Managing Your Risk
Use reasonable judgment for small vendor limits

By Michael Kelly
Risk Management Director

What limits of liability insurance should you require from small contractors or vendors? I get this question frequently.

This is a challenge, and unfortunately there is not a simple answer; rules of thumb maybe, but as a risk manager in the public sector, you may be asked to take into account other factors that at times can make hard-and-fast rules difficult to apply. Examples are using a local contractor that is a sole proprietor for a very small construction project, or utilizing an individual to cut grass, read water meters or construct/repair benches for your parks and recreation department. What is a reasonable limit for all concerned?

It is this desire and at times even pressure put on risk managers to deviate from the norm that can pose the dilemma – and problems. How do you balance the responsibility of protecting the county's assets – and by extension taxpayer dollars – with a request to utilize local, and typically smaller, contractors or vendors? What is a reasonable expectation to provide the county in the way of insurance coverage limits, specifically for projects small enough to not require a formal bidding process?

My default recommendation of minimum coverage for anyone working on behalf of your county as an independent party should be at least equal to your own non-excess limits. For members participating in the NCACC Risk Management Pools, this equates to a per occurrence limit of $2 million for general and automobile liabilities. As an initial point of discussion, this works fairly well for counties that are fully insured and do not have their own self-insured liability retention.

Unfortunately, $2 million per occurrence can pose a problem for a sole proprietor, for to do so normally would require the purchase of a primary policy limit of $1 million per occurrence and an excess or umbrella policy with a matching limit of $1 million. In our example for a meter reader, you would likely get considerable resistance because of a perceived hardship to the individual doing the work for their cost of insurance.

Accordingly some counties have set up standards for insurance limit requirements based on the size and class of work being performed. For non-hazardous projects falling under the statutory informal bid limit, a factor of two times the total amount of expected job cost or $500,000 per occurrence (whichever is greater) minimum may be used. This would be the minimal amount of coverage limit required from any vendor working on behalf of the county performing non-hazardous work. Obviously common sense with a conservative mindset should be used here. If there is a question as to the level of hazard, then this minimum is kicked up to $1 million per occurrence and should encompass all of the very small construction/contractor-type projects. Today, a limit of $1 million per occurrence is commonplace for the smaller independent contractor.

For projects large enough to require a formal bid process, $1 million with another $3 million excess is typical as the bare minimum, and coverage design, in addition to liability limits, becomes imperative to carefully consider. Again, common sense prevails, and these larger class/size projects generally fall outside the scope and discussion intent for this article.

Set these minimum standards in writing and – if management agrees – it will alleviate a large amount of discussion and hand-wringing in the future, for it is the small, not the large company or individual vendor, that typically will seek a variance.

It is also important to understand that the majority of the cost for general liability and automobile liability coverage is loaded into the first $100,000 of its rating basis, and the cost to increase this to a $500,000 minimum is relatively small. Bottom line: If an individual is not able to provide the required minimum liability limit, they should not be utilized. There has to be a cutoff point regardless of the scope and size of a project. If agreed up front as a matter of policy, the issue of ignoring the standard, regardless of who the vendor is – or who they know – becomes much more difficult to accomplish, which is truly in the best interest of the county.

Finally, and perhaps the main takeaway point, is some liability insurance – even a minimal level imposed on all vendors or independent contractors working on behalf of your county, no matter how small – is better risk management practice than attempting to forecast which ones will have something negative happen and actually need insurance.

One size does not fit all, but the establishment of a minimum standard with the small local vendor in mind, up front, will allow a balance of fairness and still be tempered with reasonable risk management judgment. In addition, appropriate contract language with the vendor that requires the purchase of insurance – even at a minimal level – will provide the transfer of risk to an independent third party, and a legal defense for both the vendor and the county, should the unfortunate occur.

NCACC Risk Management Director Michael Kelly writes a regular column on risk management for CountyLines. With more than 33 years of risk management/insurance experience, he holds the Associate in Risk Management for Public Entities, Certified Risk Manager and Certified Insurance Counselor professional designations. He can be reached at michael.kelly@ncacc.org or (919) 719-1124. Archived versions of the column can be found online at www.ncacc.org/managingyourrisk.html.