The State of Third-Party Insurance Verification – Research Report
October 18, 2021
For companies that have been targeted by a class action lawsuit, insurance coverage can provide a critical lifeline, as even the most frivolous and unfounded class action claims can be costly to defend and resolve.
Much like an unwanted health scare, the key to successfully defending against a class action lawsuit is early detection. Most insurers require notice within a certain number of days of the discovery of a loss so they can start the process of building a defense early, which makes it even more important for a business to know the appropriate third-party insurances to contact about the loss and potentially ask them to take the lead on it if they’re at fault. All of this has to be done as quickly as possible so the business can provide immediate and ample notice to any impacted third parties before reporting periods come into play.
Most insurance policies provide class action defense costs, whether included within the limits or outside, but preparing for litigation can get tedious and complicated for retailers like supermarkets and convenience stores that face frequent class action suits resulting from product recalls due to gross negligence, exposure to contamination, or association with long-term health issues.
Ultimately, third-party insurance coverage can mean the difference between bankruptcy and survival for businesses faced with bet-the-company litigation – which refers to any legal action that threatens a company’s existence or major line of business, whether or not the case goes to trial. If a business isn’t properly verifying their suppliers’ insurance coverage, and their supplier’s product or service results in damages, they are ill-prepared to defend themselves.
Businesses that aren’t verifying and continuously monitoring their suppliers’ insurance run the risk of leaving third-party resources (e.g. the insurance money), additional counsel and/or legal resources of the third-party’s insurer, and the “guaranteed cooperation” of the third party responsible for the loss on the table, all of which are theoretically designed to put the third party front and center to take the first hit of the class action suit.
Companies that believe their vendors are contractually liable for any losses, regardless of whether they have the appropriate insurance, are setting themselves up for failure. If a third party isn’t able to pay their insurance bill, they won’t be in a position to settle a multi-million dollar class action suit, and the business will end up spending more time, money, and resources litigating to recoup losses, which could drive the business into bankruptcy where they’ll recoup far less than they would if they’d simply spent the money upfront to verify that their vendors carried proper coverage. When a business can verify a vendor’s coverage, they can ensure that some portion – not all in most cases – of the loss will be covered by the third party, especially the immense legal defense costs which are often the biggest part of the class action.
As the number of class action suits continues to increase, the risk becomes more diverse, as do the types of coverage required to do business. And when a supermarket or convenience store requires its product suppliers to carry a wide range of coverage types (e.g. automotive, product liability, workers’ compensation, general liability, etc.), it’s more likely that the business will have to make exceptions to maintain relationships with their preferred suppliers. Unfortunately, all this does is make them 100% compliant on paper, and may not actually help in the event of a class action suit.
The bottom line is that simply having coverage is not always enough. Businesses need to consistently verify their suppliers’ proof of insurance so the business can pass liability to them and isn’t held solely responsible for damages in the event that the third party is responsible for the loss. This is especially important for retailers that sell a wide range of products in their stores, but it can be frustrating if they lack processes to verify hundreds of coverage types that are specific to dozens of supplier categories.
Evident’s platform solves this problem by giving retailers unprecedented versatility and precision in creating their insurance requirements to accommodate a wider range of third-party partners. The platform also provides evaluation capabilities to test potential new requirements and criteria rules before implementation, and automation tools to improve communication with third-party insureds and streamline exceptions and overrides to better guide them toward compliance.