Assessing Outsourced Risk
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. It is not uncommon for risk managers to learn after a reported loss that they are not holding a current certificate of insurance and, even worse, are not listed as a certificate holder or additional insured. In many cases, they may also discover that the contractor no longer maintains active liability coverage.
Verification, however, is only as effective as the systems used to store, track and manage contractor and vendor compliance documents, so organizations must consider these elements as they develop their risk management checklists.
Other risk comes from the vendors themselves. Many risk managers are now recognizing that contractors and vendors pose some of the greatest risks because they operate outside the organization. They are hired to do a particular job for a certain period of time, so they are not vested stakeholders.
Although safe hiring programs have become more common in larger organizations, they typically only cover employees, not contracted workers. It seems logical, then, to expand the scope of safe hiring programs to broader “safe contracting programs” through which the provisions of employee safe hiring programs are extended to contracted workers as well. Elements of such a program can include criminal background and driving record screens, and drug tests, which should be performed at the time of contract, for cause and on a random basis.
A comprehensive safe contracting program benefits the organization by reducing corporate liability and financial risk, preserving the company’s reputation, improving customer/employee safety and ensuring more professional services from contracting companies.