What is risk transfer? It is when one party assumes the legal liability of another party in the event of a specific loss. We do this, for example, when we buy an insurance policy; for payment of a premium, the insurance carrier agrees to pay for a specified loss.

We buy these policies to protect our owned property, such as fire insurance, and we buy liability coverage to protect us from lawsuits in the event that we cause bodily injury or property damage to another arising from our negligence.

We can also attempt to transfer risk of loss for the extra exposures that our tenants and their operations bring us, and the extra exposure that arises when contractors and vendors we hire are working at our property by the use of a properly structured contract.

In most cases we find that we are doing a good job in transferring risk when we are leasing space because we are using our own contracts. It is when we hire contractors and vendors that we find the inconsistencies. Some property managers use their own contracts and others sign contracts provided by the contractors or vendors.

Imagine a contractor is doing work at one of your properties and causes a loss. The ensuing lawsuit will name multiple parties — not just the contractor. Properly protecting your interests means having a written contract in place that will transfer the risk (potential for a loss) from you back to the party or parties who created the potential for this loss.

The only way to do this is to insist on using your own attorney-reviewed contract. A properly written contract transfers the risk to the people who should be responsible. A poorly written or no contract, leaves you open for financial loss. Using your own contract means avoiding the time involved in reading everybody else’s.

Again, the above risk transfer is accomplished in a contract. There are two parts that make up the risk transfer. The first is the Indemnification Agreement, which is a large run on sentence drafted by your attorney that states, who (you and all associated with the property) will be indemnified (made whole) for any and all damages. It determines contractually who bears the financial risk of loss and who will be restored to their financial position after a loss. Please keep in mind that not all risk transferred by the indemnification agreement are covered by insurance. So first, the agreement is stating that they will hold us harmless, and make us whole in the case of any and all incidents that occur out of their negligence. Then in the second part, the contract will specially list the insurance requirements that the contactor or vendor must carry if they want to be on our site. The insurance requirements of the contract could include the following:

Insurance. General Contractors and all Subcontractors shall maintain the following minimum insurance coverages during the course of construction, and for a period of at least two years thereafter.

Workers’ Compensation. General Contractors and all Subcontractors shall carry workers’ compensation insurance, and no owners or officers shall be excluded if they plan to be at the site. This also includes one-man operations.

Employers Liability. General Contractors and all Subcontractors shall carry Employer's Liability insurance with minimum limits of:

If applicable, the Jones Act and US Longshoremen and Harborworkers Act coverage shall be included.

Commercial General Liability. General Contractors and all Subcontractors shall carry General Liability insurance written on an occurrence basis. Commercial general liability forms shall include contractual liability, and coverage for liability arising from premises operations, independent contractors, products/completed operations, and personal and advertising injury. The General Liability coverage shall not include the following exclusions or limitations: explosion, collapse, or water damage. Nor shall it exclude coverage for foundation work, torch work and/or work on residential or habitational properties. The above shall have minimum insurance limits of:

Automobile Liability. General Contractors and all Subcontractors shall carry Automobile Liability insurance covering all owned, hired, non-owned, and borrowed vehicles used in connection with the work with a limit of $1,000,000 for injuries, including accidental death and damage to property for any one occurrence combined single limit.

Excess/Umbrella Liability. General Contractors and all Subcontractors shall carry Excess/Umbrella Liability insurance, written on an occurrence basis, which must follow form for all above liability policies. Contractors shall pay any self-insured retention. Limits of:

Additional Insured. Owner is required to be named as additional insured on the General Contractor’s and all Subcontractors’ commercial general liability, automobile liability policies. The excess umbrella liability shall be following form insurance. All additional insureds shall be on a primary and non-contributory basis. The forms of Additional Insured coverage shall be CG 20 10 (07/04) and CG 20 37 (07/04) or equivalent, and additional insured coverage shall apply and include completed operations.

Waiver of Subrogation. All the above coverages shall include waiver of subrogation.

Certificate of Insurance. General Contractors and all Subcontractors shall provide a certificate of insurance prior to commencement of work, and shall provide written notice to the property manager of cancellation or termination of insurance at least thirty (30) days prior to effective date. Insurance coverage shall be continuously maintained, and Subcontractors shall provide renewal evidence at least ten (10) days prior to policy expiration. The "Name of Person or Organization" section on the additional insured form should list all the additional insured parties, but failure to do so shall not affect additional insured status or the obligation of Subcontractor to make other parties additional insureds. All contractors’ insurance policies shall be written by companies authorized to transact business in the state of Illinois with an AMBest rating of at least A-VII.

During the BOMA meeting we discussed each of the above coverages in detail, how the coverage responds, and some general risk management objectives. Unfortunately, the limited space of this article does not allow detailed explanation of these coverages. We as insurance professionals spend weeks of training for each of the above topics. This is intended to give you a quick brief review of this topic, and to direct you back to the your insurance professional and/or attorney for additional information.