Business owners commonly agree to accept the liability of another party, in a practice known as “risk transfer.”  Contractual risk transfer is a non-insurance contract between two parties whereby one agrees to indemnify and hold another party harmless for specified actions, inactions, injuries, or damages. The 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. However, in practice, some parties attempt to contractually absolve themselves of responsibility for injury or damages they are solely liable for.

When entering into a contract with another company or a government entity, business owners often find themselves agreeing to insurance terms that may not be supported by their current insurance program.  In business contract situations, it is common for the parties with the most bargaining power, such as large general contractors, corporations, and government entities, to demand onerous insurance requirements from the other party to the contract. A few examples:

  • Requiring outdated additional insured endorsement language in the contract;
  • Demanding that the commercial general liability policy continue in force, with no specific termination date, even after all work has been completed;
  • Forbidding any exclusionary language for risks such as pollution, mold, or earth movement;
  • Asking for omnibus wording that essentially requires anyone and everyone be listed as additional insureds; and
  • Requiring that language in the standard certificate of insurance form be modified or deleted.

Typically, most insureds expect their commercial general liability policies to support all of the risk transfers outlined in a contract, but this is not always the case.  In fact, the coverages sought for those risks may be unavailable from the current insurance carrier or generally unavailable in the insurance marketplace as a whole. The result is that the risk is ineffectively transferred or not transferred at all, contrary to the expectations of all parties.  So, if one party to the contract does not fulfill its obligations by failing to provide additional insured status or to obtain proper coverage, litigation may result in the form of a breach of contract action. That’s why it’s essential for business owners to understand insurance requirements before agreeing to meet them. Be sure to consult your insurance agent to assist you with this analysis.

For more information about properly insuring against contractual risk transfers, contact us.