Transferring Vendor Risk - A 10 Question Survey

It is very common for businesses to hire vendors to perform routine work, and provide products and services. In doing so, organizations have an expectation that if the vendor causes injury to a third party, the vendor’s insurance coverage will be triggered, and defend and indemnify them. This protects those businesses which rely on vendors, by ensuring that liability stays with the party responsible for the loss.

Consider this scenario: Your company hires an electrician to perform maintenance work on a light fixture at one of your facilities. The electrician’s employee does not properly perform his work, and two weeks later the light fixture falls and hits someone on the head, causing injury.

After learning of the incident, you report the claim to your insurance provider. In turn, your insurance agent asks you for a copy of the electrician’s insurance certificate, as well as any contract you have in-place with the electrician. You quickly discover the only insurance certificate you collected from the electrician is now expired, and you are unsure as to whether you ever had a formal contract in place with them.

As a result, instead of the electrician’s insurance policy paying for the claim, you are stuck with the bill. You must look to your own insurance policy for defense and indemnification, and it is your insurance that takes the hit, not the electrician’s. The following questions will evaluate whether or not you have an effective risk transfer strategy in place for dealing with the above scenario, or one like it. Improving your own vendor risk transfer strategy will help reduce the likelihood and impact of vendor-related claims when they arise, and help ensure that your organization is properly addressing vendor risk.

1. Do you Have a Written Contract with all Vendors, or alternatively track all Purchase Orders?

Requiring and maintaining written contracts with all vendors is a preferred option in an overall vendor risk management strategy. Alternatively, if you use purchase and work orders with your vendors, the same basic principles apply. Most commercial general liability additional insured endorsements require a written contract between the insured and an additional insured before the insurer will consider extending coverage to the additional insured party. It is very likely that the contract will need to explicitly state that the vendor must include the hiring party as an additional insured on the vendor’s commercial general liability policy. Maintaining a written contract with all vendors is preferable here, to ensure your company can be properly named as additional insured.

2. Do Your Vendor Contracts Include Indemnity/Hold Harmless Language?

Indemnification is a key provision in a contract which requires one party to assume the financial responsibility of the other party. Typically, the hiring organization will impose a ‘hold harmless’ responsibility on the vendor. For example, vendor contracts typically require the vendor to indemnify the organization with respect to the organization’s liability to members of the public who are injured, or whose property is damaged during the course of the vendor’s operations.

3. Do Your Vendors Carry Appropriate Insurance?

An indemnity clause is only valuable so long as the vendor responsible for the accident on your premises is financially solvent. Requiring the vendor to also maintain insurance coverage is recommended, because it allows your organization to rely on the insurance company to pay for a claim, not the vendor directly, should a claim arise. Your vendors should always be properly insured before performing any work for you.

4. Are Your Contracts Executed by Both Parties Prior to the Start of Work?

Countless claims are denied each year because a contract between two parties is invalid. A common reason is because both parties had not signed a final agreement memorializing their contract, and due to the nature of the contract at stake, either no formation occurred, or alternatively the final terms differ from how one party intended.

5. Have You Collected and Reviewed the Vendor’s Certificates of Insurance?

Review of the vendor’s insurance certificates should be based on the insurance requirements within each individual vendor contract. This may or may not contain differing terms from the standard vendor contract template your organization typically uses. It is surprisingly common for companies to routinely make one-off changes to contracts or service agreements when contracting with new vendors. Unless these are properly documented and readily available, you may be mistaken about the actual responsibilities individual vendors have regarding their obligations to purchase and maintain insurance.

6. Have You Collected and Reviewed the Vendor’s Key Insurance Policy Endorsements?

If your contract with the vendor requires them to carry and maintain certain policy endorsements and coverage, it is important that you collect and inspect those policy endorsements, rather than simply assume the vendor actually maintains that level of coverage. Insurance agents and brokers routinely attempt to substitute one
policy endorsement for another, often times inserting endorsements that materially differ from the endorsements you specifically require. You must inspect each key endorsement to determine if it in fact is materially similar to what you require.

7. Are you Following-up on Updated Certificates when Policies Expire?

Insurance certificates can contain numerous policies, all of which could potentially expire at various points throughout the year. To ensure the vendor has not lapsed on any particular policy, you need to collect a renewal certificate every time a single policy expires.

8. Do you Have a Developed System for Following-up with Vendors?

The amount of certificates you collect from vendors can quickly pile-up. This ever growing stack of paperwork can become overwhelming. The solution is to implement an efficient system to manage the certificates of insurance, become alerted to policy expirations or cancellations, and have the ability to communicate directly with vendors and their
agents when the time comes to collect renewals.

9. How do you handle Non-Compliance and Exceptions with your Vendor’s Insurance?

When you work with tens, hundreds, or even thousands of vendors, one-off situations are bound to arise. An advantage of having a well organized vendor risk management program is the ability to execute and manage one-off vendor situations. If a vendor’s contract requires them to carry a particular coverage, yet
you determine that for the work they are engaged they don’t actually need that coverage, you should have a system in place to record the exception. Next, make sure the required parties have signed-off on the exception, and the entire process is properly documented.

10. Do Your Contractors use Contractors?

If your contractors use subcontractors, many of the above steps and procedures apply to them, as well. This additional step can really put your vendor risk management strategy on track.