Limiting your liability and controlling insurance costs is on on going challenge. Every time you enter into a new contract you're accepting certain risks whether you know it or not. Each contract should be reviewed carefully to understand the extent of risk you are accepting. Many contracts are negotiable when intended or ambiguous language exposes you to more risk than you're willing to accept. It is very common for companies to engage outside resources like their attorney or insurance advisor to ensure appropriate language is incorporated into the contract to protect their interests. Having strong internal controls over your contracts will help you manage your insurance premiums and protect you from other business risks. Only after fully understanding your risks can you determine if entering into a contract is a good business decision.
How does contractual risk transfer work?
Risk transfer protects the company and places [transfers] responsibility for claims, losses, and damages on the other party. In the construction industry, this type of risk management is applicable to a subcontractor or a contract between the general contractor and the owner. However, risk management is significant with any type of risk you assume. Successful risk management transfers the maximum amount of risk to the other party. Lawyers and risk management consultants have created indemnity and insurance provisions that pass to the sub contractors the risk of defective construction as well as the rise of general supervision of a project and the risk of site safety for example.
Indemnity provisions are often referred to as hold harmless agreements and are one of the primary vehicles by which a contractor can shift or apportion risk in a contract. Indemnity provisions may include three obligations 1) indemnify, 2) defend, 3) hold harmless the other party. Indemnity provisions are extremely effective risk management tools.
The other risk management factor to consider in addition to strong indemnification language is to be listed on the other party’s insurance as an additional insured on a primary and non-contributory basis.
Have your insurance advisor look at the contracts before you sign them. Risk transfer is complex and requires specific language to prevent you from being liable.
Read more about Construction Insurance and how HNI can help!