Risk Transfer Indemnity
Most business transactions carry some risk. When you're dealing with known players and fulfilling contracts that are familiar and of long standing, those risks may be less overt. However, the risks can become overwhelming in other situations.
If everything goes well, both parties to the transaction stand to profit. If things go wrong, the potential for injuries, damage and legal liability are staggering. To make things worse, your company may not have any control over the actions of other parties to the transaction. How can you protect your interests when there is a possibility that you could be held legally liable for someone else's negligence?
The answer may be a risk transfer contract or policy.
Imagine that your company provides maintenance services to heavy, potentially dangerous equipment that belongs to a client. This equipment is operated by the employees of the client, over whom you have no control. Should a piece of equipment malfunction in some catastrophic way while being operated by an employee of your client, the client could decide that you are responsible for the mishap. However, if you have a mechanism for risk transfer or indemnity in place, then you have protected yourself in whole or in part from any legal liability that your client may try to attach to you.
Indemnity and transfer of risk agreements come in many forms. Insurance contracts and indemnification provisions are among the most frequently used. However, before it's possible to determine which mechanism to use, it's essential to identify which risks will need to be transferred.
As any seasoned businessperson knows, all agreements and transactions involve risks. The key to transferring risks is recognizing which ones are going to be so serious or frequent that your organization is unwilling to take total responsibility for them. Moreover, it may be necessary to transfer the risks that are utterly out of your company's control or that are exclusively controlled by another party.
When your company encounters a new contract or a type of transaction that is unfamiliar, it may be necessary to identify the risks all over again. Essentially, if you will be traveling into unknown territory, you won't know all of the ways that you may suffer a loss. Looking before you leap may enable you to transfer some of the risks away to a responsible party.
Remember that a single catastrophic event can have the ability to put a company out of business for good. A series of small losses could be just as devastating. This is why it is critical to identify risks before they occur.
When identifying risks, it is wise to ask these questions:
- Which party is in control of the potential risk?
- If no agreement is in place, how will the risk be allocated among the involved parties?
- Is this risk covered by insurance?
- Does one of the parties have greater risk tolerance than the other?
- Which party has the best bargaining position?
In an ideal world, the party that is in control of the risk would be the one to bear the risk. However, additional factors may come into play, and this means that the other party, which may have little or no control over the risk, may become liable. This is why indemnification and risk transference are crucial.
Risk may be transferred to other parties such as service providers, vendors, tenants and subcontractors. Some insurers provide these services without raising the cost of your insurance premiums.
NXG Insurance Group is experienced when it comes to devising risk management strategies. This includes reviewing contract indemnification provisions to ensure that your company is not taking on too much risk in a transaction.
NXG Insurance Group's goal is to understand your business from the ground up so that we can provide you with superior insurance coverage, risk transference and indemnification. Because we have worked extensively with clients in certain high-risk industries, we understand the potential losses that companies like yours may face when things go wrong. This is why we look for better, more complete coverage for your business.
We also review indemnity agreements and hold-harmless clauses to ensure that you have the best possible protection if anything should ever go wrong. NXG Insurance Group similarly takes the time to educate our clients regarding reviewing the certificate of insurance that a subcontractor presents to prove that they have adequate coverage. In most cases, this insurance is not sufficient to protect you from liability based on the negligence or recklessness of the subcontractor. This means that you may ask the subcontractor to include you as an additional insured on their policy.
This can be a complicated process. Fortunately, NXG Insurance Group is your partner at every step of the way. If you're concerned that your company isn't appropriately transferring risk, speak with one of our insurance professionals today.