Ask an Insurance Expert: Contractual Risk

September 5, 2023

As a risk manager, understanding the ins and outs of contractual risks is critical. From determining appropriate coverage to negotiating contracts with subcontractors, it can be overwhelming to try and make sure you’re taking all possible measures to protect your business from financial losses.

To ensure you have a full understanding of contractual risks, we’ve brought in an expert in insurance to answer your burning questions about them.

Read on for important information that’ll help you identify—and mitigate—the potential dangers posed by these risk agreements.

Enhancing Loss Ratios: The Impact of Claims on Your Insurance

When applying for liability insurance, it’s crucial to understand how claims can affect your loss ratio. Insurers not only assess the level of risk you face but also consider your loss history when making underwriting decisions.

Loss history refers to any past instances where your hired personnel have caused problems or incurred losses for which their insurance can cover. By containing these losses within the third-party insurance program, you can significantly reduce the losses that are reported under your own policy. This has a direct and positive impact on your loss ratio and overall loss history.

Furthermore, actively verifying coverages for your third-party contractors and vendors can further improve your standing with insurance carriers. By documenting the compliance percentages of these entities, you can showcase your commitment to risk management and gain a competitive edge.

These factors are particularly important in higher-risk industries like construction. Segregating and containing losses with third-party insurance companies helps prevent them from impacting your own insurance coverage.

Understanding the relationship between claims and loss ratios is essential for any organization seeking to optimize its insurance standing. By effectively managing claims and leveraging third-party coverage, you can enhance your loss ratio, mitigate risk, and strengthen your overall insurance history.

Understanding the Implications of Third-Party Claims on Your Insurance Coverage

It is crucial to be aware of the potential consequences of third-party claims. If an incident occurs on your property, regardless of whether it was caused by someone else, you may still be held liable.

Believe us when we say that lawsuits are a very real possibility in such cases.

Liability insurance is where things come into play. It’s often not about what someone does, but rather what they fail to do. This is especially relevant in the retail and franchise sectors, where risks like trips and falls are commonly discussed.

When such incidents take place, the effects spill over into the insurance coverage of the franchisor and their master insurance plan.

The question then arises – how comprehensive and substantial are the limits that the franchisor requires from their franchisees or tenants? These limits play a significant role in protecting the business owners and the retailers associated with their landlord holding.

To provide an example, consider the emerging concept of “ghost kitchens” or shadow kitchens. These are virtual food service providers that operate without a physical location for customers to visit. Instead, food is prepared in various kitchen facilities and then delivered to customers.

While this may seem convenient, it significantly expands potential liabilities. Not only are there product liabilities for the food being sold, but there are also liabilities associated with the transportation and delivery process.

For such businesses, the concern extends beyond their premises. What happens in connection with their premises and their operations becomes a critical factor.

When incidents occur at these locations, the question is not simply about what was done. More often than not, the focus is on what could have been done to prevent the loss.

This concept of passive liability is just as important as active liability. In the eyes of the court, liability is a liability, regardless of its nature.

To mitigate the risks associated with liability claims, it is essential to have a robust risk transfer process in place.

Evident excels at ensuring compliance with insurance requirements, flagging any prohibited or suspicious endorsements that could render the policy ineffective. We go beyond merely verifying the requirements themselves; we also review and remove any endorsements that may limit coverage.

Don’t be caught off guard by ineffective coverage in the event of a third-party claim. Our system safeguards your interests by identifying potential gaps and ensuring that the burden of the claim doesn’t fall solely on you. Instead, we strive to shift the responsibility as per the required coverage limits, be it one million, two million, or five million, or more.


Why Should You Prioritize Third-Party Verifications?

In the realm of risk transfer and risk management, there’s a proven procedure to follow. It starts with avoidance, but if you can’t avoid risk, the next step is to manage it in order to prevent losses. If prevention is not feasible, the goal becomes reducing the severity of losses. When all else fails, segregating losses is key, especially for property coverages. However, if these traditional risk management strategies are ineffective, the final step is to transfer the risk to someone else through contractual agreements.

So, why should you verify?

The answer lies in my decades of experience in this industry. Most contractors simply sign contracts without fully understanding the terms and requirements, including their insurance obligations.

Consequently, they may lack adequate coverage, putting everyone at risk. Verifying their insurance ensures that their policies will indeed provide the necessary protection when claims arise.

By verifying coverage, you are able to prevent a common issue where policies seem sufficient at first glance but fail to deliver when the need arises.

This verification step is crucial in the risk transfer process, as it ensures that the risk is truly transferred to another party. It’s not enough to rely solely on contractual agreements; we must confirm that the necessary coverage exists.

