Lead-Based Paint Liability Insurance Coverage for Housing Authorities

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Public and Indian Housing

24 CFR Parts 905 and 965

[Docket No. R-94-1676; FR-3275-F-02]

RIN: 2577-AB21

Lead-Based Paint Liability Insurance Coverage for Housing

Authorities

AGENCY: Office of the Assistant Secretary for Public and Indian

Housing, HUD.

ACTION: Final rule.

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SUMMARY: Public housing agencies and Indian housing authorities

(collectively, housing authorities or HAs) conducting lead-based paint

testing and abatement activities need to assure that they have adequate

liability insurance coverage to cover the hazards inherent in these

activities, in order to comply with insurance requirements of their

Annual Contributions Contracts with HUD. This rule prescribes the

nature and quality of liability insurance to protect HAs and

contractors performing this work for HAs. The rule is being issued to

comply with directions in the Department's appropriation act for Fiscal

Year 1992 to adopt regulations specifying the nature and quality of

insurance to cover HAs in the performance of this work.

EFFECTIVE DATE: July 21, 1994.

FOR FURTHER INFORMATION CONTACT: John Comerford, Director, Financial

Management Division, Office of Assisted Housing, Department of Housing

and Urban Development, 451 Seventh Street, SW., Washington, DC 20410,

telephone (202) 708-1872. A telecommunications device for hearing or

speech-impaired persons is available at (202) 708-0850. (These are not

toll-free telephone numbers.)

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act Statement

The information collection requirements contained in this rule have

been submitted to the Office of Management and Budget (OMB) for review

under the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520) and

approved under OMB control number 2577-0187, which is valid through

August 1994.

II. Background

A. HUD Contract Requirements for Insurance

Under their Annual Contributions Contract (ACC) or Mutual Help

Annual Contributions Contract (MHACC) with HUD, Public Housing Agencies

(PHAs) and Indian Housing Authorities (IHAs) (hereinafter referred to

as HAs) must carry adequate (1) owner's, landlord's, and tenant's

public liability insurance; and (2) manufacturer's and contractor's

public liability insurance (both now combined and referred to by the

insurance industry as commercial general liability insurance). When the

conditions of the ACC or MHACC were formulated in 1969, it was not

anticipated that there was any reason to address the issue of bodily

injury due to the ingestion of lead-based paint, since the health

hazard of this chemical was not well-known. Also, at that time, no

pollution exclusion in the general liability policy was thought to

apply to claims of this nature.

However, during subsequent years, as environmental claims started

arising, insurance companies began to exclude pollution and

environmental liability; and it is the opinion of most insurance

companies that, since lead is a chemical which is included in the

definition of a ``pollutant'', claims arising from lead poisoning are

excluded from current policies. However, some courts have differed with

the insurance companies' position on pollution exclusions.

HAs are engaging in lead-based paint testing and abatement, often

funded by HUD under the Comprehensive Improvement Assistance Program or

Comprehensive Grant Program, which support rehabilitation work needed

to improve the condition of public housing units. The Department

published a document in the Federal Register to guide these activities,

entitled ``Lead-Based Paint: Interim Guidelines for Hazard

Identification and Abatement in Public and Indian Housing'' (55 FR

14556, April 18, 1990, and revised 55 FR 39874, September 28, 1990, and

56 FR 21556, May 9, 1991). Use of these guidelines is the subject of

other program regulations and notices of funding availability, and it

is not addressed in this rule.

B. Appropriations Act

The Departments of Veterans Affairs and Housing and Urban

Development Appropriations Act for Fiscal Year 1992, Pub L. 102-139,

105 Stat. 736 (approved October 28, 1991) (``1992 Act'') included an

express provision concerning selection of insurance to protect against

the liability hazards involved in the testing and abatement of lead-

based paint, at 758 and 759:

Hereafter, until the Department of Housing and Urban Development

has adopted regulations specifying the nature and quality of

insurance covering the potential personal injury liability exposure

of public housing authorities and Indian housing authorities (and

their contractors, including architectural and engineering services)

as a result of testing and abatement of lead-based paint in

federally subsidized public and Indian housing units, said

authorities shall be permitted to purchase insurance for such risk,

as an allowable expense against amounts available for capital

improvements (modernization): Provided, That such insurance is

competitively selected and that coverage provided under such

policies, as certified by the authority, provides reasonable

coverage for the risk of liability exposure, taking into

consideration the potential liability concerns inherent in the

testing and abatement of lead-based paint, and the managerial and

quality assurance responsibilities associated with the conduct of

such activities.

