Contractual Risk Transfer (CRT) - Why does it matter?

May 15 2023

Categories: Business Insurance

Contractual Risk Transfer (CRT) - Why does it matter?

Contractual Risk Transfer (CRT):
Managing 3rd Party Relationships

Negotiating and managing 3rd party relationships is a routine task for many businesses.  An important factor to recognize is the benefit of transferring potential liability in these situations.  The purpose of risk transfer is to pass the financial liability of risks, like legal expenses, damages awarded and repair costs, to the party who should be responsible when an accident or injury occurs.

No one likes to imagine they could be involved in a liability judgement, but it's best to be prepared.  Take for instance the following scenarios:

A painter's scaffold collapses resulting in severe injury to the painter and a pedestrian.  The painter had no insurance.  The building owner is held liable for all losses.  

A motor manufacturer, to get the business of a big new customer, agrees to sign a contract which the customer requires of all vendors.  If they don't sign it, there are plenty of other motor manufacturers who will.  After a fire loss due to a customer's improper use of a motor, the motor manufacturer is surprised to find that the contract requires them to indemnify and hold harmless their customer for ANY and ALL losses associated with the motor.

The intent of risk transfer is to help assure that your business is not financially vulnerable to damages and claims due to acts, errors or omissions caused or contributed by others.  Instead of decisions of liability being determined in court, make sure there is a written, signed, and binding contract in place at the beginning of a business relationship.

Outlining Contractual Risk Transfer

The graphic below outlines the components of contractual risk transfer and how the components work together

contractual risk transfer

We're not done yet...Stay with us for parts 2 and 3 of our risk management series where we will discuss the good, better, and best ways to manage third party risk.  Proper planning and sound legal counsel can help avoid surprises and make sure all roles and responsibilities are predetermined, agreed upon by all parties, and documented before an event.


#TeamKoppinger has resources to help you assess, address, and minimize third party risks, making your business less likely to be faced with financial, operational, or reputational setbacks
Contact us we can help!

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