Insurance in procurement: Goods and services guide

This guide outlines the touchpoints for insurances in the lifecycle of a procurement. Actions may be taken by a central team (such as procurement or finance) and/or individuals in business units.

The guide also provides information for general awareness. Agencies should obtain expert legal and insurance advice as necessary for procurement activities.

For expert insurance advice contact the Victorian Managed Insurance Agency(opens in a new window) (VMIA). The VMIA is a statutory authority that protects the assets and services of the State of Victoria by providing risk management advice and insurance services to Agencies.

Insurance touchpoints

Procurement function

When establishing the procurement function or during annual strategic planning, agencies may specify default insurance types and cover required in their procurement policies and processes.

Category planning may specify insurances required for specific categories or planned procurements within categories.

Individual procurements

There are touchpoints for insurance throughout the lifecycle of a procurement, which may include:

Planning

• When managing risk in an individual procurement, assess risks and treat as appropriate with insurances.
• Develop insurance specifications - mandatory or desirable, types of insurance, levels of coverage, and certificates sought.
• Plan evaluation of insurance requirements and detail in the evaluation plan.
• Include insurance requirements in the invitation to supply as specifications and as clauses in the draft contract.

Approaching the market

• Evaluate offers for compliance with insurance requirements.
• Clarify and negotiate insurances as appropriate.
• Include the agreed insurance requirements in the final contract.
• Obtain insurance certificates before signing the contract.

In contract

• Monitor renewals and obtain updated insurance certificates.
• Require the supplier to adjust insurance levels if the risk profile changes (this may require a contract variation and may include in a price adjustment).
• Claim on insurance if applicable.

Post-contract

• Monitor renewals and obtain updated insurance certificates if applicable.
• Claim on insurance if applicable.

Types of insurance

The main types of insurance that suppliers are frequently required to hold are:

• product liability
• public liability
• professional indemnity.

The goods and services standard contract templates contain provisions for these insurances. Additional insurances may be required and these can be included in the contract templates.

A supplier may have combined public liability and product liability cover. Public and product liability insurance policies exclude risks covered by more specific insurances, such as professional indemnity insurance.

Other insurances may also be required such as run-off insurance, cyber insurance, and workers’ compensation insurance.

Public liability

Public liability insurance covers claims arising from personal injury or property damage resulting from a breach in the supplier's duty of care to third parties, which may include the public and clients of the Agency.

Product liability

Product liability insurance covers the liability from a defective product that causes personal injury, property damage or other losses. Defects may include design defects, manufacturing defects, and inadequate labelling, including instructions for use and warnings.

Professional indemnity insurance

Professional indemnity insurance covers liabilities arising from a breach of professional duty by a supplier. A claimant can seek compensation for financial and economic loss.

Professional indemnity insurance may cover:

• a breach of professional duty
• negligence
• bodily injury and property damage arising from service breach
• fraud/dishonesty other than a company director's dishonesty
• infringement of intellectual property rights
• breach of confidentiality
• defamation
• loss of documents.

Check that all required cover is included in the supplier’s policy.

Run-off insurance

Run-off insurance is a policy that provides coverage for a specified period after a business has closed, been sold, or a professional has retired, protecting against claims for past actions. These policies generally apply to an insurance that operates on a claims made basis, such as Professional Liability. This risk may be higher when engaging sole traders or suppliers in dynamic markets.

Cyber insurance

Cyber insurance covers a Supplier’s business for its first-party response and recovery expenses (incurred by the Supplier in the event of a cyber incident) and third-party expenses (amounts the Supplier may be legally liable to pay to third parties, due to a cyber incident).

Ensuring that the supplier’s Cyber policy has appropriate first-party cover will support their ability to recover from a Cyber incident, whilst having sufficient third-party expenses will ensure they can respond to third party liability claims.

Depending on the nature of the service and information held by a Supplier, your risk assessment on limit and breadth of coverage will be tailored on the nature of the Supplier’s services.

Workers’ Compensation Insurance

Workers’ compensation insurance covers an employer for its liability for bodily injury, disease, illness or death of a worker.

Australian jurisdictions have laws covering workers' compensation for workers in Australia.

For international businesses that do not employ workers in Australia, assess the risks and consider insurance requirements.

Considerations

Risk management

Insurance is a means of treating risk by transferring it to an insurer for a premium.

Risk management provides a structured approach to:

• identify potential areas where problems might arise in the contractual relationship between the parties
• consider the likelihood and impact of losses (financial or otherwise) that may arise, and
• develop treatments to reduce the likelihood of events occurring and/or reduce the impacts caused by these events.

For detailed guidance on how to manage risk in procurement see the Manage risk in procurement – Goods and services guide.

Agency responsibilities

In the sourcing phase (from planning up to awarding a contract), activities around insurance requirements are the responsibility of the procurement lead.

In contract, insurances may be the responsibility of the contract manager or a central team such as procurement or finance. After the contract expires, responsibility may reside with the business unit or a central team.

Timing of insurance

Suppliers may not routinely hold the types or levels of insurance cover required by a procurement. If a procurement requires suppliers to obtain more insurance, suppliers may be reluctant to obtain that insurance until their offer is accepted. The invitation to supply and evaluation plans should be clear when suppliers are required to have the specified insurances, for example:

• when submitting an offer or
• when their offer is accepted and prior to contract signature.

Total cost of ownership

A supplier's cost of insurance (the premium) may be included in the contract price in part or in full. Where a procurement requires insurance cover beyond what a supplier routinely maintains, the additional costs are likely to be passed on in full to the buying Agency.

Limitation of liability

Given that insurance can be a significant cost, suppliers may seek to limit their liability to a specified sum or to a value of cover linked to the contract value. A limit on liability may apply to any loss or may only relate to specific categories of loss e.g. consequential loss.

A supplier may offer a lower contract price in return for limiting liability or some other value adding benefit.

It may not be appropriate to limit liability in the following situations:

• liabilities that can impact on the physical or mental wellbeing of individuals
• there is potential for major loss or damage to tangible property
• breach of third-party intellectual property, or
• where the goods or services are critical to the operation of the Agency.

The standard contract templates do not include clauses that limit liability. A limitation on supplier liability may increase risk for the Agency. Prior to agreeing to any limitation of liability, conduct a risk assessment and seek legal and/or Insurance Advice from VMIA on the impacts to your insurance program.

Limiting supplier liability or indemnity may impact the financial delegation required to approve a contract. Consult your organisation’s finance team for advice.

Cross liability

When considering the applicability of insurance and the limit of liability, buyers should also consider cross liability. Cross liability requires suppliers to take out insurance in both the supplier and Agency’s name for the purpose of the agreement, so that if a claim is made against the Agency by a third party, the Agency can directly claim on the insurance policy rather than going through the supplier to make the claim.

When including cross liability in a contract, the Agency may also require the insurer to waive its rights of subrogation, which removes the right of the insurer to recover from the Agency the money paid out to the third party.

Given that cross liability increases risk to the insurer, the supplier's insurance premiums would likely rise, and in turn, the cost of the goods or service is likely to increase.

Using this guide

This guide accompanies the goods and services policies. There are 5 policies:

• Governance policy.
• Complexity and capability assessment policy.
• Market analysis and review policy.
• Market approach policy.
• Contract management and disclosure policy.

This guide supports the market approach policy.

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