Risk Management Insurance
By Brad Wilson, CPFO - Finance Director, City of Wood Dale, Illinois
There are many facets to risk management—from bending and lifting with your knees to driver training to keeping sprinkler systems clear of obstructions. As a result a wide range of risks must be considered and addressed on a regular and ongoing basis. One topic that is often overlooked, but is vital to risk management, is the insurance requirements for contractors or vendors performing work on municipal projects. Any contractor that performs work for your municipality should meet or exceed the standard insurance requirements you request.
Two questions that often come up are "how much" and "what types of insurance should we require?" We took these questions to our P&C Insurance broker, who recommended developing three buckets of coverage:
- Low risk
- Medium risk
- High risk
Generally speaking, these buckets align with project costs. Previously, when we had only two buckets, we found ourselves having to waive and modify the insurance requirements and restrictions for smaller vendors and/or lower-cost projects. This led to the possibility of inconsistent application of the rules, which we try to avoid at all costs.
Each bucket has slightly different requirements regarding the amounts and types of coverage. Coverages include, but are not limited to, General Liability, Auto Liability, Workers Compensation, and Professional Liability. The buckets should align with the size of the project in question and the corresponding potential for claims.
In broad terms, each bucket is related to the risk faced by the entity should the project go wrong.
- Low risk – Minimal harm, the entity can continue operations as normal
- Medium risk – Moderate harm resulting in potential interruptions to operations
- High risk – Major harm that leads to a significant impairment of the entity's ability to function properly or threatens the completion of the project
For significant projects that exceed the limits in the predetermined buckets, additional coverage in the form of Builders Risk Insurance should be considered to help mitigate the risk of loss that the contractor's coverage might not otherwise cover. Some contractors may carry a Builders Risk policy; however, the entity should also work with its P&C broker (or directly with its carrier if it does not have a broker) to determine if additional coverage would be appropriate for the project in question.