The Essentials of Contractual Risk Transfer (2024)

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 insurance policy, accepts the liability in the indemnitee’s place.

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.

Some techniques used to achieve contractual risk transfer include:

• Indemnity & Exculpatory Agreements
• Waivers of Subrogation
• 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(COI)—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 contractual risk management program should include a strong vendor insurance managementsolution that includes well-written vendor contracts with indemnification and hold harmless agreements and comprehensive insurance requirements. Businesses should hire a qualified attorney to assist with the indemnification and hold harmless agreement and an insurance risk management professional to write the comprehensive insurance requirement language. When it comes to contractual risk transfer, it all comes back to the contract; if it’s not well written, the whole risk transfer technique falls apart.

The vendor management program should also include a COI tracking program and document compliance review process. 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 a vendor’s insurance carrier and protect your business.

Four Endorsem*nts That Are Critical to the Contractual Risk Transfer Process

1. Additional Insured Endorsem*nt: Can be added to commercial general liability, automobile liability, pollution liability, and certain other policies. This extends coverage to the additional insured named in the endorsem*nt. If a blanket additional insured endorsem*nt referencing “where required by written contract” is used, careful review of the language is essential to ensuring that all parties seeking additional insured status are covered.
2. : 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.
3. Waiver of Subrogation Endorsem*nt: Prevents the vendor’s insurance carrier from subrogating or seeking reimbursem*nt from the party that requested that subrogation be waived.
4. Alternate Employer Endorsem*nt: On workers’ compensation and employers’ liability policy, this type of endorsem*nt allows a party to be scheduled with primary coverage as if they were listed as an insured on the policy.

COI Tracking Basics: How to Collect & Correct Valid and Compliant Evidence of Insurance

The industry trend is to require certificates of insurance to obtain an overview of the insurance your vendor carries. 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 endorsem*nts, 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 and analyze whether it is providing true contractual risk transfer utilizing well-written contracts and effective 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 COI tracking and compliance review, which are critical to the risk transfer process within your vendor management program.

Consider employing a comprehensive third-party vendor management solution, such as Business Credentialing Services’ full-service option, to enhance and augment your current program and ensure your contractual risk transfer strategy is strong and effective. With the right in-house expertise and resources, you might otherwise consider bcsself-service solution to streamline your processes through our convenient, cloud-based software.

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.

Happy insuring!