Contractual risk transfer: How to ensure the responsible party pays for the loss
Many businesses encounter several forms of risks both internally and externally that can significantly impact their resources and operations. Internal risks such as exposure from operational processes and procedures are often easier to control.
However, external risks such as exposures that may be introduced through partnerships or other parties hired to provide a service for your business, are more difficult to control. A common way of managing or controlling these external risks is by transferring the exposure through contractual risk transfer (CRT) process.
According to Insurance Journal, contractual risk transfer 鈥渋s a non-insurance contract or agreement between two parties whereby one agrees to indemnify and hold another party harmless for specified actions, inactions, injuries or damages.鈥� Furthermore, 鈥渢he ideal use and true purpose of contractual risk transfer is to place the financial burden of a loss on the party best able to control or prevent the incident leading to injury or damage.鈥� [1]
Why is CRT important?
Although every business would like for every relationship or transaction to go well for its entirety, it鈥檚 not uncommon for accidents to occur when you least expect them. When accidents occur, the injured party or parties who sustained damages will seek compensation from anyone who was involved with or liable for the injury or loss.
Having a properly written contract with other business partners helps clear up any confusion about who will be responsible for liabilities acquired from an accident. Not only do written contracts minimize your risk, but they protect your company by helping you understand your rights and obligations under the agreement.
Below are some examples, provided for illustration purposes, of those risks associated with different parties:
A manufacturer of ready-to-bake cookie dough sources their heat-treated flour from a domestic supplier. The supplier has a mix-up and provides untreated flour to the manufacturer. The manufacturer uses untreated flour in the production of their cookies, and they release the "tainted" batch to their retail customers. The cookie dough is consumed raw, resulting in a salmonella-related, food-borne illness to customers.
A construction general contractor hires a subcontractor to install finished carpentry work. An employee of the subcontractor damages a water supply line during the installation of the finished carpentry. The leaking supply line goes undetected during the end-of-day inspection and clean-up. The supply line flows for 14 hours resulting in considerable damage to this nearly completed renovation.
A service provider has been contracted to treat (passivate) stainless steel parts for a landing gear manufacturer. The service provider fails to adhere to the guidance established by ASTM A967 - Stainless Steel Passivation. The improperly treated parts are returned to the manufacturer. The treated parts are subject to the manufacturer's in-house testing, which reveals the parts are not corrosion resistant, and they have not been treated properly.
How to incorporate contracts into your business relationships
All contracts are required to be written to achieve proper risk transfer and reviewed by a contract attorney in the appropriate state before presenting to the other party. Once reviewed, the contract needs to be signed by all parties before the start of any services offered.
Also, there needs to be a clear understanding of the key elements or common clauses included in the agreement. Below are some key elements that should be included in a written contract:
- Indemnity, hold harmless and exculpatory agreements
- Additional insured status
- Primary and non-contributory
- Waiver of subrogation
- Notice of cancellation
- Limitation of liability
Lastly, an internal risk transfer review process should be established and performed routinely to confirm that all contractual requirements are consistently being met.
This material is provided for informational purposes only and does not provide any coverage.
Citations
[1] Boggs, C.J. (2015, March 16). Academy Journal Contractual Risk Transfer: The Basics. Retrieved from Insurance Journal:
Related resources
Contractual risk transfer: How to ensure the responsible party pays for the loss
Many businesses encounter several forms of risks both internally and externally that can significantly impact their resources and operations. Internal risks such as exposure from operational processes and procedures are often easier to control.
However, external risks such as exposures that may be introduced through partnerships or other parties hired to provide a service for your business, are more difficult to control. A common way of managing or controlling these external risks is by transferring the exposure through contractual risk transfer (CRT) process.
According to Insurance Journal, contractual risk transfer 鈥渋s a non-insurance contract or agreement between two parties whereby one agrees to indemnify and hold another party harmless for specified actions, inactions, injuries or damages.鈥� Furthermore, 鈥渢he ideal use and true purpose of contractual risk transfer is to place the financial burden of a loss on the party best able to control or prevent the incident leading to injury or damage.鈥� [1]
Why is CRT important?
Although every business would like for every relationship or transaction to go well for its entirety, it鈥檚 not uncommon for accidents to occur when you least expect them. When accidents occur, the injured party or parties who sustained damages will seek compensation from anyone who was involved with or liable for the injury or loss.
