Originally published July 18, 2017; updated April 9, 2019
Contractual risk transfer is when the language in a non-insurance agreement excuses one party from financial or legal responsibility associated with specified actions, inactions, injuries or damages. In contractual risk transfer, one party agrees to indemnify and hold another party harmless in a contract. The indemnitor, backed by their own insurance policy, accepts the liability in the indemnitee’s place.
Some techniques used to achieve contractual risk transfer include indemnity and exculpatory agreements, waivers of recovery rights (subrogation) and comprehensive insurance requirements. If risk-related contract stipulations are well-written, they can effectively protect indemnitees from unexpected liability by literally transferring risk to the indemnitor. Of course, it’s not as easy as it sounds.
In a contract, there are two methods of transferring risk:
- Strong Indemnification and Hold Harmless Agreements
- Comprehensive Insurance Requirements
The indemnification and hold harmless agreements transfer risk of financial loss from the indemnitee to the indemnitor, but what happens if the indemnitor does not have the financial ability to protect the indemnitee? If the contract also includes comprehensive, well-written insurance requirements and you have collected valid and compliant evidence of insurance—namely, a certificate of insurance—you can tender the claim directly to the indemnitor’s insurance carrier for defense and payment of any damages.
How To Ensure Contractual Risk Transfer
Every risk management program should include a strong vendor insurance management program that includes well-written vendor contracts including indemnification and hold harmless agreements and comprehensive insurance requirements. A qualified attorney should be hired to assist with the indemnification and hold harmless agreement and an insurance risk management professional should be hired to write the comprehensive insurance requirement language. When it comes to contractual risk transfer, it all comes back to the contract and if not well written, the whole risk transfer technique falls apart.
The vendor management program should also include a certificate of insurance (COI) and document compliance tracking program. By collecting and correcting the evidence of insurance provided by your vendors, you are more likely to be able to transfer any risk back to the vendor’s insurance carrier and protect your business.
Four Endorsements That are Critical to the Insurance Risk Transfer Process
- Additional Insured Endorsement: Can be added to Commercial General Liability, Automobile Liability, Pollution Liability and certain other policies and extends coverage to the Additional Insured being named in the endorsement. If a blanket Additional Insured Endorsement referencing “where required by written contract” is being used, careful review of the language should be done to ensure that all parties seeking Additional Insured status are provided coverage.
- Primary and Non-Contributory Endorsement: States that the vendor’s insurance policy will extend coverage to the Additional Insured on a primary basis and will not seek contribution from the Additional Insured’s policy.
- Waiver of Subrogation Endorsement: Prevents the vendor’s insurance carrier from subrogating or seeking reimbursement from the party that requested that subrogation be waived.
- An Alternate Employer Endorsement: On Workers’ Compensation and Employers’ Liability Policy, this type of endorsement allows a party to be scheduled with primary coverage as if they were listed as an Insured on the policy.
How to Collect and Correct Valid and Compliant Evidence of Insurance
The industry trend is to require certificates of insurance to obtain an overview of the insurance that your vendor is carrying. However, it is important to remember that the certificate of insurance is for informational purposes only and does not confer any rights to the Certificate Holder.
In addition to collecting a certificate of insurance, one should consider collecting actual endorsements, schedule of forms pages, declarations pages and possibly certified copies of insurance policies on very high-risk vendors. All documentation should be reviewed for accuracy and requests for corrections should be made and followed-up on. If the vendor is providing ongoing services, renewal policies must be collected and corrected on an annual basis to complete your COI tracking program.
Take the time to assess your company’s vendor management program to analyze whether it is providing true contractual risk transfer utilizing well-written contracts and documentation tracking procedures.
Don’t Try This at Home
Does your in-house team have the time, bandwidth and resources to review and correct dozens of documents from hundreds of potential or existing vendors? If not, you are certainly not the only company that is struggling with certificate of insurance and document compliance tracking, which is critical to the risk transfer process within your vendor management program.
Consider employing a third-party vendor management firm, like Business Credentialing Services, to enhance and augment your current program today and ensure your contractual risk transfer strategy is strong and effective.
Business Credentialing Services is a tech-based company specializing in risk-mitigation and document tracking for enterprise-level clients and their third-party subcontractors. To learn more about Vendor Insurance Review, download the guide below.