Understanding Contractual Risk Transfer - DSP Insurance Services

Contractual risk transfer (CRT) is a risk management strategy commonly employed by businesses to shift potential liability to another party through non-insurance contracts or agreements. The objective is to transfer risk to the party (e.g., vendor, supplier, subcontractor) to the at-fault party. 

While insurance is the traditional method of risk transfer, CRT serves as an additional tool that can be utilized. By engaging in CRT, businesses can effectively reduce claim and premium costs. Below we have provided you with an in-depth explanation of CRT, including its applications, commonly used tools, and important considerations. 

Instances Where CRT Is Applicable 

Contractual risk transfer is suitable for various scenarios where one party is performing work on behalf of another business (e.g., subcontracting) or when a party assumes certain responsibilities through supplier, sales, or lease agreements. In such situations, businesses may opt for CRT to transfer the risk to the at-fault party. and away from the innocent party. 

For instance, a landlord might partner with a building maintenance company to ensure the property remains in good condition. However, if the maintenance company causes bodily injury, property damage, or other monetary loss through its own negligence, the landlord could be held liable for any resulting damages in the absence of CRT. Similarly, a general contractor may employ CRT to ensure that a subcontractor assuming responsibility for specific tasks at a job site also takes on the liability for any losses caused by their work. 

Common Tools for Contractual Risk Transfer 

Contractual Risk Transfer is frequently accomplished through various tools, including hold-harmless agreements, indemnification agreements, waivers of subrogation, and the requirement of being named as an “additional insured” on another party’s insurance policy. Here’s a detailed explanation of these common CRT tools: 

• Hold-harmless agreements: These contractual provisions release one party from responsibility for the actions or negligence of another party. 
• Indemnification agreements: These agreements outline how an indemnified party, or indemnitee, will be protected and compensated by the indemnitor, or indemnifying party, in the event of a third-party claim. 
• Waivers of subrogation: These clauses prevent one party’s insurance company from seeking reimbursement from the other party’s insurer for any compensation provided to a third party. For example, if an installer agrees to a waiver of subrogation with an equipment manufacturer, the installer’s insurer cannot seek recovery from the manufacturer or its insurer if the insurer has already paid a claim for damages caused by the equipment’s installation. 
• Additional insureds: This involves adding another party as an “additional insured” to an existing insurance policy to receive coverage. For instance, if a contractor is named as an additional insured on a subcontractor’s insurance policy, the contractor would be covered by the subcontractor’s insurance for liability arising out of the subcontractor’s work. 

To ensure proper insurance coverage and sufficient limits, it is generally recommended for companies to request a certificate of insurance (COI) from parties that may create liabilities (e.g., subcontractors, vendors, lessors) and contractually require these parties to name their company as an additional insured. It is also important to obtain a copy of the additional insured endorsement, which, along with the COI, can verify the existence and adequacy of insurance coverage. 

Important Considerations for Contractual Risk Transfer 

When implementing CRT, businesses should be aware of additional considerations. Firstly, it’s crucial to understand that laws governing CRT can vary by state, and seeking advice from an attorney familiar with these laws is advisable. An attorney can also provide guidance on crafting agreements that are not overly broad and ensure they effectively achieve their intended goals. Additionally, each party involved in a CRT should have a clear understanding of their financial obligations in the event of a loss. 

In Conclusion 

Contractual Risk Transfer offers businesses a means to reduce insurance claims and costs while transferring risk. Alongside securing insurance, CRT plays a vital role in a comprehensive risk transfer strategy for businesses. 

To learn more about Contractual Risk Transfer, contact DSP Insurance Services today.