In other words, until a final rule is effective, HAs may proceed

with lead-based paint abatement activities, selecting their own lead-

based paint liability coverage so long as they determine it is

appropriate for their needs.

A proposed rule was published on November 2, 1993 (FR 58513) which

covered this subject. This final rule responds to comments received on

that proposed rule.

III. Public Comments

The Department received comments from nine public sources. Three

were from housing authorities. Two were from testing/abatement

contractors or consultants. Three were from PHA-owned insurance

entities or their administrators, and one was from a trade association.

Comment. Three sources questioned HUD's reasoning in not attempting

to secure another master insurance policy that would provide liability

coverage for both the contractor performing testing and abatement work,

as well as the HA, and requested reconsideration of this decision. Two

of the sources also recommended that such master policy also cover any

type of contractor (plumbing, heating, mechanical, electrical, painting

and decorating) who might come in contact with lead-based paint while

performing their work.

Response. The Department rejects this recommendation for a number

of reasons. In its report to Congress dated September 24, 1991,

concerning the previous master policy which expired on October 1, 1993,

the HUD Inspector General questioned the involvement of HUD staff in

the procurement of that policy. The IG felt that since this was not a

Federal procurement, but an HA procurement subject to State procurement

statutes and regulations, HUD's involvement should have been only in an

advisory capacity. In addition, it is extremely doubtful that any

insurance company would consider issuing a liability insurance policy

to a HA that would cover as insured parties, contractors engaged in

performing various types of skilled work only while working on HA

premises. Should the housing authorities or any contractor trade

associations desire to secure a master policy that meets the

requirements of this rule and provides adequate protection for the

exposure, they are free to do so. Also, since the passage of the

Residential Lead-Based Paint Hazard Reduction Act of 1992, which is

Title X of the Housing and Community Development Act of 1992 (42 U.S.C.

4851-4856), other public and private housing owners are required to

engage in lead-based paint testing and abatement. Since contractors

performing these operations need insurance when working for other

housing owners, a master policy obtained by HUD insuring them only

while performing work for HAs would not fill all of their needs. In

addition, there appears to be a more available market for this type of

insurance than prevailed in 1990 when the previous master policy was

obtained.

Comment. The rule should have a ``grandfather clause'' allowing HAs

and contractors to continue coverage that was obtained prior to the

effective date of the rule even though the policy does not meet the

rule requirements.

Response. The Department agrees that it should not require midterm

cancellation of any policy that would result in a short rate penalty in

order to comply with the rule and has modified the rule accordingly. It

will be necessary, however, to comply with the requirements of the rule

when the policy in force on the effective date of the rule expires.

Comment. In order to expand the availability of insurance policies

that would qualify under the rule, allow a ``claims made'' form as long

as it has a discovery period.

Response. The Department is willing to allow a ``claims made''

form, as long as it has a discovery period of at least five years, and

the rule has been changed to that effect.

Comment. Professional Liability insurance for architects and

engineers cannot be obtained on an ``occurrence'' form and insurance

companies insuring the contractors and HAs for liability do not want to

add this coverage to their policies.

Response. It was not the intent that this rule was to apply to

Professional Liability policies obtained by architectural and

engineering firms, and the rule has been clarified accordingly. The HA,

however, should have these firms provide evidence that they do have

some type of Professional Liability insurance in effect.

Comment. Even though the contractor purchases the insurance and

names the HA as an additional insured, the HA should also be required

to purchase primary insurance to cover any exposure to liability for

claims not directly related to work being done by the contractor.

Response. While such an exposure may exist, the Department believes

that the exposure is more limited than the exposure that already exists

prior to any abatement work, and liability insurance to protect against

claims for the mere existence of lead-based paint has never been

required. Although not a requirement, there is no prohibition against

the HA purchasing this insurance if it feels it is necessary and can

afford to do so.

Comment. The rule should allow defense costs to be included within

the policy limit, since some of the insurance companies providing this

insurance are now issuing policies on this basis.

Response. To make coverage more readily available, the Department

is willing to allow a limit being placed on the cost of defense prior

to being deducted from the limit of liability, as long as the defense

limit is not less than $250,000 per claim. The rule has been amended to

that effect.

Comment. The rule should encourage insurers to underwrite the risk

by requiring them to analyze the risk of each abatement project and

assure that there is proper guidance and technical assistance

throughout the abatement process.

