Subcontractor RiskMore Like This

Four Steps to Transferring Third-Party Risk

risk management strategies - ignore, accept, avoid, reduce, transfer and exploit - sketch on a cocktail napkin, with a cup of coffee

Most construction companies don’t effectively transfer risk to the right parties and are not protecting themselves or other required parties according to the contract.

Construction companies must be aware of potential exposures when working with third-party entities, such as subcontractors and suppliers; otherwise, the organization can be on the hook for a loss. An integral part of understanding and evaluating these exposures is developing insurance requirements for the third parties involved and tracking their certificates of insurance.

A certificate of insurance is a document issued on behalf of an insurance company to a third party as evidence of the existence and amount of insurance carried by an organization. In addition to the coverage type and limits, a certificate of insurance often will include pertinent policy language such as additional insured and alternate employer relationships, waivers of subrogation, policy exclusions, etc.

When contract requirements are set, companies should develop a system to gather certificates of insurance, review them for compliance and monitor on a regular basis. Following are a few key steps to help in that process.

  • Notify all third parties of the insurance requirements. If the existing contract does not include the requirements, update the paperwork and send out notification to all parties of the change and what is required of them (i.e., signing a new contract and submitting a certificate of insurance).
  • Once the certificates of insurance are received, evaluate them against the contract to make sure each are in compliance. This step also includes collecting and reviewing additional insured, alternate employer and waiver of subrogation endorsements (where required).
  • Once the status is determined, establish a protocol for notifying the parties of any non-compliance issues. This can be done via email, letter or fax. Include a cover page outlining specifically where the certificate is deficient to help the third party easily understand what they need to do. Diligently follow up on all non-compliant items until the third party is brought into compliance.
  • Request renewal certificates. It is important to get these prior to policy expiration for the length of time specified in the contract.

The purpose of a certificate tracking process is to ensure businesses are aware of the third-party entities they are doing business with and any potential liability with that entity, such as a lack of coverage. A tracking program or process allows a business to obtain, analyze and monitor its third-party certificates of insurance. It can act as a “checks and balances” system to ensure the business is receiving a current certificate and signed contract from each entity it requires.

Once a tracking program is in place, certificates of insurance should be monitored for expiration to ensure a renewal certificate is being provided in a timely manner. In addition, the results of the program can be used to determine the compliance rate, identify potential liability exposure with high-risk entities and determine how to approach issues with common discrepancies.

If risk transfer methods are not incorporated into a construction business’ day-to-day activities, the exposure could negatively impact its financial strength, as well as the company’s own insurance program and costs. Become proactive in minimizing liability exposures by creating a process to effectively transfer risk.

Leave a Reply

Your email address will not be published. Required fields are marked *