Magazine article Risk Management

Assessing Outsourced Risk

Magazine article Risk Management

Assessing Outsourced Risk

Article excerpt

Even at a time when outsourcing is widespread, the risks inherent in contractor/vendor relationships are often overlooked. To avoid the unfortunate consequences of improperly managed contractor and vendor relationships, it is important to look at certain key areas to assess the risks.

One of the most significant problem areas for today's risk managers involves insurance coverage. Many organizations may place an undue amount of faith in indemnification clauses to protect themselves from vendor liability. Although these clauses can be helpful in offsetting or recovering direct financial losses, they cannot protect against reputational damage or loss of consumer, partner or vendor confidence.

Insurance carriers have transferred the risk for "additional insured" clauses by referencing contractual language. In the absence of such language, coverage will not be granted, however, and if no one is reviewing this language, this can expose the insured to a large risk.

For example, if "additional insured for completed operations" coverage is required, the contract must specify that it is for a stated period of time from the date of the completed service or the extent afforded by law, whichever is greater. Unfortunately, many contracts have not been updated to reflect the current liability language required by carriers. Even if the certificate of insurance grants this additional insured coverage, the carrier can reject the claim as not being covered in the contract, particularly if there is no stated term of the completed operations coverage.

Another area of concern is the verification of contractor insurance and licenses. Active management of licenses and insurance documentation is absolutely necessary. Risk managers and others responsible for these documents must work closely and frequently with vendors and contractors, as well as their insurance agents, to verify and track their status. …

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