Effective Contractual Risk Transfer in Construction
When astutely negotiated, a construction contract can become a valuable risk management tool. Liabilities can be equitably distributed among the contracting parties—general contractor, subcontractors, suppliers, architects, and the owner. Unfortunately, many construction contracts are drafted (or standard versions modified) by professionals with little knowledge of insurance coverage.
As a result, it is not unusual for contracts to shift liabilities to the contractor that are extremely difficult or costly to insure or even uninsurable. Many contractors accept these onerous contractual provisions without complaint (often without even noticing them), particularly when the business climate is very competitive. If a contractor fails to recognize gaps between its contractually assumed liabilities and its insurance coverage, it becomes the de facto "insurer" of these liabilities. (The fact that a loss is uninsured does not relieve the contractor of its contractual obligation.)
In this practical guide, Ann Hickman, assistant vice president at IRMI, provides strategies for executing effective risk transfers that take into account economic realities, insurance market conditions, and more. Strategies are provided for both sides of the transaction—transferring risk to others and accepting risk from others. Equipped with this knowledge, agents and brokers will be in a position to give value-added advice to their contractor clients, and contractors will become better contract negotiators.
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Topics Included in the Report
Statutory Limitations on Risk Transfer
- Most states limit the amount of risk that can be transferred in certain types of construction contracts. Running afoul of the applicable anti-indemnity statute can nullify the indemnification provision unless appropriate “savings” language is included.
Additional Insured Coverage
- Indemnification provisions are often "backed up" with additional insured requirements. Additional insured endorsements vary in the scope of coverage provided, so it is important to ensure appropriate endorsements are attached.
Outdated Insurance Requirements
- Insurance requirements are often given little to no thought by contract drafters, who may copy and paste requirements from prior contracts without consideration of current market conditions and policy language. This practice creates unnecessary friction in the contracting process.
Certificates of Insurance
- Certificates of insurance are an important tool for documenting coverages required in the contract. A proactive certificate management system will assist contractors in ensuring contract requirements are met.
For over 40 years, International Risk Management Institute, Inc. (IRMI), has been a premier provider of practical and unbiased risk management and insurance information to corporations, law firms, government, and the insurance industry. This information is developed by the most experienced research and editorial team in insurance reference publishing in partnership with a host of industry practitioners who work with us. We take great pride in giving you up-to-date, objective, and practical strategies, tactics, and solutions to help you succeed and prosper in a changing insurance and risk management environment.