<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=1148227851863248&amp;ev=PageView&amp;noscript=1">

The importance of contractual risk transfer in claims

Posted by West Bend Staff on Oct 5, 2022 8:30:00 AM

Besides a good insurance policy, an effective way to reduce exposure to loss or financial uncertainty is contractual risk transfer. Construction projects, sales agreements, and property lease agreements are three of the common situations where contractual risk transfers are seen. Typically, this is used to transfer risk to the party that’s in the best position to control the risk or mitigate of the damages. For example, on a large construction project, the owner of the project may be willing to accept the risk of insuring for potential losses to prevent the contractors involved from arguing about who’s responsible. This would keep the project moving and avoid delays should a loss occur. risk transfer

Types of Transfer

Hold harmless, indemnity, insurance procurement, and waiver of subrogation clauses are commonly used methods to transfer risk.

  • Hold Harmless Agreement – This agreement is used to release one party from liabilities due to the acts of the other. Subcontractors and renters will typically provide this agreement to the general contractor and property owners. This can be written in broad or limited terms.
  • Indemnity Agreement – This agreement is commonly seen along with or in conjunction with the hold harmless agreement. A hold harmless will protect against losses and liabilities while the indemnity agreement will protect against actual losses. The party will agree to hold harmless and indemnify the other and this will again be written in broad or specific terms.
  • Insurance responsibilities – Many contracts will state which party should procure the insurance policy to cover certain risks. Examples may be which party is to purchase a builder’s risk policy or a wrap-up policy for a construction project. Another may be written into a lease agreement on which party is responsible for insuring the building or tenant improvements.
  • Waiver of Subrogation – This may be added to a policy to prevent the party that’s responsible for insuring the risk from recovering damages from the other contract participants. Waiver of subrogation or recovery of damages would be applicable regardless of liability for the damages. It likely will be written to not apply to gross negligence or intentional acts.
  • Limitation of Liability – While this isn’t a type of transfer, it is a way to limit liability for an organization or business. This is commonly placed in service contracts or inspection contracts and may limit liability to a certain dollar figure or to an amount related to that of the contract price itself.

Importance of Contracts

The contract clauses above can mitigate and control liability exposures. It’s important to be aware of the language and requirements in contracts. While the bargaining power may not always be in your favor, you may be able to limit the scope of hold harmless and indemnity written into contracts. We recommend having contracts, whether related to real estate, construction, services, or inspections, reviewed by local counsel that specializes in these business agreements. This will also verify that all jurisdictional rules and laws are taken into consideration in the writing of the contracts.

This article is intended for general educational and illustrative purposes only and should not be construed to communicate legal or professional advice. Further, this article is not an offer to sell insurance. Please consult with your licensed insurance agent for specific coverage details and your insurance eligibility. All policies are subject to the terms, conditions, limitations, definitions, and exclusions contained therein.

Topics: Claims, Risk Management

If you’re a content writer and would like to contribute to our blog, click here to read our guidelines.