Myth # 9: After an outsourcing provider has been terminated, it is no longer important to track the company’s financial condition and its insurance policies. Claims based on the outsourcing provider’s work may trickle in for years following the termination of the contract. Indemnity and insurance obligations should survive termination of the contract, and a company needs to continue tracking the provider to make sure these obligations are fulfilled.
Suggestions: If the outsourcing provider is required to continue to purchase insurance for the company's benefit, continue, in the very least, to demand coverage certificates regularly.
Myth # 10: If an outsourcing company goes out of business, the company has few options to recover for the obligations that the contractor owes. If a company's outsourcing partner goes out of business, there are a number of things the company can and should do. But these actions should be pursued quickly. The more claims that make it to the outsourcing company’s insurer before the policy is cancelled or reduced, the better. The company may also be able to negotiate directly with the outsourcing company’s insurer for continued insurance coverage before the policy is cancelled or coverage reduced; buying additional coverage this way may be cheaper than obtaining a separate policy elsewhere.
Further, the company may have some recourse against other parties. Even without a guaranty, the company may be able to reach the parent company of the outsourcing provider. If the provider made any distributions in the last several years to the parent company, these distributions may be subject to recapture as unlawful dividends or “fraudulent transfers,” and this recovery can be used to pay the company's damages.
In addition, a failed company will sometimes move valuable assets (like accounts receivable, contracts, or equipment) to a new corporate shell to start doing business again. This is a form of “fraudulent transfer” and can justify claims against the new company and the individuals involved. Other potential claims may also be available against the related entities and individuals, and it is important for the company to realize that the shutdown of the outsourcing company might be more a visual deterrent than a real barrier to collection.
Suggestions: Should your outsourcing partner go out of business, tender every claim and potential claim to the outsourcing company’s insurer as soon as possible. Also, consider negotiating directly with the outsourcing provider’s insurance company to purchase a tail policy or buy some level of continuation coverage.
Further, always consider all of your alternatives before giving up the chase. See if you can recover any obligations from the parent company, and investigate the situation to determine whether there may be claims against third-parties or successor companies that can be pursued.
A Final Suggestion
The presence of risk is no reason for companies to reject outsourcing as a strategy. Outsourcing always will pose some risk, but the extent of that risk—and how it compares with the potential benefits—will be determined to a significant degree by the executives charged with negotiating the contract. Among the myths presented, many share one common theme: They reflect a measure of complacency that can lead to disaster. The final suggestion? If you are pursuing an outsourcing arrangement, make vigilance be your mantra.