Response. The Underwriting Department of each insurance company is

charged with the responsibility of approving and accepting each risk

they insure. Most insurance companies also have Loss Control

Departments that work with their insureds in an effort to promote safe

work habits and procedures and reduce losses. It would be inappropriate

for HUD to attempt to dictate to the insurance company how they should

underwrite and service the accounts they insure.

Comment. Since the statutory requirement found in the 1992

Appropriations Act that coverage be purchased through a competitive

process expires with the promulgation of this regulation, HAs should be

entitled to purchase this coverage from a HA-owned insurance entity

without competitive bidding.

Response. We agree. Since issuance of the Final Rule setting

Financial Standards for Housing Authority-Owned Insurance Entities

which became effective on November 4, 1993, HAs are now authorized to

obtain any line of insurance from a non-profit insurance entity that is

owned and controlled by HAs and approved by HUD. Since this is now

permitted by 24 CFR 905.190 and 965.201, no additional clarification in

this rule is necessary.

Comment. Paragraph (e) should be eliminated from the rule since it

is gratuitous.

Response. The provision concerning the HA's responsibility for

supervision of testing and abatement activity has been moved to the

general paragraph.

Comment. Requiring small (some as low as one or two persons)

contractors to purchase this type of insurance will have an enormous

impact on small businesses due to the high minimum premiums and total

cost involved.

Response. While this may very well be true, the Department is not

willing to waive the insurance requirement for small businesses. The

underwriting standards of insurance companies may preclude them from

insuring accounts that do not generate a certain minimum premium.

However, if the Department were to waive the insurance requirement for

small contractors, it would place both the contractor and the HA at

risk for uninsured claims.

Comment. The minimum required limit should be raised to $1,000,000

per occurrence with no annual aggregate being permitted.

Response. The $500,000 limit is only a minimum. Higher limits are

permitted and highly recommended. It was not felt that the Department

should require substantially higher minimum limits than required for

other forms of insurance, particularly automobile and commercial

general liability. The absence of an annual aggregate limit would be

very desirable. However, few insurance companies are willing to issue a

policy without one. To insist upon having no annual aggregate limit

would severely restrict the market availability and certainly increase

the cost.

Comment. The rule should address all forms of insurance including

workers compensation, general liability and professional liability.

Response. This rule is concerned only with the provisions of Pub.

L. 102-139, 105 Stat. 736 concerning selection of insurance to protect

against the liability hazards involved in the testing and abatement of

lead-based paint.

IV. Findings and Certifications

A. Environmental Review

A Finding of No Significant Impact with respect to the environment

was made in accordance with HUD regulations at 24 CFR part 50 that

implement section 102(2)(C) of the National Environmental Policy Act of

1969, 42 U.S.C. 4332, when the proposed rule was issued. No changes

made in this final rule require any changes in that finding. The

Finding of No Significant Impact is available for public inspection and

copying between 7:30 a.m. and 5:30 p.m. weekdays in the Office of the

Rules Docket Clerk, room 10276, 451 Seventh Street, SW., Washington, DC

20410-0500.

B. Federalism Impact

The General Counsel, as the Designated Official under section 6(a)

of Executive Order 12612, Federalism, has determined that the policies

contained in this rule will not have substantial direct effects on

states or their political subdivisions, or the relationship between the

Federal Government and the States, or on the distribution of power and

responsibilities among the various levels of government. This rule

merely gives standards used by HUD in approving the sources of

insurance coverage selected by HAs in accordance with longstanding

provisions of the contracts between them and HUD. As a result, the rule

is not subject to review under the order.

C. Impact on the Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this rule does not have

potential for significant impact on family formation, maintenance, and

general well-being, and, thus, is not subject to review under the

order. No significant change in existing HUD policies or programs will

result from promulgation of this rule, as those policies and programs

relate to family concerns.

D. Impact on Small Entities

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed this rule before publication and, by

approving it, certifies that this rule does not have a significant

economic impact on a substantial number of small entities. The rule is

limited to specifying the nature and quality of liability insurance for

the hazards of testing for and abatement of lead-based paint; and while

it may be more difficult for small entities to obtain the insurance or

to obtain it at a reasonable cost, this is a factor controlled by the

insurance marketplace, and not by the establishment of this rule.

E. Regulatory Agenda

This rule was listed as item 1703 under the Office of Public and

Indian Housing in the Department's Semiannual Agenda of Regulations

published on April 25, 1994 (59 FR 20424, 20474) under Executive Order

12866 and the Regulatory Flexibility Act.

F. Catalog

The Catalog of Federal Domestic Assistance numbers for the public

housing and Indian housing programs affected by this rule are 14.850

and 14.851.

