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To Track Or Not To Track Why Tracking Certificates Of Insurance Make Sense By Robert Barry Scott

A reasoned overview of the beneftis derived from tracking vendor incoming certificates of insurance.

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To Track Or Not To Track Why Tracking Certificates Of Insurance Make Sense By Robert Barry Scott

  1. 1. eSolutions Group Aon 360 eSolutions Magazine (Q1 / Q2 2006) – Pages 21 – 22 – Jan 2006 Incoming Certificates of Insurance—To Track or Not To Track, What is the Answer? By Barry Scott, Director, Aon eSolutions Certificate Management Group The process of tracking certificates of insurance can be overwhelming, time consuming, and complex. Some organizations are adamant as regards tracking Incoming Certificates for all Vendors, Contractors, Tenants etc. (Vendors), while others are indifferent. What is the right answer? Does Generally Accepted Accounting Practices (GAAP) or the Sarbanes-Oxley Act of 2002 (SOX) require Incoming Certificates of Insurance be tracked? What is the most efficient / cost effective methodology to perform this process? How does an organization select an Incoming Certificate tracking solution? As we seek to answer the question – to track or not to track incoming certificates, let’s first understand the basic requirements of Generally Accepted Accounting Practices (GAAP) and the Sarbanes-Oxley Act of 2002 (SOX).  GAAP are imposed on companies to ensure investors have a minimum level of financial reporting consistencies. GAAP cover such things as revenue recognition, balance sheet classifications, and share measurement.  The Sarbanes-Oxley Act of 2002 is designed to protect shareholders and the public from accounting / financial reporting errors and fraudulent business practices for U.S. listed companies; this is especially critical as the majority of the financial reporting processes take place in back-office systems, with much of the occurring in standard desktop applications such as spreadsheets and e-mail. Two key components of SOX have caught corporate executive’s attention – i) Section 404 of the act requires management of the publicly held companies and their outside auditors report on the effectiveness of the company’s internal controls, and ii) Section 302 of the act mandates that executives must sign the annual external auditor certified “internal control” evaluation and financial reporting documents.  Based on the above requirements overview, as well as discussions with several corporate executives, neither GAAP nor SOX explicitly require organizations to track Certificates of Insurance. However, many smart financial mangers continue to look for opportunities to leverage Section 404 compliance efforts to enhance their overall business reporting processes. This is especially true for multinational companies who are using SOX implementations as a vehicle to increase process and reporting consistency across their business functions and geographies. So, if GAAP nor SOX require tracking certificates of insurance, then why invest the time or bear the costs to perform this process? What is the benefit to my company?  First, based on discussions with over 250 companies during the past 24 months, Aon has learned that most organizations are looking to go beyond the letter of the law, especially in light of the corporate / financial confidence issues occurring in 2001. As a result, most publicly traded organizations are considering ways to eliminate "knowledge" gaps regarding their financial exposures. Many CFO’s, Legal Counsel, Risk Managers, and Procurement Departments, believe that Tracking Incoming Certificates of Insurance is a substantive way to improve organizational control structures and enhance their Sarbanes-Oxley compliance / reporting measures.  Secondly, in today’s highly competitive marketplace, every organization is looking for ways to reduce operating expenses / losses, while increasing profitability. Organizations th Aon eSolutions Certificate Management Group  1000 North Milwaukee Ave., 4 Floor  Glenview, IL 60025
  2. 2. eSolutions Group who aggressively track incoming certificates of insurance, are frequently able to reduce financial losses and litigation costs by transferring high risk and/or high frequency exposures to their Vendors (indemnitors).  Finally, standard operating procedures for most companies require that every Vendor signs a Contract which details the product / service requirements, financial obligations, indemnifications, and other pertinent aspects of their engagement. The Contracts protect both organizations by defining the relationship, and frequently include a listing of the insurance coverages / limits required to conduct business with the procuring organization. However, the benefits of a signed Contract are dramatically hindered if the procuring organization never implements the key control process designed to reduce their litigation and financial exposure – the Requesting and Tracking of Incoming Certificates of Insurance from each Vendor. Therefore, if an business determines that Tracking Incoming Certificates is an important control factor for their organization, a key question must still be answered – What is the most efficient / cost effective methodology to perform this process? Tracking certificates can be as simple as confirming that your organization has received a certificate from a Vendor, or as complicated as evaluating all elements of your risk management program (this may include confirmation that the Vendor’s insurance coverages / limits are in synch with your organization’s Contractual requirements). The least expensive / time consuming process is to capture any Incoming Certificates that may be requested / provided by an organization’s Vendors. However, if this process is