Are You Protecting Your Business?
This month, OneGroup hosted a 101 series webinar on contractual risk transfer. Experts Kirsten Shepard and John Schmitt spoke about protecting your business from the negligence of others.
Contractual risk transfer is a legally binding way to transfer risk from one party to another. One party transfers a risk of loss to the other party involved through a written contract, created prior to the loss.
What is risk? It’s the potential for injury or financial loss, a loss can be caused by fires, water damage, vehicle accidents, slips, trips, or falls, work-related injuries, and lawsuits.
Controlling risk. You face risks everyday, so you should know what risks you can afford to take, and what you should avoid. Managing these risks by transferring the risk to another party will help avoid litigation against you, or your insurance cancelling or non-renewing your policy.
Contractual risk transfer in action. A store owner hired a landscaper to do landscaping around the parking lot, and a customer tripped on netting left by the landscaper to protect the grass. The customer broke his wrist, and then sued the store owner for medical costs. The store owner was able to tender the lawsuit to the landscaper, and the landscaper’s insurance ended up paying. This was due to the contract that the store owner had with the landscaper to indemnify them for losses arising out of their work.
Why should you transfer risk? Transferring risks protects yourself and your business. Contractual risk transfer can help you avoid paying for the negligence of others, create trust between both parties, and off-set insurance costs. Dividing the risk before something bad happens will make both parties more comfortable. Having the contract drawn up will uphold responsibility in the event of an accident. To make the claims process easier in the event of an injury or loss, have a copy of the other parties’ insurance certificate.
A few examples of contractual relationships:
- Property Lease (Landlord & Tenant)
- Construction Contract (Owner & Contractor)/(Contractor & Sub-Contractor)
- Vendor Agreement (Company & Vendor)
- Service Agreement (Company & Service Provider)
What is indemnification? It’s when one party agrees to compensate another party in the event of a loss. Indemnification should be clearly decided upon and agreed to before the loss occurs.
An indemnity agreement is only as good as the financial condition of the parties. An insurance policy is a method to finance the obligation to indemnify and defend the contract that was agreed upon. Requiring third parties to carry the right insurance coverage and enforcing compliance is one of the most effective ways an organization can protect themselves. When deciding what insurance to require, you should look at who the contract will be with, the type of contract, and who could potentially be harmed.
Basic insurance requirements:
- Commercial general liability insurance covers bodily injuries and property damage to third parties.
- Workers’ compensation and employers liability insurance provides coverage for an employer’s legal liability for bodily injury to employees arising out of and in the course of their employment.
- Umbrella insurance provides an additional layer of coverage over underlying insurance policies.
Certificate of insurance. A certificate of insurance is not a contract, it is evidence of coverage at the time the certificate is issued. Though, it does not guarantee that coverage is currently in force or that coverage is as broad as what one party requested.
Insurance will pay for claims that are covered by the terms of the policy, this means that anything outside of your current policy will not cover a claim with that loss. Many policies have limitations and exclusions. You should always check your coverages, and update your policies to prevent a loss. Insurance policies have a limit of liability. The limit of liability is the most an insurance policy will pay for a loss. If a claim is not covered or your vendor does not have enough insurance, the hold harmless and indemnity agreement gives your agency the right to be reimbursed by your vendor. Having both an indemnification agreement and additional insured coverages is best practice.
If you have questions regarding the webinar or contractual risk transfer, please email Kirsten Shepard (KShepard@OneGroup.com) or John Schmitt (JSchmitt@OneGroup.com) or click here to fill out a form to connected with one of our experts.
OneGroup is looking forward to the next 101 Series Webinar, Personal Insurance 101, on June 7, 2023 from 9:30AM – 10:30AM EST. Personal Insurance expert Dave Weaver, will discuss how to protect the important things in life. Register for the next webinar here.
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.