By Kent Arps and Dani Noble, M3 Insurance
A construction industry attorney once advised that there isn’t a construction contract executed that doesn’t contain some form of contractual default. The question is whether or not the default ever surfaces.
While we wouldn’t go that far (there are many compliant M3 construction clients out there after all), there is a shift underway in the insurance industry to alleviate some of the uncertainty related to subcontractor insurance compliance. The movement is away from the nearly impossible task of manually tracking subcontractor insurance compliance and using technology to automate this process in a much more accurate and efficient manner.
This is where technology comes in. Very efficient and accurate technology platforms are now available to assist with certificate of insurance management. And, technology is on the cusp of achieving near real-time proof of coverage for certificates due to important investments in insurtech. The value of automation for the certificate management process is limitless – and the potential to give clients peace of mind that they’re covered in the event of a loss.
What is a certificate of insurance?
Let’s start with a simple definition. A certificate of insurance is a document that shows a snapshot in time of what your subcontractors, suppliers, and vendors carry in insurance coverage. It could be very general in nature or specific to a job depending on the circumstances. While the value of a certificate on its own can be debated, it’s the starting line for most organizations when trying to gauge compliance with the requirements of an organization or specific contract.
Construction organizations in particular deal with hundreds, if not thousands, of certificates of insurance annually, as they work with many third-party organizations in order to complete projects. Your organization may require certificates from vendors in order to prove liabilities will be covered in the event of a loss.
What are the most common issues organizations have with managing COIs?
The definition of a COI may make it seem simple, but there are many challenges in play with certificates of insurance – and technology can be an ample solution for all of them.
Once you start multiplying the number of vendors you work with by the number of projects you have going on in a given year – that process can start to feel crushing.
The vast majority of companies are still tracking their collected certificates of insurance manually through spreadsheets or home grown methods. This can leave a lot of room for human error. In this instance, companies often don’t discover that a subcontractor is out of compliance until something goes wrong, at which point it’s too late.
Difficulty sharing with underwriters
Underwriters want to see that you’re adequately shifting risk away from your organization by ensuring liabilities are covered downstream as agreed to by contract. A manual process can make it difficult to share this information efficiently with underwriters who control your programs.
Lack of insights
Data is king, and a manual certificate management process with hundreds (if not thousands) of inputs doesn’t allow you to see patterns or areas for improvement at a glance.
What can happen if you don’t maintain compliance?
If it’s that difficult to manage your certificates accurately and efficiently, then why bother? Why not just accept that some certificates may not be in compliance? Before you take your chances and cross your fingers that nothing goes wrong, let us highlight some of the risks.
If it’s that difficult to manage your certificates accurately and efficiently, then why bother?
Missed opportunity for risk transfer
If your certificates are not in compliance with your contracts, risk can be put back onto your organization – and you may not be prepared to take on the loss. Many contracts now also contain flow down provisions which put you at further risk for your own non-compliance with your project owners and upstream partners.
Your risk becomes less appetizing to insurers
Insurance companies want to see that you are making an effort to lower your risk and protect your organization. If you fail to effectively manage your COIs, you’ll become less enticing to an underwriter.
Loss of Income
If you don’t ensure coverage with your vendors, you may find yourself in a position where a project must be halted because a loss isn’t adequately covered, a vendor financially can’t cover a loss, etc. – all potentially costly issues for not only the subcontractor, but any upstream parties.
What is the solution?
Thankfully, through R&D and strategic partnership, there are solutions available to businesses who want to know for a fact that they are maintaining compliance with certificates of insurance.
First, know that it’s easier if you’re not working on this alone. Teaming up with a broker who can provide guidance in terms of customary insurance requirements and help you to identify those risks that can be transferred is the right first step for any organization.
Then, seek out ways to automate your certificate management process using technology platforms.
- Create a digital record of your COIs where they can be managed and verified
- Integrate with your ERP systems
- Generate compliance dashboards that allow you to see each party’s status at a glance (you can share this with underwriters too)
- Accelerate business transactions while decreasing loss ratios
- Collaborate with all stakeholders in real time on vendor compliance to reduce vendor risk
Kent Arps is an account executive with M3 Insurance. Dani Noble is a technology account manager with M3 Insurance. M3 has vetted many platforms and has preferred partnerships in place to offer solutions to clients that use machine learning and AI to accomplish this automation.