Transferring risks using contracts or “contractual risk transfer” is a contract/agreement between two parties where contract conditions are used to transfer the risk of loss and hold another party harmless for specified actions, inactions, injuries or damages.
Understanding Contractual Risk Transfer
The main objective 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. If done effectively, the risk transfer allocates risk to parties consistent with the ability to control the risk.
Keep the following points in mind before getting into agreement:
- It is possible that your business could be a part of more than one contractual relationships at a given time; this makes it important for you to control the liabilities that you may take.
- Keep a keen eye for opportunities where you can legally manage risk by having others contractually assume their share of liabilities.
Accomplishing Risk Transfers
Risk transfers are accomplished using contracts. These contracts are mostly issued as indemnification provisions. Indemnity clause is a contractual provision. As per this provision, one party agrees to answer for any specified liability or harm that might be incurred by the other party. Indemnification agreements transfer the financial consequences of legal liability from one party to another.
Objectives
Risk Control
Risk transfer is mainly used as a risk control measure, i.e. a method to take appropriate action in order to avoid, prevent, reduce or transfer losses. Risk control can be implemented either before a loss even has transpired or after the occurrence of a loss event. There are various methods of controlling loss. The effectiveness and success of a risk control program depends on the organisation’s capability to implement and maintain the various processes and procedures associated with it. This can be accomplished by different techniques, one of which is contractual transfer for risk.
Risk Financing
Risk financing is used by organizations to provide funding for potential losses. The most common form of risk financing is insurance, though there are other methods that are frequently used. As far as Canada is concerned, it generally uses the “self-underwriting” option in the management of risks.
The self-underwriting option is used by Canada because Canada has the legislative authority and capacity as a sovereign country to raise funds to pay for the losses.
Contractual risk transfer is something used in many commercial contracts. This could include a construction contract, a lease agreement, a service contract or some other type of agreement. A good understanding of contractual risk transfer will help you read the provisions better when conducting business. If you want to get an extensive idea about contractual risk transfer, then head to Prowse Barrette (Previously Prowse Chowne). We will be able to help you out with all your queries.