Insist your suppliers and service providers are insured

If your business contracts for goods or services, you have risks. It’s good risk management to ensure your contracts include clauses requiring your suppliers and service providers carry insurance that will extend protection to you in the case their actions, or lack thereof, cause you a loss.

Businesses can be at risk of costs and claims arising from errors by external auditors, accountants, engineers, architects and other professionals. Manufacturers risk business losses if suppliers fail to provide the required components or materials on time in the needed quantities. They can also risk product liability claims resulting from sub-standard components or materials. Any supplier or service provider can cause you injury or property loss while performing services for you or on your behalf. They can also cause injury or property damage to third parties – customers, neighbours, passers-by – leaving you exposed to liability claims and legal bills.

You can protect yourself with little effort and without additional cost, by ensuring your contracts contain two important sections:

1. Indemnification and make-whole requirements. An indemnification clause ensures a contractor pays for any loss or damages awarded against you resulting from their errors, acts or omissions; it ensures you don’t pay for their mistakes. A “make-whole” provision ensures all expenses associated with defending a claim, even if the lawsuit is unsuccessful, are paid for by the contractor; and

2. Insurance requirements. Contractually obligating your contractors and suppliers to carry their own insurance ensures the contractor has the means to pay for damages to you. Without insurance, the indemnity and make-whole agreements are dependent on the contractor’s ability to free up enough capital. If they don’t have coverage and can’t pay the costs of an injured third party, courts could still order damages against you. Making sure your contractors have appropriate insurance helps ensure you don’t pay, just because the court feels you have deeper pockets.

Start by developing a risk/insurance decision matrix for your business. It’s easy:
1) Canvas your business divisions to determine the types of goods or services they routinely contract for.
2) Develop a list of these goods and services.
3) With the assistance of a risk management consultant, analyze the exposures inherent in the activities a contractor would normally perform to deliver the goods or services. What losses might you experience if the contractor or supplier fails to properly do what you hired them for, or what injury or property damage might they cause you or someone else?
4) Determine standard indemnification language that protects you and your business and include it in your contracts, along with the types and limits of insurance that would be appropriate; and
5) Develop a matrix which identifies each good or service on your list, and the recommended insurances and limits.

Each time you negotiate a contract you should consider the risk exposures inherent in that contract and check the matrix. Talk to your risk management consultant about whether you need to include a requirement for your suppliers and service providers to carry any or all of the following:

• Commercial General Liability (CGL) Insurance
• Professional Liability (PL), also called Errors and Omissions E&O) Insurance
• Business Interruption (BI) insurance

Want to know more? I’d love to hear from you. If you have questions, comments or want to geek out about risk management, contact me, Chris Maclean, at:
[email protected]

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