deployed, the organization can only presume that their Vendor has some type of insurance coverage, which may or may not provide the requesting organization the ability to transfer their high risk and/or high frequency claims to their Vendor (indemnitor). Two of the most common models utilized to track Incoming Certificates is to access a proven Certificate Tracking application that allows your organization the ability to perform this process with the organizations internal resources (Self Service) or to outsource the entire requesting / tracking process to an experienced Incoming Certificate Tracking company (Outsourced). Both models provide an organization with the ability to identify if an Incoming Certificate is compliant with their Contractual requirements. However the time requirements and experience levels required to support a Self Service program are frequently usually not considered a core competency of most organizations; also the additional resources required to perform the Self Service tasks are usually adversely impacted by organizational budget constraints. As a result, most multinational companies have determined that an Outsourced program, managed by licensed insurance professionals, will provide their organization with the maximum benefits that can be realized by Tracking Incoming Certificates of Insurance. The following two case studies illustrate the importance of implementing a comprehensive Incoming Certificate management solution: Case Study #1 A 75-year-old transportation company contracted with Aon eSolutions ‘outsourced certificate tracking team’ in June 2000 to track incoming certificates for all Vendors (Indemnitors) servicing this organization’s facilities and equipment. In October 2003, a janitor working at one of the company’s facilities was struck and killed by a drunk driver. The janitor killed in this accident actually worked for a Vendor who was not directly contracted to provide services for this transportation organization. After some investigation, it was determined that the janitor’s th Aon eSolutions Certificate Management Group  1000 North Milwaukee Ave., 4 Floor  Glenview, IL 60025
  3. 3. eSolutions Group company was actually a sub-contractor for an approved Vendor of the transportation company. Though the transportation company had some loss protection, as they had a Contract with the approved janitorial Vendor, they also minimized their financial / litigation costs by evidencing an Incoming Certificate from the approved Vendor naming the transportation company as an additional insured. As a result, the transportation company made a successful motion to remove themselves as defendants and was able to defer all defense costs to the Vendor. Case Study #2 A 120-year-old national retail / grocery store chain contracted with Aon eSolutions ‘outsourced certificate tracking team’ in June 2000 to track incoming certificates for all merchandise and service Vendors (Indemnitors). In early 2005, a customer purchased a bottle of peppers from one of this chain’s stores. As they were eating the peppers out of the bottle, they ingested a shard of glass, which caused injury to the customer’s mouth and throat. After some discussions between the retail / grocery store chain, the chain’s TPA, and Aon, it was determined that the manufacturer had a valid Contract with the retail / grocery store chain which provided some protection from loss (as the Vendor Contract required insurance). However, all agreed that the retail / grocery store chain could greatly minimize their financial / litigation costs if they could evidence an Incoming Certificate from the approved Vendor, especially if they were named as additional insured. As Aon was tracking all Incoming Certificates against the specific Indemnitor insurance requirements of the retail / grocery store chain (of which additional insured was one condition), they were able to retrieve an Incoming Certificate of Insurance for the contracted Vendor. As the retail / grocery store chain was able to secure the Incoming Certificate of Insurance, they were able to tender the claim to the manufacturer who accepted their tender and agreed to pay all legal expenses incurred in the defense of this case. The manufacturer (Vendor) also agreed to pay any judgment / future settlement. The retail / grocery store chain realized a savings in excess of $50,000. In evaluating the optimal Certificate Tracking solution, consider these questions:  If you are currently tracking certificates, what problems are you having with your current certificate tracking method? Does the system / process utilized meet your current / future needs?  Does the solution provide all of the required features necessary to accurately monitor insurance coverages, limits, insurance company ratings, renewal dates, etc.?  Does your current solution handle correspondence, certificate storage and retrieval?  Do you have sufficient resources necessary to track your incoming certificates?  Do you currently have the ability to control day-to-day decisions regarding Vendor compliancy?  Can your application / hardware store large amounts of data on-line? For how long?  Is your Board of Directors confident they have taken all possible steps to reduce litigation costs and/or minimize financial exposure? Remember, the process of tracking Incoming Certificates of Insurance supports Corporate and Risk Management objectives, while reducing an organization’s exposure to financial loss and costly litigation. Additionally, for organizations requiring signed Vendor Contracts, tracking Incoming Certificates of Insurance allows the organization the ability to monitor the insurance standards of their Vendors and enforce the agreed upon Contractual standards. th Aon eSolutions Certificate Management Group  1000 North Milwaukee Ave., 4 Floor  Glenview, IL 60025