Through this process, you’ll invest a small amount of money to secure valuable coverage from third-party insurance companies. It’s a crucial safeguard that prevents claims from falling back on us when the unexpected occurs.

So, prioritize third-party verifications to protect yourself and ensure that the coverage you rely on is truly reliable.

How will risk transfer impact our relationships with stakeholders and partners?

Risk transfer has a significant impact on our relationships with various parties. By transferring risk to others, the firm can mitigate potential losses and enhance its overall value. This benefits all stakeholders involved.

Additionally, risk transfer reduces costs for the company by allowing us to document and verify coverage with our own insurance providers. This not only prevents losses but also saves money on insurance costs.

It’s important to note that issues with third-party insurance can arise even with standard endorsements.

For example, certain contractual requirements must be met to ensure coverage, and being named as an additional insured may not guarantee protection if the contract is not with you directly. Many people are unaware of these limitations and their implications.

Furthermore, recent changes in additional insured endorsements require specific requirements in contracts to access full coverage. Without these requirements, coverage may be limited to the minimum required amount, even if the responsible party has higher coverage limits.

Our language requirements address this by allowing us to access the full amount of coverage, including any additional insured endorsements held by the responsible party. This ensures maximum protection for our company, stakeholders, and bottom line, effectively transferring risk and protecting our interests.

By thoroughly verifying insurance certificates and ensuring the activation of coverage, all stakeholders involved benefit. This includes your company employees and your bottom line.

It’s important to understand the limitations of standard endorsements and ensure that our contracts address these issues, preventing potential issues with coverage and payment.

Discover the Consequences of Failing to Verify Insurance Coverage: Real-life Examples

Now we are going to explore two compelling stories:

  1. Highlights the importance of verifying insurance coverage
  2. Demonstrates the negative consequences of neglecting insurance verification

In the first case, a staggering $200 million dispute arose due to imprecise and incorrect language regarding coverage. This monumental issue involves deaths, as the primary insurance refuses to pay and all other excess layers are held back until the primary claim is settled. With the option to use our trusted verification system, this complicated situation could have been avoided altogether.

On the other hand, a recent success story showcases the benefits of thorough insurance verification. A joint power authority, consisting of multiple cities, embraces our recommended approach to transferring risk through proper indemnification and the correct additional insured endorsement. As a result, they avoid an $11 million claim and celebrate their successful decision.

By incorporating our wealth of experience into the innovative Evident system, we’ve anticipated potential legal loopholes and preemptively addressed them in the contract. This proactive approach ensures that claims cannot be easily denied, even before they reach the courtroom.

Don’t find yourself in a costly legal battle or left holding the bag. Embrace the importance of insurance verification and experience the peace of mind that it brings.

How Implementing a COI Tracking and Monitoring Solution Can Save You Money on Premiums and Claims

By automating the COI tracking and monitoring process, you can significantly reduce costs and streamline operations. There are several key reasons why this automated system is more efficient than manual in-house methods.

    1. Manual processes often result in wasted time and confusion. Evident, stores all the necessary documentation in one place, easily accessible with just a few clicks. This efficiency eliminates back-and-forth communication, ensuring precision and promptness.
    2. A majority of third-party insurance policies are never verified, posing a significant risk. Approximately 3/4ths of these policies lack verification, leaving individuals vulnerable to limited or even nonexistent coverage. Our automated system solves this problem by providing thorough verification, protecting policyholders from unexpected gaps in coverage.
    3. The verification process not only safeguards against future claim denials but also leads to insurance credits. When individuals can demonstrate their compliance and verification through our system, they can negotiate lower premiums with their own insurance providers. In many cases, clients have received credits ranging from 10% to as high as 25%.

Contrary to the belief that this verification process is futile without a future claim, the benefits extend beyond coverage from third parties. By reducing risk and demonstrating proactive risk management, businesses can also enjoy reduced premiums on their own insurance policies. Insurance carriers recognize the value of a well-documented and verified risk profile, resulting in credits that can save businesses up to 15% annually.

With our simplified and automated system, businesses can achieve significant time and cost savings. Unlike manual methods that require extensive manpower, our system automates the entire process, resulting in a significant reduction in labor costs and a streamlined workflow. The efficiency is unparalleled, making it well worth the investment for businesses.

Moreover, the benefits extend to claim management. The prompt verification and clear activation of coverage language expedite claim processing, minimizing the potential for larger liability losses. Studies show that the longer it takes to settle a claim, the larger the claim becomes. By utilizing our system, both the insurer and policyholder can expedite the claims process and keep losses under control.

In summary, implementing our COI tracking and monitoring solution offers numerous advantages, including cost savings, streamlined operations, improved coverage verification, and reduced claim sizes. It is a valuable tool for any business, even if they have not utilized such a system in the past. Contact us today to find out more.

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