Insurance aims to transfer risk from one party to another, typically from a business or individual to an insurance company.
Risk can be anything from a fire destroying your property to the death of a business partner. Insurance aims to transfer risk from one party to another, typically from a business or individual to an insurance company.
While any business requires a degree of risk-taking, the real question is whether you can afford to take on the liability of specific risks. A risk that is outside your experience wheelhouse, or could cause a catastrophic loss, poses a higher probability of financial ruin to your business.
Some activities, events or services can put you at a greater risk for financial loss. These include:
- Construction projects
- Manufacturing operations
- Lease agreements
- Real estate managers
- Professional services
- Third-party service providers and subcontractors
- Venture capitalists and investments
- Business startups
- Mergers and acquisitions
What is a CRT?
Contractual Risk Transfer is a legally binding way to transfer risk from one party to another. CRTs identify problematic business risks and transfer those risks from one business to another using a written agreement. Usually, the business most qualified to handle or control the risk assumes the financial and legal risk of liability associated with the operation or exposure.
CRTs can help offset insurance costs and create a trust bond between the companies doing business. CRTs put known risk on the table and divide it in a way that makes both businesses feel comfortable.
What is the function of a contractual risk agreement?
It is intended to legally transfer the risk of financial loss, bodily injury or property damage to the responsible party. This helps your business avoid paying to the negligence of others that may cause a lawsuit against your business.
Insurance companies tend to shy away from operations and exposures to you or your business that you cannot always control. These typically include services and activities mentioned above such as leasing properties you own, hiring contractors, hiring service providers, working with vendors and suppliers, etc. These activities create hazards/risks to your operations that the insurance carrier may not want to insure or if they are willing to insure, may result in higher premiums due to the increase in exposure to loss. Having a written agreement with these parties to contractually transfer the risk of loss to these other parties will make your business more favorable to your insurance carrier.
Walkway injury: a CRT example
An assisted living residential facility houses elderly residents in a sizeable apartment-style building. The facility hires a third-party maintenance service to handle its landscaping, including walkway and driveway maintenance. The housing staff can’t oversee or inspect the daily landscaping and walkway maintenance. They won’t know if there are immediate hazards on the property, leaving them open to liability.
The facility and the maintenance service enter into a contractual risk agreement that transfers the outdoor maintenance liability from the facility to the maintenance company. The maintenance service promises a specific standard of care and holds the facility harmless if there is a lawsuit. More importantly, they agree to provide defense and indemnification to the facility if the facility is sued for the acts, omissions or negligence of the maintenance service in performing these services.
Later in the year, one of the residents slips and falls on the sidewalk during a visit. The family sues the facility for poor walkway maintenance. The facility’s liability passes to the third-party maintenance service, leaving them with less risk to defend against.
An experienced lawyer specializing in business contracts and risk mitigation can help you draft a CRT agreement like the one in this example.
Who needs CRT protection?
A CRT can be an invaluable tool for most businesses, especially in high-risk operations or when there’s a reliance on third-party service providers. Making sure you’re not responsible for oversights or errors made by a service provider (like in the maintenance service example) can help protect your company from liability outside of your control.
A contract that clearly defines the scope of work and which party is responsible for the hazards associated with the work, could save your business time and expenses in litigation. It could even save your working relationship with that vendor or provider. Being upfront and clear about who’s willing to take on specific risks before they are part of a lawsuit makes the path to a settlement much more manageable.
CRTs are prevalent in the high-risk construction industry. But as insurance markets harden and nuclear verdicts become more commonplace, CRTs are becoming more important in other industry sectors.
What’s in a CRT?
An average risk transfer agreement usually includes the following:
- A hold harmless agreement or indemnification clause outlining each party’s responsibilities, including a duty to defend in court if negligence, personal injury or a property damage lawsuit arises
- An insurance procurement clause that specifies who is responsible for obtaining insurance, including the policy types, limits and duration
- A waiver of subrogation clause stating that if the other party’s insurance policy pays a claim related to your business liability, their insurance company waives the right to sue you to recoup damages, even if you were partially responsible
- An additional insured clause stating the other party’s liability insurance policy will name you as an additional insured on a primary and non-contributing basis for that “other party’s” negligence. Being listed on their policy offers some benefits, like a duty to defend clause in a lawsuit.
Involve a seasoned contract attorney familiar with your state laws and industry risks. They’ll answer your questions and help protect your business interests before you enter into any signed agreements.
- Avoid overly broad agreements.
- Specify the scope of work and each party’s responsibilities.
- Verify that your contract language complies with your state laws. (A local court could void improper contract language, leaving you responsible. This is especially important when businesses are located in different states.)
- Confirm your state laws regarding negligence and fault. (Some states do not allow you to transfer losses that are partly your fault.)
Ask your insurance agent to review the other company’s insurance policy to ensure adequate coverage. It doesn’t help to be named as an additional insured on an insurance policy that doesn’t afford proper protection.
Call for advice — before you sign
CRTs don’t replace insurance; they supplement insurance programs and help solve some of your trickier risks. If you think a CRT might be a solution for your business, contact the risk trio: your insurance agent, lawyer and accountant. They can offer a comprehensive view of how a CRT could affect your financial, tax and legal liability.
This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem. Please refer to your policy contract for any specific information or questions on applicability of coverage.
Please note coverage can not be bound or a claim reported without written acknowledgment from a OneGroup Representative.
Written content in blog post: Copyright © 2023 Applied Systems, Inc. All rights reserved.