Risk Control Strategy: Transferring Your Risks
How to Successfully Create and Employ Risk Transfer for Your Business
As a small business, you work closely with contractors, subcontractors, vendors and others who may pose a liability to your company. While these relationships are crucial to your business, they can be costly if you don’t have proper risk management and control strategies in place to offset things like bodily injuries on the jobsite, or loss of damage of equipment.
That’s where risk transfer comes into play. Not sure what risk transfer is, or how to implement it effectively? We’ve got your back.
Defining Risk Transfer
Risk transfer refers to the shifting of a specific risk from one party to another willing party. Typically, risk transfer strategies are in the form of insurance policies or contractual agreements. In an effective risk transfer situation, the party that holds a majority of control over the risk should be held liable, creating an equitable transfer of risk.
Risk Transfer Options
As a small business, you have three common options for risk transfer.
Purchasing an insurance policy means the insurance company assumes the liability for specific financial risks. In return, the employer (that’s you) pays a fee or insurance premium, as well as deductibles, reserves and other financial obligations for the peace of mind that you’re taken care of.
Waiver of Subrogation
Your contractors’, subcontractors’ and vendors’ insurers have a right to subrogation, or the recovering of some or all costs, from you if you were at fault for the cause of the claim. To avoid paying subrogation costs, your company needs to have subrogation waivers in place for each contractor, subcontractor and vendor before loss occurs.
Building a Risk Transfer Strategy
Insurance Risk Transfer
If purchasing insurance is your chosen risk transfer strategy, here are some important steps to keep in mind.
Certificate of Insurance Requirements
Before you begin services with a contractor, subcontractor or vendor, ensure you’ve received a certificate of insurance. Coverage to look for may include workers’ compensation, commercial automobile liability, property and general liability, depending on the scope of work.
Also, be sure to require your business be listed as the “additional insured” under the general liability policy. This protects you under the other party’s insurance policy for certain liabilities.
Minimum Insurance Requirements
Consult your insurance agent and legal counsel to determine the minimum coverage for subcontractors. If they don’t have the minimum, they could be putting you at more risk than it’s worth.
Just because you check for insurance at the onset of the partnership doesn’t mean your subcontractors will renew their coverage. Establish a yearly review system to ensure you are consistently engaging in proper risk transfer, and make sure you have a filing system that is up-to-date in order to keep track of documents.
Contractual Risk Transfer
Verbal contracts may not be sufficient to enforce in a case of damage, liability or loss. Confirm everything in writing. When engaging in contractual risk transfer, include an indemnity clause, or hold-harmless clause, that indemnifies against liability, within each contract. This will protect you from the actions of your contractors.
The clause should explicitly state that you are the indemnified party, and the authority of any person signing on behalf of a corporation must be apparent, such as a president or vice president.
Work with your legal counsel as you create each contract to ensure you’ve covered each potential risk.
Waiver of Subrogation
If you seek a waiver of subrogation from your workers’ insurers, make sure each generally encompasses all hazards, locations and work details. A waiver of subrogation should be void of limitations so that each risk is covered.
Before building your risk transfer strategy, consult both your insurance professional and legal counsel to determine the most effective strategies for your company’s needs. When done right, risk transfer can protect your business from significant financial burden.
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