What is Contractual Risk Transfer?
Examining and managing risk exposures is one of the keys to the long-term success for businesses of all sizes. However, when you work with partners and other parties such as contractors, renters, component suppliers and service providers, you may be held accountable for their actions or negligence. And because your regular risk management procedures and insurance policies generally don’t cover others, you could be found liable for huge losses.
The best protection in these situations is to shift risk and liability away from your business (whether temporary staffing agency, PEO or other), and onto other parties. Thankfully, you can do this when you draft a formal business contract by including provisions, clauses and other text that determines exactly who is liable for specific scenarios and losses. This is generally referred to as contractual risk transfer and can include a wide range of provisions on liability. For example, a business could agree to be responsible for losses only when employees or customers are on the premises.
Because properly worded contracts are legally binding in court, they can help protect your business in the event of a loss or dispute. Additionally, contracts can contain insurance requirements, waivers and other types of risk transfer that give your business legal counsel or direct financial compensation.
Although contractual risk transfer is an effective way to protect your bottom line when working with partners and other parties, the practice itself may expose your business to significant risks.
Many states have laws that require specific legal language in order to make contractual risk transfer enforceable, and some states have outlawed specific types of contractual risk transfer altogether.
Contracts are binding legal documents that outline the relationship between your business and another party, and the different sections included in a contract will detail how you operate together. In order to transfer liability from one party to another, contracts include dedicated sections—often called clauses or provisions— that describe the subject of risk and liability. Because contracts are a negotiated agreement, there are a number of ways to transfer liability during the drafting process. However, there are three main types of contractual risk transfer:- Indemnity provisions
- Additional insured provisions
- Waivers of subrogation
Each type of contractual risk transfer has unique advantages and disadvantages, and you should examine each one to see what’s right for your business. For example, many states have laws that limit some of the types of contractual risk transfer, and some may be outlawed entirely.
When determining the type of risk transfer that’s best for you, you should consider the following questions:- How can I establish the best working relationships with others?
- What types of risk transfer are most common in my area and industry?
- What type of risk transfer offers me the most financial protection in this scenario?
- Who will review my contract to ensure it’s both legal and in my best interest?
You should contact legal counsel for advice before you agree to a contract with other parties but in order to help you answer the questions above, and for more information on risk transfer and contracts, call Barrow Group today or click here to email one of our risk management specialists.