Having a properly written contract with other business partners helps clear up any confusion about who will be responsible for liabilities acquired from an accident. Not only do written contracts minimize your risk, but they protect your company by helping you understand your rights and obligations under the agreement.
Below are some examples, provided for illustration purposes, of those risks associated with different parties:
A manufacturer of ready-to-bake cookie dough sources their heat-treated flour from a domestic supplier. The supplier has a mix-up and provides untreated flour to the manufacturer. The manufacturer uses untreated flour in the production of their cookies, and they release the "tainted" batch to their retail customers. The cookie dough is consumed raw, resulting in a salmonella-related, food-borne illness to customers.
A construction general contractor hires a subcontractor to install finished carpentry work. An employee of the subcontractor damages a water supply line during the installation of the finished carpentry. The leaking supply line goes undetected during the end-of-day inspection and clean-up. The supply line flows for 14 hours resulting in considerable damage to this nearly completed renovation.
A service provider has been contracted to treat (passivate) stainless steel parts for a landing gear manufacturer. The service provider fails to adhere to the guidance established by ASTM A967 - Stainless Steel Passivation. The improperly treated parts are returned to the manufacturer. The treated parts are subject to the manufacturer's in-house testing, which reveals the parts are not corrosion resistant, and they have not been treated properly.
How to incorporate contracts into your business relationships
All contracts are required to be written to achieve proper risk transfer and reviewed by a contract attorney in the appropriate state before presenting to the other party. Once reviewed, the contract needs to be signed by all parties before the start of any services offered.
Also, there needs to be a clear understanding of the key elements or common clauses included in the agreement. Below are some key elements that should be included in a written contract:
- Indemnity, hold harmless and exculpatory agreements
- Additional insured status
- Primary and non-contributory
- Waiver of subrogation
- Notice of cancellation
- Limitation of liability
Lastly, an internal risk transfer review process should be established and performed routinely to confirm that all contractual requirements are consistently being met.
This material is provided for informational purposes only and does not provide any coverage.
Citations
[1] Boggs, C.J. (2015, March 16). Academy Journal Contractual Risk Transfer: The Basics. Retrieved from Insurance Journal:
Related resources
Contractual risk transfer: How to ensure the responsible party pays for the loss
Many businesses encounter several forms of risks both internally and externally that can significantly impact their resources and operations. Internal risks such as exposure from operational processes and procedures are often easier to control.
However, external risks such as exposures that may be introduced through partnerships or other parties hired to provide a service for your business, are more difficult to control. A common way of managing or controlling these external risks is by transferring the exposure through contractual risk transfer (CRT) process.
According to Insurance Journal, contractual risk transfer 鈥渋s a non-insurance contract or agreement between two parties whereby one agrees to indemnify and hold another party harmless for specified actions, inactions, injuries or damages.鈥� Furthermore, 鈥渢he ideal use and true purpose of contractual risk transfer is to place the financial burden of a loss on the party best able to control or prevent the incident leading to injury or damage.鈥� [1]
Why is CRT important?
Although every business would like for every relationship or transaction to go well for its entirety, it鈥檚 not uncommon for accidents to occur when you least expect them. When accidents occur, the injured party or parties who sustained damages will seek compensation from anyone who was involved with or liable for the injury or loss.
Having a properly written contract with other business partners helps clear up any confusion about who will be responsible for liabilities acquired from an accident. Not only do written contracts minimize your risk, but they protect your company by helping you understand your rights and obligations under the agreement.
Below are some examples, provided for illustration purposes, of those risks associated with different parties:
A manufacturer of ready-to-bake cookie dough sources their heat-treated flour from a domestic supplier. The supplier has a mix-up and provides untreated flour to the manufacturer. The manufacturer uses untreated flour in the production of their cookies, and they release the "tainted" batch to their retail customers. The cookie dough is consumed raw, resulting in a salmonella-related, food-borne illness to customers.
A construction general contractor hires a subcontractor to install finished carpentry work. An employee of the subcontractor damages a water supply line during the installation of the finished carpentry. The leaking supply line goes undetected during the end-of-day inspection and clean-up. The supply line flows for 14 hours resulting in considerable damage to this nearly completed renovation.
