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CONTRACTUAL RISK TRANSFER CAN TAKE OVER AND RUIN YOUR DAY By: Chris Boggs Insurance is the slave of contractual risk transfer. The contracts your insureds sign, generally before giving you the opportunity to review them, create requirements to which the insurance policy must respond – if it can. Understanding contractual risk transfer is a key requirement for staying out of trouble when you insure contractor risks. But even if you don't insure construction-type operations, you will be subject to contractual risk transfer language at some point, you can count on it. Following are seven of the most frequently asked questions related to contractual risk transfer. Though brief, the answers give us a glimpse at the complicated issues emanating from contractual risk transfer. What is contractual risk transfer? Contractual risk transfer (CRT) is a non-insurance risk transfer mechanism that accomplishes the goals of risk financing and risk control. In essence, CRT allows the upper tier / upstream contractor to tap into the finances of the lower tier / downstream party. The lower tier can finance the requirements of the contract in one of two ways: 1) some or all costs can be paid out of their own pocket (from savings or other accounts; or 2) the lower tier can purchase an insurance policy to finance that part of the contractually agreed to risk. Sometimes both sources are in play. From a risk control perspective, CRT allows the upper tier to avoid the activities that could lead to injury to another party and make that party directly liable for the results. This dovetails with the risk transfer aspect of CRT. Why is contractual risk transfer necessary? The most simplistic answer is vicarious liability. The upper tier contractor (could be the GC or another contractor who subcontracts work to another party) can be held liable for the actions of the party to whom they subcontracted the work. The GC is ultimately
