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The ABC’s of Contractual Risk Transfer

- Thursday, December 27, 2018
TriState Business Insurance - Virginia, Maryland, and DC

Contractual risk transfer is a business strategy designed to reduce the cost of risk by transferring certain risks to another entity's risk program. This transfer takes many forms. It is most commonly employed when a hiring company engages a sub-contractor. It is also employed when an entity rents or leases property to another and wants the lessee (renter) to be responsible for renter’s insurance while they have use and control of the asset. We'll address a few of the more common ones here.

A common insurance requirement is the Additional Insured. A hiring company will often ask the subcontractor to name the hiring company as an additional insured, so if something goes wrong, the sub contractor's insurance program will take care of the claim. By off-loading these from the hiring company's risk program, they transfer the cost also.

Landlords will often ask tenants to name them as additional insureds, so that if a guest of the tenant is injured, the tenant's insurance takes care of the claim. Again, the cost has been transferred.

Another is "waiver of subrogation." Subrogation is the process whereby insurance companies go after each other based on who was ultimately responsible for a loss. A simple example is when my fleet insurance company pays a collision claim, then goes after the company of the driver that actually caused the accident. Agreeing to waiver of subrogation means that the subcontractor's insurance cannot go after a hiring contractor's insurance, even if they are responsible for whatever happened. If an electrician's employee is hurt at an unsafe contractor's work site, the claim still goes on the electrician's experience, not the responsible contractor's.

Many B2B contracts include "hold harmless" and "agree to indemnify" language, which are corollaries to the insurance provisions described above. This can be a very complicated business management challenge and we stand ready to consult you on this subject and any business insurance need. With that said, we’ll likely advise that before pen is put to paper that you consult with your business’ attorney as well.

For questions regarding contractual risk transfer for business residing within Virginia, Maryland, and DC, contact us today!