Risk Transfer: What Have You Got to Lose?
Losses have a negative financial impact on an organization, so minimizing the exposure to loss should be a goal. One way an organization should minimize the exposure to loss is to execute effective risk transfer.
Purpose of Risk Transfer
To minimize potential exposures of the organization by transferring the legal and financial responsibility for losses to the party best able to control them.
- To meet the objective of transferring exposures to the most responsible party.
- To avoid costly claims.
When Does Risk Transfer Apply?
Risk transfer should be utilized anytime an organization uses the services of an outside party or allows an outside party to use your facilities (e.g., contractor, concessionaire, supplier, lessee, etc.) The following are just a few examples of when risk transfer is appropriate:
- Professional Services
- Use of Facilities
Exposure Identification and Analysis
Model Agreements and model risk transfer clauses are available from an insurance advisor or insurance carrier. These contain indemnification wording and/or insurance requirements that, in general, should be your minimum requirements. There may be special circumstances where the suggested insurance requirements are not appropriate and a higher (or lower) limit may be in order. The deviation from the recommended limits depends on the hazards (exposures) of the job. In order to determine appropriate insurance limits and the extent to which risk transfer is necessary, the organization should evaluate the size of the job and the exposure to loss.
Consider the following in determining how rigorous risk transfer should be, and for deciding on appropriate insurance requirements:
- To what extent will the contractor control the work?
- What types of activities will take place during the term of the contract?
- Will inherently dangerous activities (such as blasting, tunneling, or pile driving) take place?
- Is there a possible pollution exposure?
- What is the potential for injury to the public?
- Who could be harmed by these activities?
- What property could be damaged?
- Are crowds or concentrations of people likely to be involved (e.g., schools, shopping, apartments)?
- Is work being done in traffic?
- Is it a long term or short term contract?
- What is the contract amount?
- Is work being done within 50 feet of a railroad facility?
- Is use of aircraft or watercraft involved?
The purpose of this list is to stimulate thinking about the potential adverse consequences of a project. This is the first step in establishing realistic risk transfer provisions and insurance requirements.
The identification of risks is the most important part of the process of managing risks. It requires time and thought!
If you have questions about risk transfer, contact Michele Reager, Director of Underwriting at email@example.com