Construction is a business with a good deal of inherent risk. When contractors hire subcontractors to accomplish some of their work, contractual risk transfer agreements determine which party is liable in the event of an injury, property damage or another claim.

Here, we’ve answered some questions we often hear about contractual risk transfer agreements. If you’d like more information or to review your contractual risk transfer agreement with an insurance expert, contact us today for a complimentary consultation.

What is included in a contractual risk transfer agreement?

A typical contractual risk transfer agreement defines the roles and responsibilities of the contractor and each subcontractor as well as any financial and insurance requirements and specifications. It also contains a legal indemnification clause that transfers liability from the contractor to a subcontractor in certain situations.

What types of risk transfer are there?

There are three situations in which risk can be transferred from a contractor to a subcontractor:

Limited transfer

When a subcontractor is responsible for an accident or injury, the contractor can be held liable (known as vicarious liability) because they have some level of control over the subcontractor’s actions. Limited transfer agreements move vicarious liability from the contractor back to the subcontractor. This type of risk transfer is allowed in all 50 states.

Intermediate transfer

When a contractor and subcontractor share responsibility for an action, they have joint liability. 19 states, including New Jersey, allow intermediate transfer, where the contractor can transfer joint liability to the subcontractor.

Broad transfer

An action for which a contractor alone is responsible is known as sole negligence. New Jersey is not one of the 10 states that allow broad transfer, where the contractor can transfer sole negligence liability to the subcontractor, but any contractor that does business in multiple states must be familiar with broad transfer.

What should insurance specifications include?

Insurance specifications in a contractual risk transfer agreement should specify which insurance policies subcontractors are required to have as well as minimum policy limits. At the very least, they should include details about general liability, auto, workers’ compensation and umbrella insurance. Any forms of insurance common to a contractor’s specific industry should also be included.

Every contractual risk transfer agreement should also have a Certificate of Insurance (COI) from each subcontractor showing that all of the insurance specifications have been met.

Get help from the experts

Contractual risk transfer agreements are complex documents with numerous clauses and provisions upon which a contractor’s ability to continue doing business could depend. It’s vital to review both new and existing agreements with your legal counsel and an expert in insurance.

John B. Wright Insurance is a leader in helping contractors insure their businesses. Contact us today for a complimentary consultation.