Contractual Risk Transfer – The Basics
It is good risk management to make certain that risk is transferred whenever possible. This is usually accomplished through use of various legal documents, typically a contract and an indemnification agreement. In this way, liability for the negligent delivery of products or services is transferred to the party in the best position to control loss.
Best practices involves a few key steps:
- Analyze the risk. The scope of work should be reviewed carefully. Who is doing the work? Are they capable of completing the work successfully? You need to consider what could go wrong. Don’t fall into the trap of not paying sufficient attention to small jobs; there is no correlation between the size of a project and the degree of risk, even the smallest job can potentially be catastrophic.
- Use a Hold Harmless. Contracts should contain a Hold Harmless agreement, also known as an Indemnity Agreement. Hold Harmless means that the entity performing the work is obligated to defend you in the event something goes wrong. The language contained in the Hold Harmless should be written so as to be interpreted as broadly as possible in your favor. A well-written Hold Harmless will include the following language (courtesy Alliant Insurance Services):
"To the fullest extent permitted by law, Contractor shall hold harmless, defend at its own expense, and indemnify Entity, it officers, employees, agents and volunteers against any and all liability, claims, losses, damages or expenses, including reasonable attorney’s fees, arising from all acts or omissions to act of contractor or its officers, agents or employees in rendering services under this contract; excluding, however, such liability, claims, losses, damages or expenses arising from Entity’s sole negligence or willful acts."
- Choose the appropriate insurance requirements. By requiring insurance you are making sure the contractor will have the funds to fulfill its obligations under the Hold Harmless agreement. It’s important to select the proper type of insurance and in sufficient amounts to protect against a potential loss. Advise the contractor early in the bidding process what your insurance requirements will be. This saves time by eliminating contractors for consideration who may be unwilling to agree to your insurance specifications.
- Verify coverage. At minimum, the contractor must provide you with a Certificate of Insurance and all appropriate endorsements, such as Additional Insured and Waiver of Subrogation. Review these documents carefully or have them reviewed by your insurance professional. Be mindful of policy expiration dates and make certain to collect renewal documentation as it becomes due.
- Report claims promptly. You must inform the other party’s insurer immediately, in writing, of any incidents or claims arising out of the work. Send a copy to the contractor and its insurance agent as well. You should also inform your own insurance carrier and agent in order to protect your rights under your policy.
Following these simple guidelines are the first steps in ensuring that your relationship with third-parties with whom you contract is properly established and your rights and financial interests are protected.
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