Risk Transfer for Municipalities: Understanding How and Why
Municipalities often issue requests for proposals (RFPs) for jobs and services subsequently entering into contracts or agreements with outside contractors and vendors. Whether your contracts are for road maintenance, a new construction project, snow plowing, fireworks displays or maintenance of your buildings, reviewing the contract to ensure you’re properly protected can be a daunting task.
A few “what if” potential issues involving contract review and proper risk transfer include the following:
- The Contractor’s Aggregate Is Depleted
Your contractor had $1-2 million worth of general liability insurance, just as you stipulated in the bid specifications. Unfortunately, the contractor had several jobs underway and all of their projects were damaged by the unexpected storm. Now you’re sharing the loss with other parties. The contractor’s $1 million per occurrence is divided equally among the aggrieved parties, without a “per project” endorsement.
- Your Certificate of Insurance (COI) Isn’t “Endorsed”
The contractor’s policy may state that to be properly listed as an additional insured, your entity must be endorsed on the policy. Therefore, it’s critical to require the contractor/vendor to provide you with an original copy of the actual additional insured endorsement showing your entity as an additional insured.
- The Contract Provisions Limited the Contractor’s Obligations
It’s crucial that you require contractors/vendors to defend, indemnify and hold harmless your public entity for damages and expenses arising out of the ongoing work or service performed under the contract. Don’t accept contract provisions that limit the contractor’s/vendor’s defense and indemnification obligations to damage or loss that results from their “sole” or partial negligence.
You can avoid these potential problems by addressing your risk transfer exposure as you do many other risks. All risk transfers should funnel down to staff trained in handling these documents. In addition, your insurance broker should provide assistance in reviewing the various risk transfer mechanisms. A good risk transfer program should involve the following steps:
- Identify the Exposure – Assemble a list of your projects, contractual obligations, subcontractors, leases and mutual-aid agreements. These agencies should provide you with a COI naming you as an “additional insured.”
- Evaluate the Risk – Determine the amount of exposure you’re undertaking. Frequency and severity are the factors you need to consider in assessing your exposure to risk.
- Control the Risk – You can finance the risk by purchasing insurance to cover the exposure. You can attempt to avoid the risk, although this is often difficult to do because of the duty owed the public for a service as a public entity. You can control the risk through prevention and solid risk transfer.
- Implement Risk Control – By implementing effective risk controls, you can reduce losses. Your controls should be rigorously and consistently applied.
- Monitor the Program – Continuing to monitor your program’s effectiveness will improve your results.
Register for Assurance’s upcoming risk transfer webinar for tips on how to build and manage an effective risk transfer program.
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- Arm Yourself with 3 Tips for Best Practices in Risk Transfer
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