Do You Have a Contractual Risk Transfer Program?
As with any project, construction projects come with potential financial and operational risks for contractors when working with third-party providers of products and services. A Contractual Risk Transfer (CRT) program can help mitigate some of those risks. These programs can help protect your business in the event of an injury, property damage, delay or construction defect claim related to third-party services or products. CRT simply outlines each party’s responsibilities before work begins for everyone involved in construction projects, and typically involves the following six concepts and/or elements.
Download the contractual risk transfer checklist
Written contract
At the heart of the CRT program are written contracts that define roles, responsibilities and your requirements (including financial) of subcontractors, vendors and service providers. They can incorporate indemnity agreements, insurance specifications and any necessary requirements, such as a Certificate of Insurance (COI).
Indemnification clause
An indemnification clause is a portion of the written contract that can help protect a contractor from liability for injury or damages resulting from another contractor’s or subcontractor’s work. It can help to outline the responsibilities of the contractor whose work results in injury or damages, including the duty to defend the other involved contractors. Indemnification clauses can be complex and involve legal issues that may need to be addressed. It is recommended that you consult an attorney knowledgeable in construction contract law in the state where the work is performed on this issue.
Insurance specifications
Insurance specifications provide details about the insurance and insurance limits you require of your subcontractors, vendors or other service providers. Typically, insurance specifications include details about auto, general liability, workers compensation and umbrella lines of insurance, but other lines of insurance may be needed. Your insurance agent and legal counsel can help you determine the appropriate coverage and limits.
Certificate of insurance (COI)
A COI can help to confirm that a subcontractor, vendor or other service provider involved in your project is carrying the insurance you require for their work. Ask for a COI and review it to confirm coverages, limits and other insurance specifications before work begins. Revisit the COI before it expires, and always keep a current copy on file.
Additional insured endorsement
This insurance endorsement can be requested from a subcontractor’s general liability insurance carrier and can help to align a subcontractor’s insurance coverage to meet the obligations required by CRT, including indemnity and duty to defend obligations. Additional insured endorsements can be reviewed and discussed with your insurance agent or legal counsel.
Record retention practices
Records, including executed contracts, drawings, specifications, change orders, videos, photographs and insurance certificates, among others, are best to be retained and readily available in the event of a loss or claim. Consult with legal counsel to determine the length of time for record retention that meets your needs and any state or federal requirements that may apply. Communicate your record retention policy to all management and supervisory personnel on a project.
If records are maintained electronically, keep up with system upgrades so electronic records are accessible. It is best to have backup copies of all records, including paper-based and electronic.
Lastly, have legal counsel review the program annually to confirm compliance with applicable laws, regulations and court precedents and audit project files frequently to make sure you have the right documents in place.
A CRT program is just one risk management strategy intended to help reduce this risk. When it comes to your third-party business relations, other risk management strategies include your subcontractor hiring and selection process and quality control program. Together, your CRT program, QA program and subcontractor selection process may help you effectively manage your project and risk.
It is important that you consult with legal counsel knowledgeable in construction law regarding risk transfer tools and how they may apply to your arrangement with subcontractors, suppliers, vendors and others involved in your project. Your insurance agent also can help you understand your insurance needs.
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