List of Subjects

24 CFR Part 905

Aged, Energy conservation, Grant programs--housing and community

development, Grant programs--Indians, Individuals with disabilities,

Lead poisoning, Loan programs--housing and community development, Loan

programs--Indians, Low and moderate income housing, Public housing,

Reporting and recordkeeping requirements.

24 CFR Part 965

Energy conservation, Government procurement, Grant programs--

housing and community development, Lead poisoning, Loan programs--

housing and community development, Public housing, Reporting and

recordkeeping requirements, Utilities.

Accordingly, the Department amends 24 CFR parts 905 and 965 as

follows:

PART 905--INDIAN HOUSING PROGRAMS

1. The authority citation for part 905 continues to read as

follows:

Authority: 25 U.S.C. 450e(b); 42 U.S.C. 1437aa, 1437bb, 1437cc,

1437ee, and 3535(d).

2. A new Sec. 905.195 is added to subpart B, to read as follows:

Sec. 905.195 Lead-based paint liability insurance coverage.

(a) General. The purpose of this section is to specify what HUD

deems reasonable insurance coverage with respect to the hazards

associated with testing for and abatement of lead-based paint that the

IHA undertakes, in accordance with the IHA's ACC or MHACC with HUD. The

insurance coverage does not relieve the IHA of its responsibility for

assuring that lead-based paint testing and abatement activities are

conducted in a responsible manner.

(b) Insurance coverage requirements. When the IHA undertakes lead-

based paint testing and abatement, it must assure that it has

reasonable insurance coverage for itself for potential personal injury

liability associated with those activities. If the work is being done

by IHA employees, the IHA must obtain a liability insurance policy

directly to protect the IHA. If the work is being done by a contractor,

the IHA may obtain, from the insurer of the contractor performing this

type of work in accordance with a contract, a certificate of insurance

providing evidence of such insurance and naming the IHA as an

additional insured; or it may obtain such insurance directly. Insurance

must remain in effect during the entire period of testing and abatement

and must comply with the following requirements:

(1) Named insured. If purchased by the IHA, the policy shall name

the IHA as insured. If purchased by an independent contractor, the

policy shall name the contractor as insured and the IHA as an

additional insured, in connection with performing work under the IHA's

lead-based paint testing and abatement contract. If the IHA has

executed a contract with a Resident Management Corporation (RMC) to

manage a building/project on behalf of the IHA, the RMC shall also be

an additional insured under the policy in connection with the lead-

based paint testing and abatement contract. (The duties of the RMC are

similar to those of a real estate management firm.)

(2) Coverage limits. The minimum limit of liability shall be

$500,000 per occurrence written, with a combined single limit for

bodily injury and property damage.

(3) Deductible. A deductible, if any, may not exceed $5,000 per

occurrence.

(4) Supplementary payments. Payments for such supplementary costs

as the costs of defending against a claim must be in addition to, and

not as a reduction of, the limit of liability. However, it will be

permissible for the policy to have a limit on the amount payable for

defense costs. If a limit is applicable, it must not be less than

$250,000 per claim prior to such costs being deducted from the limit of

liability.

(5) Occurrence form policy. The form used must be an ``occurrence''

form, or a ``claims made'' form that contains an extended reporting

period of at least five years. (Under an occurrence form, coverage

applies to any loss if the policy was in effect when the loss occurred,

regardless of when the claim is made.)

(6) Aggregate limit. If the policy contains an aggregate limit, the

minimum acceptable limit is $1,000,000.

(7) Cancellation. In the event of cancellation, at least 30 days'

advance notice is to be given to the insured and any additional

insured.

(c) Exception to requirements. Insurance already purchased by the

IHA or contractor and in force on the date this rule is effective which

provides coverage for the hazards involved in the testing for and

abatement of lead-based paint, shall be considered as meeting the

requirements of this rule until the expiration of the policy. This rule

is not applicable to architects, engineers, or consultants who do not

physically perform lead-based paint testing and abatement work.

(d) Insurance for the existence hazard. An IHA may also purchase

special liability insurance against the existence hazard of lead-based

paint, although it is not a required coverage. An IHA may purchase this

coverage if, in the opinion of the IHA, the policy meets the IHA's

requirements, the premium is reasonable, and the policy is obtained in

accordance with applicable procurement standards of this subpart B. If

this coverage is purchased, the premium must be paid from funds

available under the Performance Funding System or from reserves.

3. A new Sec. 905.585 is added to subpart H, to read as follows:

Sec. 905.585 Insurance coverage.

