whether owned, non-owned, or hired, shall 
have limits for bodily injury or death of not less than $1 million per 
person and $1 million each occurrence, and property damage limits of $1 
million for each occurrence. This required insurance may be in a policy 
or policies of insurance, primary and excess including the umbrella or 
catastrophe form.
    2. The Owner shall have the right at any time to require public 
liability insurance and property damage liability insurance greater than 
those required in paragraphs (a)(1)(b) and (a)(1)(c) of this section. In 
any such event, the additional premium or premiums payable solely as the 
result of such additional insurance shall be added to the Contract 
price.
    3. The Owner shall be named as Additional Insured on all policies of 
insurance required in (a)(1)(b) and (a)(1)(c) of this section.
    4. The policies of insurance shall be in such form and issued by 
such insurer as shall be satisfactory to the Owner. The Contractor shall 
furnish the Owner a certificate evidencing compliance with the foregoing 
requirements that shall provide not less than 30 days prior written 
notice to the Owner of any cancellation or material change in the 
insurance.

    (b) Electric borrowers shall also ensure that all architects and 
engineers working under contract with the borrower have insurance 
coverage for Errors and Omissions (Professional Liability Insurance) in 
an amount at least as large as the amount of the architectural or 
engineering services contract but not less than $500,000.
    (c) The borrower may increase the limits of insurance if desired.
    (d) The minimum requirement of $1 million of public liability 
insurance does not apply to contractors performing maintenance work, 
janitorial-type services, meter reading services, rights-of-way mowing, 
and jobs of a similar nature. However, borrowers shall ensure that the 
contractor performing the work has public liability coverage at a level 
determined to be appropriate by the borrower.
    (e) If requested by RUS, the borrower shall provide RUS with a 
certificate from the contractor, engineer, or architect evidencing 
compliance with the requirements of this section.

Sec. 1788.12  Contractors' bonds.

    Electric borrowers shall require contractors to obtain contractors' 
bonds when required by **part** 1726, Electric System Construction Policies 
and Procedures, of this chapter. Surety companies providing contractors' 
bonds shall be listed as acceptable sureties in the U.S. Department of 
Treasury Circular No. 570. The circular is maintained through periodic 
publication in the Federal Register and is available on the Internet 
under ftp://ftp.fedworld.gov/pub/tel/sureties.txt, and on the Department 
of the Treasury's computer bulletin board at 202-874-6817.

[[Page 1039]]

    Subpart C--Insurance for Contractors, Engineers, and Architects, 
                      Telecommunications Borrowers

Sec. 1788.46  General.

    This subpart sets forth RUS policies for minimum insurance 
requirements for contractors, engineers, and architects performing work 
under contracts which are wholly or partially financed by RUS loans or 
guarantees with telecommunications borrowers.

Sec. 1788.47  Policy requirements.

    (a) Contractors, engineers, and architects performing work for 
borrowers under construction, engineering, and architectural service 
contracts shall obtain insurance coverage, as required in Sec. 1788.48, 
and maintain it in effect until work under the contracts is completed.
    (b) Contractors entering into construction contracts with borrowers 
shall furnish a contractors' bond, except as provided for in 
Sec. 1788.49, covering all of the contractors' undertaking under the 
contract.
    (c) Borrowers shall make sure that their contractors, engineers, and 
architects comply with the insurance and bond requirements of their 
contracts.

Sec. 1788.48  Contract insurance requirements.

    Contracts entered into between borrowers and contractors, engineers, 
and architects shall provide that they take out and maintain throughout 
the contract period insurance of the following types and minimum 
amounts:
    (a) Workers' compensation and employers' liability insurance, as 
required by law, covering all their employees who perform any of the 
obligations of the contractor, engineer, and architect under the 
contract. If any employer or employee is not subject to the workers' 
compensation laws of the governing state, then insurance shall be 
obtained voluntarily to extend to the employer and employee coverage to 
the same extent as though the employer or employee were subject to the 
workers' compensation laws.
    (b) Public liability insurance covering all operations under the 
contract shall have limits for bodily injury or death of not less than 
$1 million each occurrence, limits for property damage of not less than 
$1 million each occurrence, and $1 million aggregate for accidents 
during the policy period. A single limit of $1 million of bodily injury 
and property damage is acceptable. This required insurance may be in a 
policy or policies of insurance, primary and excess including the 
umbrella or catastrophe form.
    (c) Automobile liability insurance on all motor vehicles used in 
connection with the contract, whether owned, non-owned, or hired, shall 
have limits for bodily injury or death of not less than $1 million per 
person and $1 million per occurrence, and property damage limits of $1 
million for each occurrence. This required insurance may be in a policy 
or policies of insurance, primary and excess including the umbrella or 
catastrophe form.
    (d) When a borrower contracts for the installation of major 
equipment by other than the supplier or for the moving of major 
equipment from one location to another, the contractor shall furnish the 
borrower with an installation floater policy. The policy shall cover all 
risks of damage to the equipment until completion of the installation 
contract.

Sec. 1788.49  Contractors' bond requirements.

    Construction contracts in amounts in excess of $250,000 for 
facilities shall require contractors to secure a contractors' bond, on a 
form approved by RUS, attached to the contract in a penal sum of not 
less than the contract price, which is the sum of all labor and 
materials including owner-furnished materials installed in the project. 
RUS Form 168b is for use when the contract exceeds $250,000. RUS Form 
168c is for use when the contractor's surety has accepted a Small 
Business Administration guarantee and the contract is for $1,000,000 or 
less. For minor construction contracts under which work will be done in 
sections and no section will exceed a total cost of $250,000, the 
borrower may waive the requirement for a contractors' bond.

[[Page 1040]]

Sec. 1788.50  Acceptable sureties.

    Surety companies providing contractors' bonds shall be listed as 
acceptable sureties in the U.S. Department of Treasury Circular No. 570. 
The circular is maintained through periodic publication in the Federal 
Register and is available on the Internet under ftp://ftp.fedworld.gov/
pub/tel/sureties.txt, and on the Department of the Treasury's computer 
bulletin board at 202-874-6817.

Secs. 1788.51-1788.53  [Reserved]

Sec. 1788.54  Compliance with contracts.

    It is the responsibility of the borrower to determine, before the 
commencement of work, that the engineer, architect, and the contractor 
have insurance that complies with their contract requirements.

Sec. 1788.55  Providing RUS evidence.

    When RUS shall specifically so direct, the borrower shall also 
require the engineer, the architect, and the contractor, to forward to 
RUS evidence of compliance with their contract representative of the 
insurance company and include a provision that no change in or 
cancellation of any policy listed in the certificate will be made 
without the prior written notice to the borrower and to RUS.
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