Managing contractual insurance requirements for your vendors and subcontractors is never simple, but it is an integral part of the risk management function. Insurance requirements under any contract can hard to administer, because the more complicated the project or service, the more unique vendors’ and subs’ insurance programs may be.
When evaluating the deductibles, self-insured retentions (SIRs) or limits of insurance available, there are a variety of approaches an organization can take. Most organizations have guidelines but no concrete rules, but take a case-by-case approach to managing insurance requirements. How you should approach insurance requires should depend on:
- How critical the services the vendor furnishes are to your organization’s mission.
- The size and scope of the contract, including the amount of the exposure (what can go wrong that can cost you money or goodwill) your organization faces from the proposed project or service.
- The financial stability of the vendor or supplier and the financial rating of its insurance carrier.
Since the vendor or supplier has to pay for his or her coverage and will want to pay for less insurance rather than more, deductibles, limits and extent of coverage are all bargaining chips to the vendor. For example, a small contractor who performs routine maintenance at your facility may balk at furnishing $1 million in general liability coverage and you may decide to negotiate that limit. However, in one case that occurred in a Hawaiian hospital, a contractor cut the power to an oxygen line to the premature babies. All was well due to a quick response by hospital maintenance; however, $1 million in coverage would not have touched this exposure if the ending were not so rosy.
SIRs may pose additional problems over deductibles. Deductibles are generally paid by the insurance company who then recovers the amount from its insured. SIRs are the portion of the loss the insured absorbs before insurance coverage pays. With an SIR in the event of a loss, you will be negotiating directly with your contractor to obtain the SIR amount, in most cases. The larger the company, the more likely they are to have an SIR as opposed to a deductible. SIRs usually pertain to liability policies and may apply to damage payments and amounts paid for expenses to handle the claim, or only to the damage amounts. This difference can be tricky and SIR provisions vary. Reviewing the policy provisions and endorsements is the only sure-fire way to determine how a loss will be handled. You always want to do that before a loss occurs, of course.
Determining an acceptable SIR becomes easier if you understand that the vendor’s insurance company would not write coverage with an SIR if the company’s operations, loss history or loss funding was unstable.
Since I have only skimmed the surface of a highly complex topic, I am going to plug International Risk Management Institute (IRMI). This IRMI article on managing certificates, although it applies mainly to construction defect coverage, is one of thousands of excellent risk management resources available from this great organization. The article has a great primer on the difference between SIRs and deductibles.