Four Things to Know About Contractual Insurance
Managing contractual insurance requirements from your vendors and subcontractors is rarely straightforward, but it is an integral part of risk management.
Insurance requirements under any contract can be difficult to administer, because the more complicated the project or service, the more sophisticated vendors’ and subs’ insurance programs may be.
When evaluating deductibles, self-insured retentions (SIRs) or available insurance limits, your organization can take a variety of approaches.
How you approach insurance requirements should depend on at least these four considerations:
- How critical the services the vendor furnishes are to your organization’s mission.
- The size and scope of the contract, including 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.
- Your history with that vendor. A new vendor requires more scrutiny than one you have utilized for years.
Since the vendor or supplier has to pay premiums and will want to pay for less insurance rather than more, deductibles, limits and scope 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. For a small project, you may agree to lower that limit.
However, in one particular case that occurred in a Hawaiian hospital, a contractor cut the power to an oxygen line to premature babies. Hospital maintenance responded quickly; however, $1 million in coverage would never have settled this accident if the incident had not ended so well.
SIRs are the loss portion that the insured absorbs before insurance coverage pays. Accepting an SIR requires additional deliberation.
Deductibles are generally paid by the insurance company, which then recovers that amount from its insured. In the event of a loss with an SIR, in most case you will negotiate directly with your contractor to obtain the SIR amount.
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 both to damage payments and expense amounts paid to handle the claim, or only to the damage amounts.
This difference can be tricky, because SIR provisions vary. Reviewing policy provisions and endorsements before a loss occurs is the only sure way to determine how a claim will be handled. You will be more comfortable accepting an SIR in lieu of a deductible, knowing that the vendor’s insurance company would not write coverage with an SIR if the company’s operations, loss history or loss funding were unstable.
Like everything in life, insurance coverage is negotiable. If you have questions on the insurance requirements your company should request, we are here to assist.