3 Steps for Mitigating Third-Party Risks

Businesses often focus on the terms required in contracts, not the various insurance options that can protect them from risks. For example, 75% of third parties are not meeting the insurance requirements of the companies they work with, according to data from Evident, a specialist in third-party risk.

With a 300% increase in supply chain attacks ¹, companies must take steps to mitigate their risks, whether they are a supplier or a buyer of goods and services. We often hear from organizations that are required to manage an increasing number of third-party contracts, which are more complex than ever. Business leaders are uncertain about what they are committing themselves to and fear they could be in breach of contract. This could lead to large underinsured – or even uninsured – exposure to their businesses. 

Effective risk mitigation includes:

1. Reviewing contracts to determine where risk(s) can be transferred to a third party.
2. Establishing favorable contract language for retained and assumed risks.     
3. Aligning insurance coverage to fully protect your contractual obligations.

Industry Focus: Transportation

As a standard course of business, motor carriers often assume significant risk by entering into agreements with shippers, suppliers, and vendors. Contractual obligations are frequently accepted without consideration for alternative transfer methods, terms, or available coverage. Existing and additional insurance needs are often overlooked, resulting in coverage gaps that could lead to significant financial consequences for the motor carrier.

When entering into one-sided contracts, transportation companies can take on liabilities that are not automatically covered by insurance. Examples include driver error in setting the temperature for refrigerated loads, running out of fuel, and losses from employee theft. It’s critical for companies to identify potential cargo gaps and evaluate their business operations to determine if incidental professional exposures exist. This can help them ensure contractual compliance and avoid gaps in coverage that could result in expensive uncovered claims.

Industry Focus: Real Estate

Real estate companies can assume substantial risk when they enter into agreements with tenants, contractors, vendors, and other parties. To protect themselves, organizations must take the three steps listed above to mitigate third-party risks and avoid uncovered losses up to policy limits and/or contract values. For example, a landlord/tenant lease agreement might contain an absolute pollution exclusion, which could create a significant gap in coverage. In this case, it’s important to consider securing a separate pollution policy to protect the owner. This can prevent contract non-compliance and associated legal expenses, in addition to potentially uncovered pollution claims.

Industry Focus: Healthcare

Healthcare organizations enter into agreements with medical professionals, vendors, suppliers, and other third parties. For example, as a part of their physician credentialing process, a hospital contractually required their employed physicians to purchase:

• $1 million of individual medical malpractice insurance.
• 3-year extended reporting period endorsement (“tail” coverage) upon separation.

Unfortunately, the medical malpractice premium for individual physicians’ coverage and the “tail” endorsement increased dramatically, requiring the hospital to find an affordable solution. USI analytics determined that including the physician claims in the hospital’s policy would significantly reduce the cost of both requirements and provide additional excess coverage for physician exposure. The insurance cost was reduced by 50%, and the potential coverage gap was eliminated.

For assistance managing your organization’s contractual exposures, contact your USI representative or email pcinquiries@usi.com.

Sources:
^{1Argon Security: https://www.aquasec.com/news/aqua-securitys-argon-experts-find-software-supply-chain-attacks-more-than-tripled-in-2021/}