Expert Tips: Contractual Risk Transfer

Posted July 10, 2017 Expert Tips

In this world of complex business relationships, it’s always a good idea to transfer as much risk as possible to the party that is creating or controlling a particular exposure to loss. So whether you’re hiring a contractor to do work for you, leasing some space in your building to a new tenant or bringing on a vendor to provide you with a product or service, make sure that you follow these guidelines to have the right risk transfer mechanisms in place:

  • Include Indemnity Provisions and Insurance Requirements in all of your contracts. The Indemnity Provisions will require the other party to “hold you harmless and indemnify” you in the event of an accident. And the proper insurance coverage will provide the necessary funding for most of the promises that are made to you in the Indemnity Agreement.

 

  • With respect to Insurance Requirements, make sure that the party you are working with has appropriate limits on their insurance policies. Don’t be shy about asking for higher limits if the exposure warrants it. By the same token, be willing to be flexible for less hazardous work.

 

  • Have them name you as an Additional Insured on their policy. Additional Insured status will give you a direct right to defense and coverage under the other party’s policies. Have the endorsement grant you coverage for both their ongoing and completed operations.

 

  • Include wording that makes their insurance coverage pay first before your own policies have to respond. This should apply to both their primary policies as well as any excess coverage they may have.

 

  • Waivers of Subrogation should be included in your favor on all of their policies. This will prevent their carrier from coming back against you if they make a 3rd party payment on your behalf.

 

  • Obtain Certificates of Insurance from the other party that will evidence all of their coverages. The Certificate will also show that you have been granted Additional Insured status and Subrogation has been waived. Don’t be afraid to ask for a copy of the Additional Insured endorsement to make sure that it includes Completed Operations coverage. Develop a system to make sure that you receive updated copies of all Certificates prior to their expiration.

The use of effective contractual risk transfer will allow you to shift defense and coverage obligations to the responsible party and therefore preserve the limits under your own insurance program.

Feel free to email me or give me a call if you have any questions about transferring risk to others.


Please note that the information contained in this posting is designed to provide authoritative and accurate information, in regard to the subject matter covered. However, it is not provided as legal or tax advice and no representation is made as to the sufficiency for your specific company’s needs. This post should be reviewed by your legal counsel or tax consultant before use.