In any contractual relationship, it’s important for the partiesinvolved to properly allocate their combined risks.

Contractual risk transfer identifies critical exposures andassigns responsibility for preventing and paying for losses — but it’s notalways an easy process. However, protecting your organization’sassets and bottom line is worth the effort.

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A critical challenge

Managing contractual risk can be challenging, increasingly so asadditional insured status has been eroded over time. In 2013, forexample, ISO introduced new additional insured endorsements tocommercial general liability policies thatrestricted limits afforded to additional insureds to thosespecified in a contract. That has made the underlying contract —and the allocation of contractual risk — more important than everbefore.

A few reasons why risk professionals should pay close attentionto contractual risk:

• To answer leadership’s questions. After a lossor disruption, the first question from the C-suite usually is:“What does the contract say?” Risk professionals who properlymanage the contractual risk process — in conjunction with theirlegal counsel — can confidently answer this question.
• To build better relationships. An organizationthat is known to be diligent in managing contractual risk can senda message to vendors, suppliers, contractors, and other partiesthat it is serious about risk management. And that can drive morerisk-conscious behavior by those other parties, contributing tobetter results for everyone.
• To avoid protracted legal struggles. Resolvinga dispute about the responsibility for managing risk can be costlyand disruptive to your business.

Best practices

To build a more effective contractual risk transfer program,organizations should consider the following best practices:

1. Create standard contractual risk terms. Theseshould be thoroughly vetted and regularly updated. They shouldinclude tiered requirements that stipulate higher limits ofinsurance for more hazardous operations undertaken by your companyor a counterparty to a contract.
2. Train procurement professionals. Yourprocurement team should understand these standardized terms and whythey’re important to risk management.
3. Require authorization to bend terms. Specificbusiness reasons may occasionally require changes to contractterms, but there should be a protocol for such deviations.
4. Establish guidelines for when to involve riskmanagement. For example, you might require that riskmanagement be consulted on any contract that exceeds a certaindollar value or falls outside the scope of normal activities.
5. Enforce collection and review of certificates ofinsurance. No work should begin until you have allnecessary certificates of insurance in hand.

For more on this topic, listen to a replay of the Marshwebcast, Fortifying Your Contractual Risk TransferProgram.

Janice Collins is a managing director inMarsh’s U.S. Casualty Practice.

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