Executing risk transfer can be broadly classified into five categories:

Insurance Certificates

Before getting into a contractual agreement, organizations can insist on insurance certificates from

Subcontractors
Tenants
Service providers and
Other third party entities

Staff remuneration, along with general, commercial vehicle and property liability are regular inclusions under these types of insurance coverage. Plans can be renewed on a yearly basis or for multiple years at once. It is good practice to avoid contractual agreements with vendors, lessees and service providers who don’t have insurance coverage.

Enterprises must also insist on receiving insurance certificates directly from the insurance providers and not from intermediaries to avoid malpractice.

What should be covered and by how much ?

Enterprises must first establish what would be a sufficient level of protection that should be expected from third party business associates such as lessees, vendors and suppliers. The insurance and legal department should get directly involved at this stage.

This is largely determined by the

Nature of operations undertaken by the company
Financial risk involved through damage to assets
Organization’s risk appetite
Probability of third party vendors triggering a negative impact on business

Insurance Certificate Annual Review

Business operations are constantly evolving. The scope of insurance plans is quickly rendered insufficient. Before commencing work on the project, enterprises must design a system for assessing multiple year insurance certificates on a yearly basis.

The annual review should be a process driven activity conducted by the administrative department to evaluate if the current insurance certificates meet the company’s risk transfer objectives.

Checklists must be created and procedures should be outlined, so that employee personnel can trigger responses when incidents such as non-receipt of policies or the provision of inadequate data.

Third parties should be intimated through a written request for additional changes with regular follow ups until the most up to date documents are received. All insurance policies must be sorted by vendor and an insurance certificate history must be maintained for each third party service provider.

Strategies for insisting on Insurance Certificate requirements

Enterprises can adopt specific measures to create an operational culture where third party entities strictly adhere to insurance certificate requirements. Legal teams should be consulted at this stage for guidance and assistance.

Deferring Commencement of Operations
Delaying Payment and Remuneration
Contract Termination

Contractual agreements with vendors must include clauses that warrant the organization’s right to resort to the above mentioned strategies if insurance certificate requirements aren’t met within a stipulated time period.

Insurance Certificate Notification System

Employee personnel responsible for managing insurance certificates should be notified through alerts about
Upcoming expiry dates
Deadlines for meeting insurance certificate requirements and so on

Enterprises must keep a tab on third party vendor adherence to regulatory norms and insurance certificate requirements through monitoring systems.

For instance, administrative teams can maintain follow up files or logs that are classified by expiry dates or deadlines for complying with risk transfer targets. This makes it easier to manage multiple insurance certificates with different types of coverage.

Third party vendors should be notified at least two months prior to policy expiry. Requests should also be sent for renewed insurance certificates. Administrative teams should subsequently send third party vendors follow up requests if the updated documents have not received. Different types of insurance certificates should be group based on commonalities so that templates can be created for this type of reminder communication.

Organizations can adopt the following classification hierarchy while maintaining insurance certificates:

Project > Third Party Vendor > Insurance Certificate by Expiry Date

Additional Insured Status

Organizations must ask for additional insured status from third party vendors wherever possible. Being granted the additional insured status in an insurance policy where the third party vendor is the primary policy holder has its benefits. However, requesting for additional insured status can be detrimental if the possibility of indemnity provisions are ruled out.

Insisting that Third Party Vendors Sign Contracts

Enterprises must formalize the terms and conditions of business partnership with third party vendors through contractual agreements. Informal agreements can lead to inconsistencies and complications.

Enterprises must take the assistance of legal teams to draft contracts that:

Consist of hold-harmless agreements that safeguard the organization’s interests when damage is incurred due to the faults of external vendors

Include the organization as an additional insured in the vendor’s general liability coverage plans

Responsibilities must be clearly outlined in terms of:

Coverage
Indemnity
Implements
Materials
Safety Norms

Legal teams must review contracts to ensure that the company’s interests are safeguarded and that the clauses are in line with corporate commercial objectives. Drafting agreements or form contracts without paying heed to the legal intricacies of jurisdiction can lead to complications at a later stage.

Accuracy and consistency must be ensured across all documents before the project commences. Competent staff with the necessary skills and expertise must be assigned the responsibility of periodically reviewing insurance certificates, contractual agreements, leases and purchase orders. The legal team must provide procedural guidelines for this activity. The review of contracts is particularly crucial before the start of any project and must be prioritized.

When vendors insist that Organizations Sign Contracts

Evaluation of Clauses

Enterprises must carefully evaluate the various clauses in a contract. Different vendors word legally binding agreements differently, even in the case of specific items such as indemnity provisions. For instance, clauses that necessitate provisions for indemnification can be included implicitly in the terms of sales invoices, rental contracts or purchase agreements. Involving legal teams at this stage is crucial.

Evaluating the extent of hold-harmless coverage that is soliciated

The legal department must ensure there are no unnecessary or accidental risk transfers and that the organization’s commercial objectives are not compromised. Enterprises should engage in discussions with their vendors where modifications and amendments to specific clauses can be negotiated.

Review Checklist

Legal teams can keep a list of factors that are detrimental to the organization’s business objectives that they can use as a reference while evaluating contracts.

In the case of hold harmless provisions and specific types of coverage that are compulsory, organizations must evaluate the job contracts section for information related to insurance plans that aren’t covered by their own policies.

Organizations must consult their legal team on the pros and cons of including vendors as an additional insured in their insurance policies.

Risk Transfer as a Protective Measure