Contractual Risk Transfer

Successful risk management involves five basic things we can do with risk: 

1. Avoid 
2. Prevent 
3. Reduce 
4. Separate (and Duplicate) 
5. Transfer risk to others

Contractual risk transfer is an especially helpful action when the liability risk arises out of third party liability from contracting services, suppliers, or renting your property to others. This is especially true in states which allow joint and several (individual) liability where you can be liable for the actions of the renter, vendor, or contractor. 

This transfer of risk is done through a contractual agreement with the third party renter or service provider. 

This contractual risk transfer principally involves three steps: 

1. IDENTIFICATION of potential risks connected to the Scope of Work (SOW).
2. REQUIREMENTS that define clear and unambiguous financial responsibility for each party.
3. VERIFICATION of specific indemnity and insurance coverage requirements for payment of the contractor's liabilities assumed in the contract.

Transfer of Risk to Others Using Contracts 

When you contract with a vendor or contractor, you become liable for their work. Hiring entities have their own liability plus responsibility and liability for the actions of others they contract or hire (vendors, general contractors [GCs], subcontractors, service providers, lessees, users of facilities, special events, etc).

The contractor or vendor can best control the risk and should be responsible. Proper use of contract agreements can transfer financial risk from the hiring entity (owner, developer, public agency, landlord, GC, or any business) to the responsible party (the renter, vendor, contractor, service provider, or their subcontractors) doing the work and causing the risk.

Two Principal Ways to Transfer the Risk & Protect Hiring Entities 

1. Indemnity: The contractor agrees in a contract to assume the liability of the hiring entity. The contractor's promise of “assurance” is “insured” in the contractor's Insurance policy by contractual liability coverage (the definition of “insured contract”) and obligates the insurance company to make covered payments for “liability assumed in a contract or agreement” by their named insured, the contractor, and/or your third-party provider. 
2. Insurance: Coverage for the hiring entity is added by additional insured endorsement(s) on the contractor's policy. 

Types of Liability to be Transferred by Indemnity and Insurance

1. Negligent Tort Liability - the Party is negligent/liable. 
   • Active Liability - What you did caused the harm, including your sole or contributory negligence; or
   • Passive Liability - What you did not do, but could have, caused the harm. This is most common for hiring entities.
2. Vicarious Liability - Liability as a function of law regardless of the actions of the Hiring Entity. No negligence is required to have vicarious liability.
3. Joint & Individual (Several) Liability - all for one and one for all
4. Contractual Liability - Liability of others assumed by Contract
5. Professional Liability - Covers financial loss from an error or omission. Different from General (tort) Liability in that it includes Financial Harm even if no Bodily Injury liability or Property Damage liability happens