[Federal Register Volume 64, Number 1 (Monday, January 4, 1999)]
[Rules and Regulations]
[Pages 1-5]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34778]



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 Rules and Regulations
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  Federal Register / Vol. 64, No. 1 / Monday, January 4, 1999 / Rules 
and Regulations  

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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: [email protected].

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.


[[Page 5]]


    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