For those charged with the responsibility of transferring risks of loss to others, you know it can be a thankless task. Does risk management have a meaningful role in your organization's contracting process, or is it an afterthought? Is input from risk management expected without full knowledge of the big picture?
Do you see the whole contract or just the insurance and indemnification provisions? Are business agreements loosely worded without the benefit of legal or risk management review?
Whether it's the risk manager or the chief financial officer with the added responsibility for risk management, the practice of transferring risk is often still perceived as a roadblock to business deals rather than the creation of a safety net for the organization.
If your organization is (1) allowing its premises to be used or leased by others, (2) contracting with others to perform services or (3) acquiring another organization, opportunities exist to transfer risks of loss to others that control the loss exposures. Too often, however, the importance of the deal takes precedence, and risk transfers are not properly effected, making your organization potentially responsible for loss exposures for which others should be responsible. You should be vigilant in your risk-transfer efforts so your insurance and self-insurance programs are not needlessly used because of the negligence of others!
Proper risk-transfer techniques include the imposition of reasonable insurance and indemnification requirements on the parties creating the loss exposures (i.e., the contractors, the tenants or the service providers). Risk-transfer provisions must also include a detailed means of verifying that the other party to the contract is meeting your risk-transfer requirements. This is accomplished by requiring the other party to provide you with certificates of insurance that clearly demonstrate compliance with all insurance requirements. In addition to requiring additional insured status under a contractor's general liability policy, for example, you should require a copy of the additional insured endorsement or policy provision to be attached to the certificate in order to provide better documentation of the transfer. Such requirements should be specified in the contract or agreement.
Incorporating requirements into formalized contracts to effectively transfer the risks of loss to the parties that control or create the loss exposures will help reduce your cost of risk. Your insurance underwriters will look more favorably upon your business if such transfers are routinely accomplished, which should result in more favorable pricing. Your loss experience will also improve if the parties responsible for injuries or damage are the ones required to insure against such injuries or damage, thereby reducing your costs.
Your organization must be proactive in this area. Selecting a contractor or service provider before knowing if they can meet your reasonable risk-transfer requirements can be costly. Bid documents or requests for proposals should clearly communicate your risk-transfer requirements so that the bidding contractor's or service provider's ability to meet those requirements is one of the selection criteria. There is little point in going through a formalized process to select a contractor if the selected contractor must increase its price to comply with your requirements or, worse, is simply unable or unwilling to comply.
Although risk-transfer efforts may occasionally create delays or impediments to programs, activities or business relationships desired or needed by your organization, be assured that there is a value to these efforts. The risk-transfer process yields benefits to companies every year, and all levels of the management team should embrace and support this process.
CHARLES COX, a principal of the Orchard Park, N.Y., consulting firm of Aldrich & Cox, is a columnist for
Risk & Insurance®.
August 1, 2006
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