Author: SPoore

[Federal Register: January 4, 1999 (Volume 64, Number 1)]
[Rules and Regulations]
[Page 1-5]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04ja99-1]

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Rules and Regulations
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.

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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: Final rule.

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SUMMARY: The Rural Utilities Service (RUS) is streamlining its fidelity
and insurance requirements for electric and telecommunications systems.
The rule was last revised in 1986, and the revisions are intended to
update requirements. The rule provides a flexible approach to insurance
that protects the government's security interest in mortgaged assets
and conforms to today's business practices.

DATES: Effective date January 4, 1999.

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. Telephone: 202-
720-0736. FAX: 202-720-4120. E-mail: fheppe@rus.usda.gov.

SUPPLEMENTARY INFORMATION:

Executive Order 12372

    This 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 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 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 has determined that this 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 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 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 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
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

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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 regulation is part of this overall effort to
modernize requirements in order to improve the delivery of customer
service.
    On October 8, 1998 RUS published a proposed rule at 63 FR 54385.
One comment was received. That comment was favorable to the rule as
published and suggested no changes in the rule.
    Consequently, RUS is publishing the final rule with no changes from
the proposed rule.
    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. All other borrowers are 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 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 guarantee after such
effective date will be required to execute such a mortgage. A provision
has been included in subpart A that places 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 amends 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

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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.

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.

Secs. 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.

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    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.

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.

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    Dated: December 24, 1998.

Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 98-34778 Filed 12-31-98; 8:45 am]
BILLING CODE 3410-15-P