Insurance Certificates in Contract Management
Insurance certificates are a critical part contract management. To improve risk management, contracts often require a party to carry certain insurance policies. The risk management benefits of these provisions are lost, unless you track the insurance certificates in addition to the contract.
Insurance, Contracts, and Risk
You have carefully allocated risk in contract drafting. It is clear that the other party is responsible for their conduct and any damages your organization suffers. You go the extra step to require that the other party carry relevant liability insurance. In some cases, they must also name you as an additional insured party on their policy.
The contract is executed. Now what? You add the contract and its expiration date in the contract management spreadsheet. You even collect the insurance certificate at signing.
What is the problem? The problem is that the insurance certificate expires before the expiration of the contract. It is quite rare that the insurance certificate and the contract share the same time line.
Contracts often include provisions that require a party to maintain insurance for certain risks throughout the life of the contract. The only proof is the insurance certificate itself. The risk is that an uncovered event occurs imposing costs on your organization. Your recourse is against the other party, but your ability to recover is complicated or reduced because the insurance carrier rightly denies coverage.
To deal with this risk, it is important to track insurance certificate due dates independently of contract due dates. Unfortunately, contract management spreadsheets often cannot bridge this risk management gap.
Only contract management software that provides post-execution risk management support can bridge the gap. To ensure that the other party maintains coverage throughout the term of the contract, you need to do the following:
- Identify the period of the contract that the other party must maintain insurance. This is usually the entire length of the contract, but there might be circumstances where coverage is only required for a specific period or under certain conditions.
- Configure your contract management software with the insurance metadata you want to track. At a minimum, you should track the insurance carrier, the policy number, the coverage limits, and the expiration date of the coverage.
- Set automatic alerts or scheduled reports to notify you of impending expirations so you do not have to remember to schedule alerts for each certificate.
- Log the first insurance certificate. Capture the metadata you want to track and store the insurance certificate document with the contract record.
- Use alerts to follow up with the other party in advance of coverage lapsing. Repeat step 4 for each certificate.
This process allows you to prevent gaps in insurance coverage that you bargained for during the contract negotiation.
Insurance and the Contract Portfolio
What about the contract portfolio in the aggregate? Can you identify gaps systematically and regularly?
To analyze the risk to your contract portfolio from inadequate insurance coverage requires one critical step in your approach to contract management. Your organization needs to perform individual provision tracking for your contracts. You need to know which contracts impose insurance obligations in the first place.
It is not necessary to track every provision for every contract. We have written about legal provision tracking elsewhere. Insurance coverage provisions are among those clauses that are worth tracking, because they are fundamental to the risk allocation for which you bargained.
Once you identify which contracts have insurance clauses, you can produce regular reports that identify which contracts are missing insurance certificates or have gaps in coverage. How often is regular? It depends. For organizations with many counterparties which must carry insurance (like transportation and health care companies), regular might be weekly. For other organizations, quarterly analysis of insurance risk in the contract portfolio might suffice. Your review frequency should reflect the term of the insurance policies in question. If most policies last for one year, then your review should probably be at least six months to avoid the chance of missing one.
Insurance certificates are a vital part of contract risk management. It is important to use contract management software effectively to receive the benefit of your negotiations.