Contractual risk transfer is an important part of protecting your business
You’re a prudent business owner. You buy insurance well above the minimum limits with highly-rated insurance companies. You employ a first-rate staff, have a good safety record and implement controls to help ensure a quality product. You’ve done everything you can to protect your business from costly litigation, right? If you haven’t established a contractual risk transfer strategy you could be at risk of unknowingly taking another contractors liability, or being exposed to additional liabilities due to the actions of others.
When a subcontractor installs a product or performs services on your behalf that results in an injury or property damage, or when a contractor’s employee is injured on your project, the question of responsibly can be uncertain. Liability should ideally lie with the party that has the most control over the potential hazards and exposures that caused the potential liability. One way to prevent or avoid such confusion and your assumption of unintended liability is to require your suppliers, contractors and subcontractors to agree to assume the risk or indemnify you.
Performed effectively, transferring risk distributes risk in a reasonable manner and places responsibility for assumption of risk on specific parties that have the ability to control it.
The first step in the process is to make use of the resources and knowledge of your insurance professional to review your current contracts and help you establish risk transfer goals. They can also work with your attorney to assure that the indemnification, common law limitations and hold harmless clauses are backed up by proper insurance provisions that can be realistically obtained in the current insurance market.
Some contractual risk transfer provisions that should be considered include:
• Performance standards
• A broad hold harmless agreement & indemnity provisions backed by insurance requirements
• Insurance coverage terms and limits that provide the scope of protection needed to cover the risks associated with the project.
• Address release of liens
• Agreement to comply with all state and federal laws, ordinance and regulations
• Safety standards
• Responsibility to pay taxes and fees
• Waiver of subcontractor immunity under workers compensation laws if any.
Because contractual risk transfer entails insurance to support its requirements, it’s important that the insurance provisions be up to date. Many contracts include terminology and provisions that have been out of date for decades. They may have been copied over and over again from previously drafted agreements without review or consideration of current coverage. These outdated provisions could possibly result in an immediate breach of contract upon execution if they cannot be complied with.
Contract terms that may indentify antiquated insurance requirements include:
• Comprehensive general liability insurance
• Public liability Insurance
• Manufacturers & contractors (M&C) liability
• Coinsured
• Additional named insured
• Broad form comprehensive general liability and or property damage endorsement
• Combined single limit
Insurance provisions should be reasonable and allow for flexibility if necessary. You can’t expect the other party to completely rearrange their current annual insurance program mid-term to meet your needs. Attempt to determine what level of risk transfer and insurance requirements will provide an acceptable level of protection without unnecessary hardship. Don’t ask for coverage you can’t give a specific purpose for requiring. Don’t specify the exact edition dates of policy forms to allow for the possibility of new forms being issued. Permit the total liability limits to be met by allowing any number of layered policy forms and avoid specifying a maximum liability deductible. Don’t ask for coverage or endorsements that are not available in standard policy forms.
The final step in the risk transfer process is establishing procedures to ensure compliance. Designate a staff member to verify that signed contracts and insurance certificates are received before the project begins. Implement a system to keep insurance certificates up to date and ask your insurance broker to audit those certificates at least once a year. Review and update your contracts and insurance requirements regularly
Contractual risk transfer isn’t just for large contractors. If you have others performing work on your behalf, you’re at risk. With a little work and the assistance of your insurance broker and attorney you can establish a risk transfer strategy that better protects your business and also makes it easier for those you do business with.
Paul Anderson is the executive vice president of commercial insurance at Biggs Insurance. You can reach him at (360)-828-3708.
