Addressing Third Party Insurance Risk

This blog was inspired by the meeting facilitated by Julie Gaiaschi, CEO & Co-Founder of TPRA, at TPRA’s November 2024 Practitioner Member Roundtable. (To watch the full presentation, TPRA Members can visit our On-Demand Webinars page and navigate to the November 2024 meeting recording.) 

With insurance risk, it is crucial to evaluate whether coverage exists and if it can protect against potential liabilities. Furthermore, understanding the types of coverage available and the appropriate limits ensures that your organization is protected against unforeseen events.  

How can you evaluate coverage types and limits to ensure they align with your risk tolerance and provide the necessary safeguards? 

In this blog, we will cover: 

• Addressing Insurance Risk  

  • What is Insurance  

  • Insurance Risk  

  • What To Evaluate  

  • Insurance Types & Limits 

What is Insurance 

The primary purpose of insurance is to mitigate the financial impact of unforeseen events or risks, providing individuals and businesses with a sense of security and stability. It is a transfer of financial risk when the likelihood of a risk occurring is low but the impact is high. If an organization is critical or high-risk, its insurance requirements should be specified in the contract.  

There should be a pre-contract evaluation of the insurance coverage and policies held by a third party to ensure they have adequate coverage to mitigate potential risks and liabilities. This assessment aims to confirm that the third party’s insurance meets your organization’s expectations, risk methodology, and risk appetite, while also ensuring adequate protection for both parties in case of unforeseen events. 

Insurance Risk 

There are many different types of insurance risk that can occur, including but not limited to: 

• Insufficient Insurance Coverage  

• Lapse in Insurance Coverage  

• Irrelevant Coverage  

• Lack of Umbrella or Excess Liability  

• Out of Compliance w/ Contractual Requirements  

• Changes to Policy Terms and/or Limits  

• Failure to Address Emerging Risks

What To Evaluate 

Evaluating a third party's insurance involves examining several factors to ensure their policies meet your organization's requirements and mitigate potential risks effectively. Below, you can read about the key aspects to consider during this evaluation. 

Coverage Types

Evaluate the types of insurance coverage the third party holds, such as general liability insurance, professional liability insurance, cyber liability insurance, product liability insurance, workers' compensation insurance, and more.  

Certificate of Insurance (COI)

Obtain and review the third party's Certificate of Insurance to verify the details of their coverage, including policy numbers, effective dates, coverage types, and limits.  

Coverage Limits

Assess the coverage limits of the insurance policies to ensure they are sufficient to cover potential losses or liabilities that could arise from the third party's actions. 

Scope of Coverage

Review the policy language to understand the scope of coverage, exclusions, and limitations of the insurance policies.  

Effective Dates

Determine the renewal and cancellation terms of the third party's insurance policies to ensure continuous coverage during the contract period. 

Additional Insured

Determine if your organization is named as an additionally insured party on the third party's insurance policies. This provides your organization with coverage under their policies for specified liabilities.  

Subcontractor Coverage

Assess whether the third party's insurance extends to cover subcontractors or vendors that they may engage for services related to your business relationship.  

Coverage Gaps

Identify any gaps in coverage that could leave either party exposed to risks that are not adequately addressed by the third party's insurance.

Deductibles and Self-Insured Retentions

Review the deductibles or self-insured retentions associated with the insurance policies and assess whether they are reasonable. 

Claims History

 Inquire about the third party's claims history and any significant claims or incidents that may have occurred in the past. 

Notification & Reporting

Understand the third party's procedures for notifying the insurance carrier and relevant parties in the event of a claim. 

Insurance Types & Limits 

Below is a list of general guidelines for common insurance policies. Keep in mind that coverage needs can vary significantly, so always consult with insurance professionals and risk management experts to determine what’s appropriate for your specific situation. Disclaimer: The following is for informational purposes and does not represent insurance advice. 

General Liability Insurance:  

• Coverage Purpose: Protects against claims of bodily injury, property damage, and personal injury due to your business operations.  

• Recommended Coverage Limit: $1 million to $2 million per occurrence, with an aggregate limit (total limit for the policy period) of $2 million to $4 million.  

Professional Liability (Errors & Omissions):  

• Coverage Purpose: Provides coverage for claims arising from mistakes, negligence, or failures in professional services or advice. 

• Recommended Coverage Limit: $1 million to $2 million per occurrence, with an aggregate of $2 million to $4 million. 

Cyber Liability:

• Coverage Purpose: Protects against data breaches, cyberattacks, and related liabilities.  

• Recommended Coverage Limit: Varies depending on the size and nature of the organization, but coverage limits of $1 million to $10 million or more may be appropriate. 

Umbrella or Excess Liability Insurance:

• Coverage Purpose: Provides additional coverage beyond the limits of the primary liability policies.  

• Recommended Coverage Limit: Should provide enough additional coverage to handle catastrophic events. It's often recommended to have a limit that matches your total assets or potential liabilities.  

Workers Compensation:  

• Coverage Purpose: Provides medical and wage replacement benefits to employees injured on the job.  

• Coverage Limit: Determined by legal requirements in your jurisdiction. It typically provides benefits according to state laws.  

Business Interruption:

• Coverage Purpose: Provides coverage for lost income and operating expenses if your business is unable to operate due to a covered event. 

• Recommended Coverage Limit: Should cover your anticipated revenue and necessary ongoing expenses during the interruption period. 

Product Liability Insurance: 

• Coverage Purpose: Protects against claims arising from defective products causing bodily injury or property damage.  

• Recommended Coverage Limit: Depends on the type of products, industry, and size of the organization. Limits could range from $1 million to several million dollars. 

Commercial Property Insurance:

• Coverage Purpose: Protects against damage or loss of physical assets, such as buildings, equipment, inventory, and furnishings.  

• Recommended Coverage Limit: The limit should be sufficient to cover the replacement or repair costs of your assets. Consider the value of your property and potential rebuilding costs. 

Employment Practices Liability Insurance (EPLI):

• Coverage Purpose: Protects against claims related to employment-related practices, such as discrimination, harassment, wrongful termination, etc.  

• Recommended Coverage Limit: Varies based on the size of the organization and potential risks, but coverage limits of $1 million to $5 million are common. 

Directors and Officers (D&O) Insurance:  

• Coverage Purpose: Protects the personal assets of directors and officers from claims related to their management decisions.  

• Recommended Coverage Limit: Varies based on the size of the organization, industry, and exposure, but limits of $1 million to $5 million are typical.

Conclusion 

Evaluating insurance risk is an important aspect of third party risk management. By carefully assessing the coverage types, limits, and terms, organizations can ensure that both their own operations and their third party relationships are protected against potential liabilities. This comprehensive approach to insurance risk helps to ensure your organization is prepared and protected against potential challenges. 

Resources: 

Guidebook