Contractual Risk Management
Because the use of outside service providers through outsourcing or subcontracting is usually driven by expectations of potential cost savings without considering the “risk exchange” taking place, it becomes a major source of contractual liability risk, default risk, and breach of contract risk.
Contractual liability exposures are very difficult to identify and mitigate. This is because they arise from activities performed by multiple parties relying on multiple contract arrangements. Just by looking at the vendor’s certificate of insurance, we will find at least four parties:
Parties Shown in a Typical Certificate of Insurance
- PRODUCER – Vendor’s Insurance Agent
- INSURED – Vendor
- INSURER AFFORDING COVERAGE – Vendor’s Insurance Carriers
- CERTIFICATE HOLDER – Your Company
The parties above will perform their contractual obligations based on documents that you may not get to see before a claim arises.
Contract Arrangements in Typical Certificate of Insurance
- SERVICE AGREEMENT – Contract between you and your vendor
- VENDOR’S INSURANCE POLICY – Contract between your vendor and it’s insurance carrier
- COMPANY’S INSURANCE POLICY – Contract between you and your insurance carrier
- AGENCY SERVICE AGREEMENT – Contract between vendor and its insurance agent
Regardless of the parties involved, the ultimate goal is to ensure that company assets are always protected against contractual liability exposures. INSIGHT will add additional layers of protection to your current insurance program.
Let INSIGHT handle your risk
To deliver our contractual liability risk management services, INSIGHT uses Contractual RM©. Our clients have 24/7 access to a customizable contract generation system with built-in certificate of insurance tracking capabilities and legal safeguards.
Why do companies outsource?
- To cut cost and transfer risk.
- Required by law (e.g. insurance vs. self-insurance)
- Don’t have the resources.
- Temporary assignment (e.g. project, seasonal work, etc.)
- To keep a sustainable growth without adding extra capital
- Don’t want to manage it.
What is Outsourcing?
Outsourcing is the process by which a company transfers an activity (or a group of activities) to another company. Because all business activities have a component of cost and risk built in, the ultimate outsourcer’s goal is to reduce overall cost and risk -at the same time.
In today’s world of globalization and specialization, outsourcing is critical for every organization to stay in business. The key to successful outsourcing lies in knowing that even though the outsourced activities do not need to be managed, the risks attached to them do.
INSIGHT’s responsibility is to help its clients identify the new risk the company is acquiring when outsourcing and recommend ways to reduce it to acceptable levels.
INSIGHT approach to outsourcing
INSIGHT’s ultimate goal is to have the vendor signing our client’s contract and complying with its insurance requirements before a purchase order is issued. If the outsourcing activity requires that our client signs the vendor’s contract (utilities companies, government, etc.), the On-Site Risk manager (ORM) will review the contract and produce a “Risk Alert” with its recommendations. If needed, the ORM will contact the client’s legal counsel.