Today I wanted to talk briefly about the importance of risk transfer and hold harmless agreements for various parties – Including common components of a risk transfer agreement, its potential impact on claims and lawsuits, as well as best practices when considering vendors and subcontractors to perform work for you, or on your property.
Scenarios where risk transfer or hold harmless agreements may be considered: One scenario I see often is when an upstream party (typically a contractor or GC on a project) is hiring a subcontractor to perform contracting or construction services. In most jurisdictions, the top tier general contractor hiring the subcontractor for example, assumes “Vicarious Liability” for their work (i.e. the legal responsibility for someone else’s work—namely the subcontractor’s work).
One method for a general contractor to reduce this exposure, is to consider implementing a formal “Hold Harmless” agreement, which is typically built into a contract. Under an indemnity, or hold harmless agreement, one party (say the subcontractor) agrees to indemnify the other party (say the general contractor) for certain liabilities arising out of the performance of the contract. In most, but not all, cases, the upstream party is the beneficiary of the indemnity provision, and the downstream party is the one agreeing to assume certain liabilities associated with the hazards of the work being performed.
A 2nd scenario I see quite often, is when building or property owners use risk transfer or hold harmless wording within their lease agreements. From my experience, every lease has their own set of requirements, and can have major legal implications in the event of catastrophic loss.
In addition to Hold Harmless wording, there are various insurance requirements that play a major role when determining which parties are ultimately responsible and in what order. It is important to work with a trusted advisor who understands the differences between the hundreds of ISO endorsements– as it relates specifically to those contractual requirements, so that, they can help you navigate through these complexities.
Other items you might see in a risk transfer or subcontractor agreement include specific policy limits as it relates to various policy lines. General Liability, commercial auto, workers compensation and employers’ liability limit requirements are commonly included. Occasionally, contracts will also require ancillary lines with varying limits, such as pollution liability, contractors’ professional liability, cyber liability, or even unmanned aircraft requirements related to drone use.
Even the most diligent business owner can’t keep pace with all the relevant clauses in these insurance contracts. With all of these items to consider, I recommend the following actions to reduce risk:
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Always work with a trusted risk professional to review contract wording prior to implementing or signing construction contracts or leases. Do not rely solely on an attorney, as insurance endorsements and policy wording are constantly changing and evolving. This is assuming that your attorney does not have their Property and Casualty license, among other important designations to consider.
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Collect certificates of insurance from all subcontractors and vendors who step foot on your premise, and review carefully with your risk professional
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Require all downstream parties to sign up-to-date risk transfer and/or hold harmless agreements at least annually
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Work with a trusted advisor who understands the various endorsements, to ensure that all down-stream parties are complying with these requirements, and have a tracking system in place to ensure that nothing slips through the cracks.
Finally, when hiring a risk professional, it is important to carefully interview insurance agents for their technical abilities and knowledge related to your industry, rather than choosing an agent who simply presented the lowest insurance premium. At Rue Insurance, we take pride in the fact that we have partnered with our clients for over 100 years to reduce risk, increase profitability and improve their long-term insurability in their marketplace.
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About the Author:
Chris Koestner graduated from Ramapo College of NJ in 2006 with a Bachelor’s degree in Business Management. After 8+ years of management, sales and operational experience in the rental car industry, he joined Rue Insurance in 2015 as a Risk Management Consultant. During his tenure with Rue, he received both the Certified Insurance Counselor (CIC) and the Construction Risk Insurance Specialist (CRIS) designations. He works closely with his clients to provide risk management solutions, particularly in the construction and contracting fields, among others. As a trusted advisor, he values the integrity of each of his clients and strives to keep all of his customers actively informed of the changing needs within the insurance industry.
When he is not providing risk solutions for his clients, he also sits on the board of the Hazlet Business Owners Association, which allows him to provide support for local businesses in his home town. Chris is an avid hockey fan, when he is not supporting clients and community, he loves to spend time with his wife and two sons.
