In the construction industry, precision and planning are paramount. Yet, many contractors continue to operate without written contracts with their subcontractors. This oversight raises questions about risk management strategies, particularly when claims arise without a contract in place.
Contractual risk transfer is a crucial method for maintaining a robust insurance program, ensuring a clean loss history, and safeguarding businesses against unforeseen events. It involves assigning financial liability for risks such as property damage or bodily injury from one party to another through specific contractual agreements.
These agreements typically include indemnification clauses and additional insured provisions. These elements form the "belt and suspenders" approach to risk transfer, providing dual layers of protection should one fail.
Despite the importance of these contracts, some experienced contractors question their necessity. However, trust alone does not suffice when legal disputes arise. Without written agreements, shifting liability becomes challenging even if incidents are clearly linked to subcontractor work.
A comprehensive contractual risk transfer plan includes several key components:
1. Written contracts with subcontractors that incorporate indemnification and hold harmless language tailored to state laws.
2. Listing as an additional insured on subcontractors' policies for both ongoing and completed operations.
3. Ensuring umbrella policies contain primary and non-contributory language to prevent reliance on general liability before excess coverage.
4. Requesting additional insured coverage for the full statute of repose period in each state.
These measures help prevent insurers from pursuing companies after paying claims, provided they are agreed upon before any loss occurs.
Risk transfer aligns responsibility with the party best positioned to manage it—often subcontractors performing the work—rather than shifting blame. Ignoring this process or relying solely on verbal agreements can result in significant costs compared to investing in protective contracts.
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