Webcast: Fortifying Your Contractual Risk Transfer Program
Contractual risk transfer is an efficient and well established way for parties to a contract to allocate risks related to a venture, and an essential part of any business contract, according to speakers on a recent webcast sponsored by Marsh’s Casualty Practice.
“All risk has a cost,” said Dan McGarvey, a managing director in Marsh’s Power & Utility Practice. “And that cost is best identified and allocated well in advance of any loss.”
Over time, managing contractual risk has grown more challenging. State laws on the enforceability of indemnification provisions vary significantly, and changes in insurance policies and endorsements have complicated the process of risk allocation among parties to a contract. Multiple versions of “additional insured” endorsements have made it difficult to determine the actual benefit provided by this status, and a steady erosion in the advantages of additional insured status culminated in form changes introduced in 2013. These changes have made the content of underlying contracts more important than ever in efficiently managing contractual risk.
Developing and overseeing a sound and robust contractual risk transfer program remains an essential task for risk management, legal, and procurement teams. Contractual risk transfer remains a potent first line of defense against the unwitting assumption of risk in any venture, and rigorous enforcement can send a message that an organization takes risk management seriously. This may be underscored by the fact that the first question senior leaders are likely to ask following a loss or disruption is: “What does the contract say?”
Among the steps, businesses should consider the following to better manage contractual risk transfer programs are:
- Thoroughly vetting and regularly updating their standard contractual risk terms.
- Ensuring procurement professionals understand and enforce contractual risk transfer requirements and insurance specifications.
- Requiring management authorization to bend these terms.
- Establishing clear guidelines for when to involve risk management.
- Reviewing certificates of insurance to ensure adherence to standard terms.
Panelists on the webcast included McGarvey and Janice Collins, a managing director in Marsh’s Casualty Practice.