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Certificates of insurance - the new profit center?

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As any manager can tell you, it's not just government that has budgetary constraints imposed on purchases. Belt-tightening is the new norm everywhere. And as important as it is to verify insurance compliance of your tenants, vendors and suppliers, it doesn't come free.

Or does it? To paraphrase a former U.S. president, it depends on what the meaning of "free" is. Take this extreme example:

We were recently approached by a company in need of assistance in managing their certificates of insurance - but with a novel twist. It seems the company had a process in place that if their Insureds' insurance did not meet the requirements of the contract a five percent surcharge was added to the total value of the agreement. This penalty was creating millions of dollars each year in pure profit for not having COIs in compliance. Needless to say, this was not a policy designed by their Risk Management department. It can be further safely assumed this policy was not about to be replaced by, shall we say, a more traditional manner of insurance compliance management.

But you don't have work against proper risk control to make the cost of compliance verification at least a more or less neutral expense to the organization. One common sense approach is to charge the Insured an insurance compliance verification fee. The cost on an individual basis would be nominal while the cumulative impact of the assessment would provide the resources necessary to fund the effort.

However, the challenge arises in the administration of the process. With small fees to collect from hundreds or thousands of Insureds, it could conceivably cost more to manage the billing than it does the COI process whose expense it is trying to offset. But there is a way - in fact, two ways:

  • For entities to whom you write a check, such as vendors, simply apply a uniform credit memo across all new and active accounts. No invoicing, no accounts receivable, no billing. The credit memo reduces the vendor's next invoice by the amount of the fee. Voila, your verification fee was just paid. Once a year, at renewal of the COI, impose the charge again. Ideally, the system you use (such as Docutrax) can monitor the expiration date and trigger appropriate notifications to both the Insured and accounts payable.
  • For entities from whom you collect a check, such as tenants, build the fee into the the language of the lease and collect the fee upfront at lease inception, the amount being equal to the annual charge times the length of the lease. Booked as a prepaid expense, the Finance Department peels off a piece of the collected fee each year and charges it to expense. Any decent accounting system can do that automatically. And, the extra-added bonus is that your CFO has a pile of prepaid cash on the balance sheet.

It has been our experience that charging a fee for a required service is not unreasonable. And placing the burden of payment for that service on the benefiting party is not a difficult argument to make. Unlike the extreme example cited above you don't have to turn the business of insurance compliance into a major source of income to the company, but it also doesn't have to be assumed that your compliance program must be a cost center and that Risk Management needs to fight for every dime to do their jobs correctly.

If cost is holding you back from implementing a proper insurance verification program, these ideas might be a useful discussion to initiate with the folks in the C-suite.

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