What is Contractual Risk Transfer?

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Take a look at contractual risk transfer and why you might want to consider implementing this type of security for your business.

Successful business owners assess all aspects of their business, from the product or services they sell, to employee health and safety, to business continuity, to risk assessment, and more.

Preferred Mutual takes a look at contractual risk transfer and why you might want to consider implementing this type of security for your business.

Making sure you’re not held responsible for mistakes or errors made by a service provider, subcontractor or other party can be critical to protecting your business. A contract that clearly and specifically spells out, for example, which party is responsible for certain aspects of a project before work begins could save your company both time and expenses in the event of an incident.

What is Contractual Risk Transfer?

Contractual risk transfer is a legally binding way to transfer risk to the party that may be in the best position to control the risks related to the service to be provided. This means that the party agrees to take responsibility for liabilities and related financial costs for that party’s services or products on behalf of your company.

When is Contractual Risk Transfer Used?

Contractual risk transfer is commonly used in subcontracting, supplier or sales agreements, lease agreements and other situations similar to these. For example, say your company manufactures machinery and you subcontract a company to install those machines at customer sites. To establish responsibility, you may want to consider entering into a contract that links the liability and risk to the subcontractor you use. Make sure the subcontractor has their own business owners policy or BOP, too!

Ways to Minimize Your Risk When Signing a Contract

You can help to minimize your risk by having an attorney trained in contractual risk transfer in the states that apply to your situation draft your contracts with vendors, suppliers, subcontractors, etc. The attorney can help craft the language to best fit your needs and protects your interests and assets.

If you are signing as the subcontractor in a risk transfer, it is imperative that you have a legal review and exercise proper due diligence beforehand!

Who Needs Contractual Risk Transfer Protection?

Contractual risk transfer is an important way for you to manage risks in your industry. It can be particularly helpful for manufacturing, professional services, real estate management and construction. Manufacturing and technology companies also use risk transfer language in their contracts for distribution and supplies as those contracts could affect the liability of your product!

It may be easier said than done, but the goal is to protect your interests by managing the risks your business faces and not taking on any unnecessary risks.

For more guidance on other risk management concerns, contact your Preferred Mutual insurance agent today!

This information is intended for educational purposes only and is not legal advice and/or an authoritative guide.

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