RUS Fidelity and Insurance Requirements for Electric and Telecommunications Borrowers

DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1788

RIN 0572-AA86

RUS Fidelity and Insurance Requirements for Electric and

Telecommunications Borrowers

AGENCY: Rural Utilities Service, USDA.

ACTION: Proposed rule.

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SUMMARY: The Rural Utilities Service (RUS) proposes to streamline its

fidelity and insurance requirements for electric and telecommunications

systems. The rule was last revised in 1986, and the proposed revisions

are intended to update requirements. The rule proposes a flexible

approach to insurance that protects the government's security interest

in mortgaged assets and conforms to today's business practices.

DATES: Written comments must be received by RUS or carry a postmark or

equivalent by December 8, 1998.

ADDRESSES: Written comments should be addressed to F. Lamont Heppe,

Jr., Director, Program Development and Regulatory Analysis, U.S.

Department of Agriculture, Rural Utilities Service, 1400 Independence

Avenue, SW., Washington, DC 20250-1522. RUS requires a signed original

and 3 copies of all comments (7 CFR 1700.4).

FOR FURTHER INFORMATION CONTACT: F. Lamont Heppe, Jr., Director,

Program Development and Regulatory Analysis, U.S. Department of

Agriculture, Rural Utilities Service, Room 4034 South Bldg., 1400

Independence Avenue, SW., Washington, DC 20250-1522.

[[Page 54386]]

Telephone: 202-720-0736. FAX: 202-720-4120. E-mail: [email protected]

SUPPLEMENTARY INFORMATION:

Executive Order 12372

This proposed rule is excluded from the scope of Executive Order

12372, Intergovernmental Consultation, which may require consultation

with State and local officials. A final rule related notice entitled

``Department Programs and Activities Excluded from Executive Order

12372,'' (50 FR 47034) determined that RUS loans and loan guarantees

were not covered by Executive Order 12372.

Executive Order 12866

This proposed rule has been determined to be not significant for

the purposes of Executive Order 12866 and, therefore, has not been

reviewed by the Office of Management and Budget (OMB).

Executive Order 12988

This proposed rule has been reviewed under Executive Order 12988,

Civil Justice Reform. RUS has determined that this rule meets the

applicable standards provided in section 3 of the Executive Order. In

addition, all state and local laws and regulations that are in conflict

with this rule will be preempted, no retroactive effort will be given

to this rule, and, in accordance with section 212 (c) of the Department

of Agriculture Reorganization Act of 1994 (7 U.S.C. 6912(c)), appeal

procedures must be exhausted before an action against the Department or

its agencies may be initiated.

Regulatory Flexibility Act Certification

RUS had determined that this proposed rule will not have a

significant economic impact on a substantial number of small entities,

as defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.).

The RUS electric and telecommunications programs provide loans to

borrowers at interest rates and terms that are more favorable than

those generally available from the private sector. RUS borrowers, as a

result of obtaining federal financing, receive economic benefits that

exceed any direct economic costs associated with complying with RUS

regulations and requirements. Moreover, this action offers borrowers

increased flexibility in determining the appropriate insurance coverage

for their organizations which further offsets economic costs.

National Environmental Policy Act Certification

The Administrator of RUS has determined that this proposed rule

will not significantly affect the quality of the human environment as

defined by the National Environmental Policy Act of 1969 (42 U.S.C.

4321 et seq.). Therefore, this action does not require an environmental

impact statement or assessment.

Catalog of Federal Domestic Assistance

The program described by this proposed rule is listed in the

Catalog of Federal Domestic Assistance programs under No. 10.850, Rural

Electrification Loans and Loan Guarantees, 10.851, Rural Telephone

Loans and Loan Guarantees, and 10.852, Rural Telephone Bank Loans. This

catalog is available on a subscription basis from the Superintendent of

Documents, the United States Government Printing Office, Washington, DC

20402-9325, telephone number (202) 512-1800.

National Performance Review

The regulatory action is being taken as part of the National

Performance Review program to eliminate unnecessary regulations and

improve those that remain in force.