A service provider has been contracted to treat (passivate) stainless steel parts for a landing gear manufacturer. The service provider fails to adhere to the guidance established by ASTM A967 - Stainless Steel Passivation. The improperly treated parts are returned to the manufacturer. The treated parts are subject to the manufacturer's in-house testing, which reveals the parts are not corrosion resistant, and they have not been treated properly.
How to incorporate contracts into your business relationships
All contracts are required to be written to achieve proper risk transfer and reviewed by a contract attorney in the appropriate state before presenting to the other party. Once reviewed, the contract needs to be signed by all parties before the start of any services offered.
Also, there needs to be a clear understanding of the key elements or common clauses included in the agreement. Below are some key elements that should be included in a written contract:
- Indemnity, hold harmless and exculpatory agreements
- Additional insured status
- Primary and non-contributory
- Waiver of subrogation
- Notice of cancellation
- Limitation of liability
Lastly, an internal risk transfer review process should be established and performed routinely to confirm that all contractual requirements are consistently being met.
This material is provided for informational purposes only and does not provide any coverage.
Citations
[1] Boggs, C.J. (2015, March 16). Academy Journal Contractual Risk Transfer: The Basics. Retrieved from Insurance Journal:
Related resources
Contractual risk transfer: How to ensure the responsible party pays for the loss
Many businesses encounter several forms of risks both internally and externally that can significantly impact their resources and operations. Internal risks such as exposure from operational processes and procedures are often easier to control.
However, external risks such as exposures that may be introduced through partnerships or other parties hired to provide a service for your business, are more difficult to control. A common way of managing or controlling these external risks is by transferring the exposure through contractual risk transfer (CRT) process.
According to Insurance Journal, contractual risk transfer 鈥渋s a non-insurance contract or agreement between two parties whereby one agrees to indemnify and hold another party harmless for specified actions, inactions, injuries or damages.鈥� Furthermore, 鈥渢he ideal use and true purpose of contractual risk transfer is to place the financial burden of a loss on the party best able to control or prevent the incident leading to injury or damage.鈥� [1]
Why is CRT important?
Although every business would like for every relationship or transaction to go well for its entirety, it鈥檚 not uncommon for accidents to occur when you least expect them. When accidents occur, the injured party or parties who sustained damages will seek compensation from anyone who was involved with or liable for the injury or loss.
Having a properly written contract with other business partners helps clear up any confusion about who will be responsible for liabilities acquired from an accident. Not only do written contracts minimize your risk, but they protect your company by helping you understand your rights and obligations under the agreement.
Below are some examples, provided for illustration purposes, of those risks associated with different parties:
A manufacturer of ready-to-bake cookie dough sources their heat-treated flour from a domestic supplier. The supplier has a mix-up and provides untreated flour to the manufacturer. The manufacturer uses untreated flour in the production of their cookies, and they release the "tainted" batch to their retail customers. The cookie dough is consumed raw, resulting in a salmonella-related, food-borne illness to customers.
A construction general contractor hires a subcontractor to install finished carpentry work. An employee of the subcontractor damages a water supply line during the installation of the finished carpentry. The leaking supply line goes undetected during the end-of-day inspection and clean-up. The supply line flows for 14 hours resulting in considerable damage to this nearly completed renovation.
A service provider has been contracted to treat (passivate) stainless steel parts for a landing gear manufacturer. The service provider fails to adhere to the guidance established by ASTM A967 - Stainless Steel Passivation. The improperly treated parts are returned to the manufacturer. The treated parts are subject to the manufacturer's in-house testing, which reveals the parts are not corrosion resistant, and they have not been treated properly.
How to incorporate contracts into your business relationships
All contracts are required to be written to achieve proper risk transfer and reviewed by a contract attorney in the appropriate state before presenting to the other party. Once reviewed, the contract needs to be signed by all parties before the start of any services offered.
Also, there needs to be a clear understanding of the key elements or common clauses included in the agreement. Below are some key elements that should be included in a written contract:
- Indemnity, hold harmless and exculpatory agreements
- Additional insured status
- Primary and non-contributory
- Waiver of subrogation
- Notice of cancellation
- Limitation of liability
Lastly, an internal risk transfer review process should be established and performed routinely to confirm that all contractual requirements are consistently being met.
This material is provided for informational purposes only and does not provide any coverage.
Citations
[1] Boggs, C.J. (2015, March 16). Academy Journal Contractual Risk Transfer: The Basics. Retrieved from Insurance Journal: