Risk transfer

Good risk management includes identifying and addressing factors that a business can control, usually inexpensively.

One way of hedging risk is by financing it
through the purchase of insurance. Another
method is by transferring risk.

“In the business world, risk transfer often
involves contractors’ relationship with sub-contractors,” says Tim Wilson, risk control
consultant at Westfield Insurance.

Smart Business learned from Wilson about
transferring risk to subcontractors through
formal agreements and documentation.

How can risk transfer dramatically affect your
liability?

Consider the following scenario: Suppose
you are ABC Masonry working on a new
office building. You have subcontracted the
installation of metal door frames to DEC
Doors, which is part of your responsibilities
in your contract with the builder. You have
always done business with people you know,
and don’t use a formal subcontractor agreement. An employee of DEC Doors accidentally drops a piece of steel and damages an
expensive piece of electronic equipment that
FGH Electrical is installing. FGH Electrical
comes to you for the cost of the equipment.
You are liable since the accident happened as
part of your contracted work, and you are
responsible for your subcontractors, including DEC Doors. Also, even if DEC Doors’
insurance carrier pays the cost, the carrier
can legally make a claim against you to recover all or part of what it paid. Even if no claim
is ever paid, the time and paperwork carries
a significant cost that you cannot recover.

With good risk transfer policies in place,
you and your insurance carrier never have to
become involved. Your subcontractors
would be liable for their employees’ negligence, and they would be contractually obligated to defend you.

What can you do to ensure legally binding
risk transfer?

The idea behind risk transfer is that everyone is liable for his or her own negligence and
not financially responsible for someone else’s
negligence. In order to make risk transfer
legally binding, it needs to be formalized in a written contract that all parties accept.

Typically, contractors use a subcontractor
agreement with their subcontractors. This is
a legally binding document that spells out
terms and conditions and covers matters
related to work performance. The language
relating to risk transfer should be spelled out
explicitly. As risk control consultants, we
look for the following:

 

  • Hold harmless and indemnification
    agreements

     

     

  • Additional insured provision (asking to
    be named as an additional insured on the
    subcontractor’s policy)

     

     

  • Requirement to provide certificates of
    insurance

     

     

  • Requirement for minimum limits (ideally
    matching the contractor’s)

     

     

  • Waiver of subrogation provision

     

     

  • Review by an attorney or knowledgeable
    authority

 

How does a waiver of subrogation differ from
a hold harmless agreement?

In short, this is an endorsement to the sub-contractor’s insurance policy that says: My insurance company can’t sue you. The
endorsement is a standard form known as a
CG2404 or CG 2404a.

The hold harmless agreement, simply put,
says: I can’t sue you. For example, if I am a
subcontractor and I trip and fall while I am
working for you at your project site, the
hold harmless agreement means that I cannot sue you for the cost of my doctor visit.
We sign hold harmless agreements all the
time when we rent a car or participate in a
10k run.

What records need to be kept on file, and for
how long?

Proper recordkeeping is crucial for many
reasons. Having a good system for keeping
track of certificates of insurance will save
time and effort when your carrier audits
your workers’ compensation and general
liability policies. When and if a claim
occurs, having copies of the contracts with
all the associated paperwork will simplify
the process. These claims often come up
many months after you complete work on a
project.

What are some other areas where risk transfer can be important?

If you sell a product manufactured by others, you should consider asking the manufacturer for what is commonly referred to as a
vendor’s endorsement [‘Additional Insured-Vendors’ (CG2015)]. Manufacturers and distributors typically purchase their own products liability insurance coverage under which
they are the ‘named insured.’

The purpose of the vendor’s endorsement
is to provide products liability coverage to
vendors that sell or distribute their products.
This endorsement gives primary products liability coverage over and above any coverage
that the vendor may carry and lists the vendor as an ‘additional named insured.’ In short,
it saves you the time and expense of being
involved in a lawsuit about a product you
sold and simplifies claim handling.

TIM WILSON, CPCU, ARM, ALCM, is a risk control consultant at Westfield Insurance. Reach him at [email protected] or
(904) 642-2144 x210. Westfield Insurance provides commercial and personal insurance services to customers in 17 states. Represented
by leading independent insurance agencies, the product we offer is peace of mind and our promise of protection is supported by a commitment to service excellence. For more information, visit www.westfieldinsurance.com.