What Is Contractual Risk Transfer? | Business Town

What Is Contractual Risk Transfer?

 What Is Contractual Risk Transfer? Did you know that you could transfer risk through contracts? Learn how to make the most of it and why it might be important for your business.

 

Hi, I’m Jeff Gordon from Gordon Atlantic Insurance. Contractual Risk Transfer is actually a risk term, not so much an insurance term. Very simply stated, what it means is transferring risk through contract.

Contractual Risk Transfer: Passing On Risk

There are several examples of this. The easiest example is when you lease space in a building. Somewhere in your lease, it probably says that if anything happens on your premises that your insurance is going to defend the landlord.

Your landlord doesn’t control who comes in and out of your business and wants to make sure that your insurance is going to take care of him if one of your guests falls down his stairs. That’s a contractual risk transfer; it’s in the lease contract.

Transfer As Much Risk As You Can Off Your Own Insurance

Insurance is another form of contractual risk transfer, but you pay for that. But to the degree that you can, transfer risks through contracts such as additional insured or waiver of subrogation.

Related: How to Convince Brokers to Insure Your Startup

Use Contracts to Transfer Risk

Contractual risk transfer is not an insurance term. Since it transfers risk through contracts it has more in common with them. It can get easily complicated…

It involves some technical terms like indemnification agreements, harmless contracts, or additional insured such as in a lease.

Related: What Is a Business Owner Policy?

Keep Your Own Costs To A Minimum By Transferring Risk Through Contractual Risk Transfer

There are many forms of contractual risk transfer. Here’s the important part though: the degree to which you can transfer risk to other people with whom you are doing business, particularly for people that are doing business for your business, is going to lower the cost of the risk transfer that you pay for the insurance.

Related: Understanding Total Cost of Risk

The more that you can transfer through contracts, the less your insurance costs and the less your total cost of risk is going to be for your business. There are many forms of contractual risk transfer. Talk to your broker about doing that before you buy your insurance.

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About Geoff Gordon

Geoff Gordon has been the owner/president of the Gordon Atlantic Insurance agency since 1987. Gordon Atlantic Insurance provides commercial and personal insurance to businesses and families throughout Massachusetts.

A prolific writer and recognized industry thought leader, Geoff has contributed articles to Banker & Tradesman, a regional trade periodical, and served on the Quincy Patriot Ledger’s Board of Economic Advisors column. He is a member of the Plymouth Rock Assurance Agents Advisory Council as well as the Bunker Hill Insurance Agents Advisory Council. Geoff has presented to the Financial Planning Association’s (FPA) education series and teaches locally. Most recently Geoff spoke to a TEDx conference on “Personal Risk for a Rich Life” in February 2016.

Geoff obtained his Certified Financial Planner (CFP®) designation in 1985, the Certified Insurance Counselor (CIC) in 1995, and his Certified Risk Manager (CRM) designation in 2004, and serves as an Asssociate Faculty member of the Institute of Insurance Education and Reasearch, a national credentialling organization.

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