Risk Transfer for Manufacturers
Purchasing insurance for various lines of coverage is the most common method of transferring risk (from the business owner to the insurance carrier). However, obtaining a certificate of insurance from subcontractors, vendors and suppliers is another method of transferring risk. And yet, if this isn’t done correctly it can provide little to no actual transfer of risk.
It’s common for businesses to request certificates of insurance from subcontractors, vendors and suppliers. Many companies do this without putting much thought as to how this may protect them, or if it actually will. Properly managed, risk transfer via certificates of insurance and written contracts can substantially reduce risk to your business by providing insurance coverages you aren’t paying premiums for.
For this method of risk transfer to be effective, a written contract between the parties is always required. Due to language in liability insurance policies, coverage for additional insured parties isn’t guaranteed unless required by written contract. Because of this, obtaining a certificate of insurance from a vendor where you don’t have a written contract requiring this, the additional insured coverage the certificate is indicating will not apply to your business in the event of a claim.
The written contract pertaining to insurance/indemnification would provide specific details related to types of coverage, limits of coverage, indemnification language, details on notice of cancellation of provisions and other insurance-related requirements. Your insurance broker should be able to provide you with the insurance requirements most appropriate for your business.
Certificates of Insurance
If your business is listed as “certificate holder,” this only indicates the certificate was mailed to you. This provides only proof that insurance is in place (as of the day the certificate was issued).It doesn’t provide any coverage for the certificate holder, thus there's no transfer of risk.
You'll always want to be listed as “additional insured” on the certificate. Again, this only provides valid risk transfer if this is required by written contract. It’s also important that all named entities of your business are listed as additional insureds too, similar to named entities listed on your own insurance policies.
A few specific endorsements or coverages that should be considered:
- Alternate Employer Endorsement – has application for those companies utilizing temporary staffing companies. This endorsement indicates a proper acknowledgement of who’s the employer and where the workers’ compensation claims would reside.
- Waiver of Subrogation (Workers’ Compensation) – has application for vendors or subcontractors performing work on your premises. This endorsement will prevent the vendor’s workers’ compensation carrier from seeking reimbursement from your business in the event their employee is injured while working at your premises.
- Pollution – recyclers and manufacturers hiring trucking companies to haul materials that would be considered “hazardous” are well advised to require pollution coverage by those vendors.
- Product recall – has application where a recall based on your supplier could require you to make a recall on utilizing their component parts or materials.
Proper risk transfer via a contract and certificates of insurance is one area of managing risk that's sometimes overlooked by business owners. The result can be uncovered losses, damaged vendor relationships and loss of profits. There are more details to consider that your insurance broker can outline based upon your specific risk transfer needs. Investing time into reviewing your own risk transfer program is well spent and will provide greater protection and less risk for your business.
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