Competitive Advantages of a Contractual Risk Transfer Agreement

Contractual Risk Transfer (CRT) is a non-insurance contract/agreement between two parties whereby one agrees to indemnify and hold another party harmless for specified actions, inactions, injuries or damages. This risk transfer accomplishes objectives found in both risk financing (finding a source to pay the cost of a claim) and risk control (developing a means to avoid or lessen the cost of a loss.)
The ideal use and true purpose of contractual risk transfer is to place the financial burden of a loss on the party best able to control or prevent the incident leading to injury or damage. Presumably, the entity directly and actively participating in the activity have the best opportunity to prevent or avoid the loss; thus they are contractually required to protect an “innocent” supervising or non-participating party from financial harm following injury or damage.
When it comes to Contractual Risk Transfer, the focus tends to be on construction businesses. However, there is significant exposure associated with manufacturers. These liabilities are often misunderstood or even unrealized.
Without proper protection, manufacturers can expose themselves to significant financial loss, which in some cases, has resulted in businesses having to close their operations. Some examples of this can be when a manufacturer receives inferior or defective materials from a contracted supplier or when a hired subcontractor does not make a product to specifications.
It is essential to address this exposure by developing a contractual risk transfer agreement in the form of a purchase agreement. This agreement should contain the liability language, subcontractor insurance requirements, and the representations and warranties that help clarify the responsibilities of the parties in the contract.
If you are a manufacturer who would like to learn more about transferring risk to a vendor when purchasing products or materials, give Ion Insurance a call today at 203.439.2815.