Contracts + Compliance = Indemnification
We are all familiar with “As per written contract” and that language has become numbingly engrained in us. But what does it really mean? In simplest terms, it means whatever is being agreed to is subject to the terms of the agreement, as executed. Most times, agreements include obligations, indemnifications and insurance that protect the interests of the parties if something goes wrong (and things never go wrong, right?)
Today, liability insurance can be difficult to procure. In many verticals limits are being shorted, prices are being increased, and coverage is being capped. It is more crucial than ever that a good risk management program with solid controls tells the story of the future of a company. Past is prologue; what you have in place today will be the story for years to come.
A strong risk management program includes proper execution of solid contractual risk management practices. Best-practices, include, but are not limited to 1) solid contracts, 2) a process to monitor deviation from insurance and indemnification standards within those contracts, 3) and once executed (or prior to execution), a method to ensure proper compliance with those terms.
Whether you are buying a guaranteed cost insurance product or have a high SIR program, these three steps should be self-evident, but we all know how difficult it is to execute on all three of these all day, every day. Strong risk management contractual controls separate a risk from the pack. Today that may be the difference between an exclusion, additional capacity, or pricing considerations. As we know, some of our carrier partners offer to have counsel review contracts and offer advice, an option you should avail yourself to, but none offer any assistance when it comes to tracking compliance with those contracts – and this is where solid controls differentiate a better risk from a good risk.
Let’s face it, you can buy insurance with no controls, you may get lucky and find a market willing to roll the dice, but controlling your destiny with a compelling story is probably better for longevity (both yours and your carriers). Poor contractual controls lead to higher risk probability ultimately leading to increased cost of insurance, or worse.
Strong contracts change the narrative, but without a supporting process that includes business decision authority and compliance the process falls woefully short. Marrying these controls around solid contracts provides you with a strategic and competitive advantage. Each year millions of loss dollars are lost because of bad or misleading contractual terms, millions more are spent because of time spent attempting to litigate those terms, and millions are paid by insurers because no one is watching– meaning those costs ultimately come back to us and get paid at a, mind the pun, higher premium.
It really does take a village, but the cost of non-compliance is much higher than the cost of compliance. Yes, from time to time you may break a few dishes while driving compliance, but if it makes you a more profitable and predictable account and a “better risk” isn’t that worth the effort? And what is the effort? Three things are critical:
- Have a contract form that your company and your insurance carrier can agree upon from an indemnification and insurance provision perspective.
- Secure buy-in from management that those terms need to stand without modification given the fact that we are paying the contracting parties to work for us.
- Third, we need to hold those contracting parties accountable to provide evidence of what was contractually promised before the work is performed.
Solid contracts plus solid compliance equals enforceable indemnification. That is the ultimate goal. But it is a tall order to find both parts of the equation readily available under one roof. The task of collecting, evaluating, and monitoring compliance with contracts is a never-ending task that requires sophisticated tools and subject-matter expertise. Most businesses do not have the core internal resources to build an effective solution from both a technological and personnel perspective.
It is here where outsourcing compliance management can be the lifeline that holds it all together. A professional service firm, armed with licensed property and casualty insurance auditors, can make the difference between failed tenders and higher premiums or favorable renewal terms at time of review. Compliance management should never be viewed as a clerical function. Its role must be elevated to C-suite buy-in and mandated procedures to ensure that contractual compliance is baked into the DNA of the company.
Forward-thinking risk managers have two choices – formalize the need for compliance management by establishing a dedicated staffing position, or outsource. Regardless of the path chosen, certain skills are mandatory, the most obvious being a thorough understanding of commercial property and casualty insurance. Yet this basic requirement is routinely unmet in many corporate and service provider settings, leading to high rates of non-compliance, preventable claims, waste, and an ongoing high-wire act by the company's Risk Management department.
In addition to a knowledgeable staff, compliance evaluation and tracking processes must be memorialized and followed. As with the creation of solid contracts, there must be a rule-driven process. In an increasingly litigious corporate environment, the failure of risk managers to not elevate the issue of solid contracts and strong compliance protocols to a level equal to its other functions is not only dangerous, it’s negligent.
Don't be the last one standing when the music stops.
Jim Iervolino currently serves as Senior Vice President of Risk Management for Vornado Realty Trust, a public REIT and the largest owner of commercial real estate in New York City. Jim has over 24 years of insurance and risk management experience including roles held within risk management, underwriting and distribution. Jim’s contractual compliance methodology is considered the gold standard for the commercial real estate sector. [email protected]
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