Hi, I’m Jeff Gordon from Gordon Atlantic Insurance. Contractual Risk Transfer is actually a risk term, not so much an insurance term. Very simply stated, what it means is transferring risk through contract.
Contractual Risk Transfer: Passing On Risk
There are several examples of this. The easiest example is when you lease space in a building. Somewhere in your lease, it probably says that if anything happens on your premises that your insurance is going to defend the landlord.
Your landlord doesn’t control who comes in and out of your business and wants to make sure that your insurance is going to take care of him if one of your guests falls down his stairs. That’s a contractual risk transfer; it’s in the lease contract.
Transfer As Much Risk As You Can Off Your Own Insurance
Insurance is another form of contractual risk transfer, but you pay for that. But to the degree that you can, transfer risks through contracts such as additional insured or waiver of subrogation.
Use Contracts to Transfer Risk
Contractual risk transfer is not an insurance term. Since it transfers risk through contracts it has more in common with them. It can get easily complicated…
It involves some technical terms like indemnification agreements, harmless contracts, or additional insured such as in a lease.
Related: What Is a Business Owner Policy?
Keep Your Own Costs To A Minimum By Transferring Risk Through Contractual Risk Transfer
There are many forms of contractual risk transfer. Here’s the important part though: the degree to which you can transfer risk to other people with whom you are doing business, particularly for people that are doing business for your business, is going to lower the cost of the risk transfer that you pay for the insurance.
Related: Understanding Total Cost of Risk
The more that you can transfer through contracts, the less your insurance costs and the less your total cost of risk is going to be for your business. There are many forms of contractual risk transfer. Talk to your broker about doing that before you buy your insurance.