Information Collection and Recordkeeping Requirements

The recordkeeping and reporting requirements contained in this

proposed rule were approved by the Office of Management and Budget

(OMB) pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C.

Chapter 35, as amended) under control numbers 0572-0032 and 0572-0031.

Send questions or comments regarding any aspect of this collection of

information, including suggestions for reducing the burden, to F.

Lamont Heppe, Jr., Director, Program Development and Regulatory

Analysis, Rural Utilities Service, U.S. Department of Agriculture, Stop

1522, 1400 Independence Avenue, SW., Washington, DC 20250-1522.

Unfunded Mandates

This rule contains no Federal mandates (under the regulatory

provision of Title II of the Unfunded Mandates Reform Act of 1995) for

State, local, and tribal governments or the private sector. Thus, this

proposed rule is not subject to the requirements of sections 202 and

205 of the Unfunded Mandates Reform Act of 1995.

Background

The Rural Utilities Service (RUS) makes and guarantees loans to

furnish and improve electric and telecommunications service in rural

areas pursuant to the Rural Electrification Act of 1936, as amended, (7

U.S.C. 901 et seq.) (RE Act). The security for these loans is generally

a first mortgage on the borrower's electric or telecommunications

system. In order to maintain the security for government loans, the RUS

debt covenants require borrowers to maintain adequate levels of

fidelity and insurance coverage. Such coverage is generally carried by

any prudent business and required by any prudent lender.

RUS regulations implementing these fidelity and insurance

requirements, 7 CFR part 1788, were last issued in 1986. Since that

time, the business and regulatory environment of electric and

telecommunications utilities have undergone rapid change, and the

experience and sophistication of RUS financed systems have increased.

RUS has published a number of regulations updating and streamlining

various requirements. The proposed regulation is part of this overall

effort to modernize requirements in order to improve the delivery of

customer service.

On April 29, 1993, at 58 FR 25786, the Rural Electrification

Administration (REA), the predecessor agency to RUS, published an

advance notice of proposed rulemaking (ANPR) requesting comments on 7

CFR part 1788. The ANPR requested comments on any issue covered by the

rule, especially on whether agency requirements are compatible with

general industry practice. Thirteen comments were received.

Most commenters strongly recommended replacing specific

requirements and levels of coverage with a more flexible standard that

would allow borrowers to employ prudent risk management practices or

take out insurance in accordance with generally accepted utility

industry practice appropriate to utilities of similar size and

character.

Consequently, RUS proposes to reduce the specific requirements to a

level consistent with loan security and provide borrowers with maximum

flexibility by adopting this recommendation. Electric distribution

borrowers having the form of mortgage found in 7 CFR part 1718 are

currently subject to provisions similar to subpart A of this part. It

is proposed that all other borrowers will required to make the first

certification under subpart A of this rule at the end of the first

complete calendar year after the effective date of this rule. It is

contemplated that an insurance provision similar to the proposed

subpart A of this rule will be included in all telecommunications

mortgages executed by RUS after the effective date of this rule and

that all borrowers receiving a telecommunications loan or loan

[[Page 54387]]

guarantee after such effective date will be required to execute such a

mortgage. A provision has been included in subpart A that proposes to

place a requirement on borrowers concerning the reporting of

irregularities that is similar to the requirement on Certified Public

Accountants in 7 CFR part 1773.

Subparts B and C of this rule will apply to the first contracts

covered by the rule that borrowers enter into after the effective date

of this rule.

List of Subjects in 7 CFR Part 1788

Electric power, Insurance, Loan programs--communications, Loan

programs--energy, Reporting and recordkeeping requirements, Rural

areas, Telecommunications.

For the reasons set forth in the preamble, RUS proposes to amend 7

CFR Chapter XVII by revising part 1788 to read as follows:

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.

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.

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 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.

[[Page 54388]]

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.

Sec. 1788.6-1788.10 [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

[[Page 54389]]

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.

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.

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.

Dated: October 2, 1998.

Jill Long Thompson,

Under Secretary, Rural Development.

[FR Doc. 98-27235 Filed 10-8-98; 8:45 am]

BILLING CODE 3410-15-P