For the requirements concerning an IHA's obligation to obtain

reasonable insurance coverage with respect to the hazards associated

with testing for and abatement of lead-based paint, see Sec. 905.195.

PART 965--PHA-OWNED OR LEASED PROJECTS--MAINTENANCE AND OPERATION

4. The authority citation for part 965 continues to read as

follows:

Authority: 42 U.S.C. 1437, 1437a, 1437d, 1437g, 3535(d). Subpart

H is also issued under 42 U.S.C. 4821-4846.

5. A new Sec. 965.215 is added to subpart B, to read as follows:

Sec. 965.215 Lead-based paint liability insurance coverage.

(a) General. The purpose of this section is to specify what HUD

deems reasonable insurance coverage with respect to the hazards

associated with testing for and abatement of lead-based paint that the

PHA undertakes, in accordance with the PHA's ACC with HUD. The

insurance coverage does not relieve the PHA of its responsibility for

assuring that lead-based paint testing and abatement activities are

conducted in a responsible manner.

(b) Insurance coverage requirements. When the PHA undertakes lead-

based paint testing and abatement, it must assure that it has

reasonable insurance coverage for itself for potential personal injury

liability associated with those activities. If the work is being done

by PHA employees, the PHA must obtain a liability insurance policy

directly to protect the PHA. If the work is being done by a contractor,

the PHA may obtain, from the insurer of the contractor performing this

type of work in accordance with a contract, a certificate of insurance

providing evidence of such insurance and naming the PHA as an

additional insured; or it may obtain such insurance directly. Insurance

must remain in effect during the entire period of testing and abatement

and must comply with the following requirements:

(1) Named insured. If purchased by the PHA, the policy shall name

the PHA as insured. If purchased by an independent contractor, the

policy shall name the contractor as insured and the PHA as an

additional insured, in connection with performing work under the PHA's

lead-based paint testing and abatement contract. If the PHA has

executed a contract with a Resident Management Corporation (RMC) to

manage a building/project on behalf of the PHA, the RMC shall be an

additional insured under the policy in connection with the lead-based

paint testing and abatement contract. (The duties of the RMC are

similar to those of a real estate management firm.)

(2) Coverage limits. The minimum limit of liability shall be

$500,000 per occurrence written, with a combined single limit for

bodily injury and property damage.

(3) Deductible. A deductible, if any, may not exceed $5,000 per

occurrence.

(4) Supplementary payments. Payments for such supplementary costs

as the costs of defending against a claim must be in addition to, and

not as a reduction of, the limit of liability. However, it will be

permissible for the policy to have a limit on the amount payable for

defense costs. If a limit is applicable, it must not be less than

$250,000 per claim prior to such costs being deducted from the limit of

liability.

(5) Occurrence form policy. The form used must be an ``occurrence''

form, or a ``claims made'' form that contains an extended reporting

period of at least five years. (Under an occurrence form, coverage

applies to any loss regardless of when the claim is made.)

(6) Aggregate limit. If the policy contains an aggregate limit, the

minimum acceptable limit is $1,000,000.

(7) Cancellation. In the event of cancellation, at least 30 days'

advance notice is to be given to the insured and any additional

insured.

(c) Exception to requirements. Insurance already purchased by the

PHA or contractor and in force on the date this rule is effective which

provides coverage for the hazards involved in testing for and abatement

of lead-based paint, shall be considered as meeting the requirements of

this rule until the expiration of the policy. This rule is not

applicable to architects, engineers, or consultants who do not

physically perform lead-based paint testing and abatement work.

(d) Insurance for the existence hazard. A PHA may also purchase

special liability insurance against the existence hazard of lead-based

paint, although it is not a required coverage. A PHA may purchase this

coverage if, in the opinion of the PHA, the policy meets the PHA's

requirements, the premium is reasonable, and the policy is obtained in

accordance with applicable procurement standards. (See 24 CFR part 85

and Secs. 965.205.) If this coverage is purchased, the premium must be

paid from funds available under the Performance Funding System or from

reserves.

6. A new Sec. 965.705 is added to subpart H, to read as follows:

Sec. 965.705 Insurance coverage.

For the requirements concerning a PHA's obligation to obtain

reasonable insurance coverage with respect to the hazards associated

with testing for and abatement of lead-based paint, see Sec. 965.215.

Dated: June 13, 1994.

Joseph Shuldiner,

Assistant Secretary for Public and Indian Housing.

[FR Doc. 94-14981 Filed 6-20-94; 8:45 am]

BILLING CODE 4210-33-P