Three Steps To Mitigate Contractual Exposures

August 19, 2021

As business relationships, supply chains, and operations evolve, contract language must continue to align with contractual obligations and insurance policy terms. Otherwise, companies can find themselves being held liable for massive uninsured losses.

According to a 2020 Ponemon Institute study regarding cyber events, 59% of companies have experienced contractual exposures caused by one of their vendors or third parties. Even more worrisome is that only 16% of companies claim they effectively mitigate third party risks. Companies that enter into agreements with vendors often focus solely on what is required within the contract—not the insurance required to protect them from the risks they assume or transfer. Liability for personal injury or property damage routinely falls on businesses whose contract language fails to include insurance coverage, which should come from the contractors responsible for snow and ice removal, maintenance of facility and grounds, leased facilities, and other obligations.

According to 2021 data from Evident, a specialist in third-party risk, 75% of third parties are not meeting insurance requirements established by companies, at least 10% of third-party vendors fall out of insurance compliance without notifying the companies that hire them, and 23% of third-party vendors do not respond at all to companies’ requests for proof of insurance. These practices may increase corporate liability for expenses involving: general and professional liability; property/assets; product liability; product recall; cyber liability; damage to reputation; and environmental losses.

To effectively manage contractual risk, organizations must continually review and improve their third-party contract language and the alignment of insurance policy terms with contractual obligations. A comprehensive review process is key, and it includes the following three steps. First, review and identify where risk can be transferred to a third party. Second, review and obtain optimal contract language when assuming risk. This step involves a review of contractual obligations to obtain the most favorable contract language.   Finally, review contract exposures and current insurance policies. A comprehensive review of contractual obligations and policies will help ensure coverage is aligned with contractual exposures, preventing an uncovered loss.

Uninsured exposures can lead to enormous losses. By following these three steps, those enormous losses are preventable. For help implementing these steps, contact the attorneys at Rock Fusco & Connelly, LLC.