Strong supply chain management is key to managing your exposure to contingent risk. This is where you are liable to a client for work undertaken on their behalf by others. It is not enough in today's economic environment of ensuring that your contractual terms are “back to back” with your supply chain.
Contingent risk exposure will have a potential impact on your claims history, and therefore your PI premium. This is because insurers struggle to make subrogated loss recoveries further down the supply chain.
With the PI insurance market increasingly taking a tougher stance on contingent risk, how can you manage this process to differentiate yourself from the pack?
Proactive firms should consider the following when vetting their supply chain:
1. Is the sub-contractor financially stable? If they are not, then any claim which you may look to pass on, may sit with you. We are increasingly seeing insured's undertake monthly / quarterly credit checking on key suppliers and also assessing their ability to procure trade credit insurance.
2. Do they have the adequate level of skill, resource and experience to carry out the work you are instructing them on? How reliant are they on work from other firms? Have they taken on contracts for others that they will struggle to fulfil?
3. Do they carry adequate PI limits? This should be reviewed annually at the renewal of their policy as PI operates on a claims made basis, so it is likely the policy that they purchase in future years which has to respond to claims you subrogate down to them.
4. You will need to ask specific questions regarding the breadth of cover that they have renewed on and any specific exclusions. Key examples include:
a. Aggregate from 'Any one Claim' cover
b. Façade and Fire Safety restrictions or exclusions
c. Significantly increased self-insured excess levels
d. Negligence insuring clause from civil/legal liability
5.Ensure that the sub-consultants / sub-contractors are not subcontracting any work out themselves. If this is the case, how do you ensure all the same checks are carried out and maintained?
Consultants should also consider the increased risk of losses flowing down to them from contractors as their design & construct PI policies become more restrictive.
At renewal, you should demonstrate to insurers how you record and audit the above and share the knowledge and performance of your supply chain around the business. For example, you may maintain a register of approved suppliers that tracks their performance. If not you may find a firm performing poorly on one job and then being hired by a separate division. It is important to make sure everyone is aware that a supplier cannot be used unless they have met the appropriate criteria and are on the approved list.
The financial collapse of Carillion and Interserve provide a constant reminder to insurers of the claim's cost associated with the supply chain.