Contracting parties typically allocate responsibility for various types of losses among them and require specific types and amounts of insurance coverage to support those obligations.
However, because these contracts are often drafted by people with only a general understanding of insurance, requirements often include demands that are unavailable, unnecessary and, in some cases, unenforceable.
You’ve probably been on the receiving end of these difficult insurance requirements and spent considerable time dealing with the resulting issues. But are your own clients part of the problem?
Provide a valuable service to your clients by reviewing their standard contracts and offering suggestions for modifying requirements that are likely to cause compliance issues. Here are a few steps to accomplish that, based on the free IRMI report “Effective Contractual Risk Transfer in Construction”:
1) Ensure requirements are reasonable. If insurance requirements are not in sync with market conditions, the time and effort spent achieving compliance or granting exceptions may be disproportionate to the protection gained.
For example, requiring a contractor to have certain standard exclusions removed from their liability policy is futile if insurers will not comply. Similarly, requiring $20 million in liability insurance from a $1-million subcontractor will produce virtually no qualified applicants for the job.
Staying within acceptable market norms will enable the client to achieve a reasonable level of protection with less disruption in the contracting process.
2) Update requirements. Insurance requirements are sometimes copied from one contract to the next without any attention to changes in insurance policy language or market conditions.
Consider that contracts requiring a “comprehensive general liability insurance policy” still exist, even though that policy was withdrawn in the mid-1980s. Requests for contractual liability, broad form property damage or cross-liability endorsements also still appear, even though these items are now part of the standard CGL policy.
These types of requests cause confusion and unnecessary delays in demonstrating compliance.
3) Verify compliance. For many years, certificates of insurance were routinely modified to say that the certificate holder would receive notice of cancellation of the listed policies. This is an unreliable strategy, and some states have statutes or rules that prohibit putting anything on a COI that does not match what the underlying policies actually provide.
A more effective approach is to require the policies to be endorsed to guarantee notice of cancellation to the certificate holder to the extent that it is commercially available, and to require the other contracting party to provide such notice within a specified number of days of becoming aware of cancellation or nonrenewal as a backup.
Ask your clients for copies of their standard contracts and review the insurance requirements. If your client’s insurance program wouldn’t meet the requirements, make suggestions for repairing the issues without significantly reducing coverage. Not only will your clients appreciate the value-added service, but you’ll also be helping solve a big issue for the industry.
For more tips like these, download the free report “Effective Contractual Risk Transfer in Construction” from IRMI.