The Nitty Gritty of Risk Transfer for Contractors
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Are you effectively transferring risk to the right parties? That question is usually answered ‘yes’ by contractors. However, truth is most contractors are not protecting themselves or other required parties according to the contract. The intent of that statement is not to be hurtful; it’s simply the truth.
The state of Illinois has very unique laws when it comes to transferring risk when subcontracting work. It’s imperative – now more than ever – that contractors are educated in what’s being required of them and what they’re requiring of others.
Let’s run through the process so you can figure out where you fit in.
- The project owner establishes a prime contract for the job, which outlines all responsibilities of the contractors.
- That prime contract is signed with the General Contractor.
- The General Contractor then hires subcontractors and shares the prime contract with those subcontractors.
- Those subcontractors then hire second tier subcontractors and so on.
Unless you’re the owner of the project, you have risk transfer responsibilities; the question is to whom.
The concept of risk transfer is having parties below you in the process indemnify you in the event of a loss. This is done through providing Additional Insured status, which allows you to name parties above you as Additional Insureds on your policy, thus indemnifying them.
As all contractors know, there are a number of forms in the market which provide varying levels of AI status under certain stipulations. The intent in this article is to give advice on the best way to ensure you’re not in breach of your contractual duties.
Three Steps to Avoiding a Breach in Contract
So, how do I avoid being in breach of the contract? There are some basic steps each contractor should take to ensure they’re not only protecting themselves, but any parties they agreed to indemnify.
First, make sure your insurance agent is reviewing all contracts prior to issuing certificates of insurance.
Second, ensure any subcontractor you may use have a copy of the prime contract to ensure they understand their responsibilities.
Finally, consider outsourcing the whole risk transfer process. Construction specialty brokers will have a program in place that assumes the responsibility of tracking subcontractors.
- Assurance University: Managing Risk Transference with Cert. Tracking Webinar Replay
- Assurance University: Certificate Tracking 101 Webinar Recording
- Three Best Tips for Risk Transfer
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