For modern businesses and organizations, working with vendors is key. Specialized vendors help increase efficiency, meet the needs of customers and communities and positively impact growth and economics. Yet working with vendors also involves challenges, such as the need to manage risk and minimize exposure.
The right level of insurance protection for both you and the vendor is key, so that both parties have the coverage and protection needed in the event of a claim. Here is your guide to working with vendors to evaluate and verify insurance needs for a successful partnership.
What to Look for in a Vendor
Besides expertise, recommendations and track record, it’s important to do your due diligence to evaluate whether a vendor has the right insurance coverage. Both the type and level of protection will vary, depending on the vendor’s industry, nature of business and business relationships. However, nearly all vendors you do business with should have two standard insurance policies:
- General liability insurance: This coverage protects your business or organization from liability risk resulting from a lawsuit, while protecting the vendor from certain claims and lawsuits. This coverage is a must.
- Workers’ compensation: Protects employees of the vendor in the event of an accident or injury during employment. Workers’ compensation is managed at the state level, so requirements and limits are location dependent. If your vendor is an employer and the employees will be at your property, this coverage is necessary.
Insurance Needs Associated with the Partnership
Some vendors may effectively manage their risk with general liability and workers’ compensation coverage. For others, the insurance protection required to properly manage risk in a vendor partnership will depend on the nature of the products or services they provide.
Two different vendors likely have very different risk exposures, so it’s important to ensure their coverage addresses the risks.
Vendors involving financial products or services, such as banking, software, data or networking services, are common. These types of vendors have some of the highest risk exposure due to the nature of their businesses. Often, these vendors need to have the following coverage:
- General liability
- Workers’ compensation
- Directors and officers liability
- Employment practices liability
- Fiduciary liability
- Cyber liability
- Commercial property insurance
- Umbrella liability
- Financial institution and fidelity bond protection
Vendors offering processing services are also common. These vendors often need to have the following coverage:
- General liability
- Workers’ compensation
- General aggregate coverage
- Automobile and/or trucking liability, if applicable
- Umbrella coverage (including errors & omissions and cyber liability)
Important Terms You’ll Need to Know
In many cases, a vendor will also need additional coverage protection, such as certain endorsements, clauses and riders, for your business or organization to be fully protected in your partnership. Here are explanations for some key terms:
- Subcontractor—A vendor undertaking work on your organization’s behalf.
- Hold harmless clause—A typical clause of a general liability policy stating that a subcontractor must defend, indemnify and provide additional insured coverage under their policy for work performed on behalf of or by your organization. Make sure your vendor’s policy has this clause.
- Additional insured endorsement—An endorsement a vendor can obtain through their policy coverage that names your business or organization as additional insured. Additional insureds are allowed coverage protection under the vendor’s policy, without a responsibility to the policy premium or ability to modify the policy terms. This endorsement is very important.
- Certificate of insurance (COI)—A certificate of insurance is a concise document summarizing the details of an insurance policy. The standard format of COIs lists a policyholder’s name, effective date, type of coverage, limits and any named additionally insureds.
- Certificate holder—A certificate holder is the named insured on the certificate of insurance. Ensure that the coverage is noted as primary and non-contributory.
- Insurance rider—An insurance rider adds or amends the terms of a policy. If a specific coverage is required for your partnership but isn’t a part of your vendor’s policy, a rider can be added to ensure both you and the vendor are protected. Check the rider to make sure you’re protected.
It’s great working with talented and experienced vendors but do your due diligence when it comes to risk management and insurance protection. Policy terms can be confusing, so don’t hesitate to reach out to your insurance provider with questions. At Lockton Affinity, we can answer your questions about your existing policy coverage and requirements needed for any vendor partnerships.