How to Achieve Contractual Risk Transfer
Achieving contractual risk transfer happens when the language in a non-insurance agreement excuses one party from financial or legal responsibility. These scenarios often include specified actions, inactions, injuries, or damages. As a basic rule, one party agrees to indemnify and hold another party harmless in a contract.
When your organization takes part in contractual risk transfer, you are taking the risk from one party and making it the responsibility of another. This practice focuses on the language in a contract. It does not mean there is no insurance involved. This is how the responsible party (the indemnitor) assures the other (the indemnitee) receives payment.
Keep reading to discover the roles in contractual risk transfer and how endorsements help to move risk from one party to another.
Indemnitor vs. Indemnitee in Contractual Risk Transfer
an indemnitor is “the person or organization that holds another (the indemnitee) harmless in a contract,” according to the IRMI insurance dictionary. This means that an individual or an organization takes on all the risks. This makes them responsible for the financial or legal responsibilities of a risk. The indemnitor is backed by insurance and relies on their policy when something goes wrong.
On the other side, we have the indemnitee. According to the risk management site IRMI, the indemnitee is “the person or organization that is held harmless in a contract (by the indemnitor).”
Indemnitor and indemnitee are roles individuals take on in a legal contract. The indemnitor most often uses insurance to protect themself from risk. In other cases, the request to be an indemnitee happens when the other party has higher risks.
Endorsements Used to Transfer Risk
Although in contractual risk transfer the language transfers the risk, sometimes it requires endorsements to help remove these damaging situations. An endorsement is an edit to an insurance policy. The indemnitor can use it to assure another party is indemnified by simply adding one to their policy.
To this end, there are four endorsements commonly used in contractual risk transfer:
1. Waiver of Subrogation Endorsement
To understand a waiver of subrogation, you first need to know about subrogation. With subrogation, the insurer “steps into your shoes” to recover losses from the at-fault party. For example, if you are in a car accident and another driver is found at fault, your insurance company will give you money to repair your vehicle. Finally, your insurance provider looks to the insurer of the at-fault party to get back what they paid to you.
When a waiver of subrogation is part of a contract, this means the indemnitors insurer cannot look to the indemnitee or their insurance provider for repayment after damages. With this endorsement, the indemnitor is taking on all the risks. They only have their personal finances and insurance to rely on when there is a loss.
2. Primary and Noncontributory Endorsement
Primary and noncontributory define what insurance policies will come into play first. For example, the contract may require both the indemnitor and indemnitee to carry general liability coverage. It could state that the indemnitors policy must pay for losses before the indemnitees does.
3. Additional Insured Endorsement
You can add an additional insured endorsement to most insurance policies. This extends coverage to somebody under the policy other than the named insured. For instance, when a contract requires that an indemnitor provides insurance to an indemnitee, they would add the indemnitee to their policy as an additional insured.
In an additional insured endorsement that offers coverage to all “where required by written contract,” the language needs to be specific in describing who will receive protection.
4. Alternate Employer Endorsement
An alternate employer endorsement is important for indemnitors who use subcontractors or vendors that work for other companies. This endorsement allows the indemnitor to provide workers’ compensation insurance and other coverage to the indemnitee.
How to Keep Track of Contractual Risk Transfer
Whether you are the indemnitor or the indemnitee, it is important to keep track of the insurance used to cover risks. The best way to achieve contractual risk transfer is with a strong certificate of insurance (COI) tracking and management system.
To learn why using software is the best way to track risk transfer, schedule a free demo with SmartCompliance.
