Contractual Risk Transfer

A formal agreement between two parties whereby one agrees to indemnify and hold another party harmless for specified acts. Such transfer encompasses both Risk Financing (planning for the cost of a loss) and Risk Control (developing means to avoid or lessen the cost of a loss). The intended goal of contractual risk transfer is to place the financial burden of a loss on the party best able to control and prevent the loss. Contractual risk transfer is used daily in all types of operations and contractual situations from lease agreements to manufacturing contracts; but its use and misuse in construction contracts are best known to insurance professionals.

Contractual Risk Transfer Rant: Contractual provisions in construction contracts are often violated by one party and then unconscionably held over the lesser of the two parties. An example in most construction contracts is the requirement stating that a subcontractor must carry certain prescribed insurance coverages, which is acceptable and expected. The contract goes on to say that the subcontractor MUST show proof of such coverage BEFORE beginning work. For expediency this requirement is often waived by the general contractor allowing the subcontractor to start work. When the subcontractor requests payment, the aforementioned contractual requirements are held over his head, and used to hold up payment.

By allowing the subcontractor on the jobsite in direct violation of the contract, the general contractor has effectively waived his right to enforce that part of the contract; but no subcontractor has the time or money to take this court to put an end to this violation of contract law.

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