Construction Contracts: Tools to Transfer Risk
For today’s General Contractor, construction risk management involves more than enhancing safety on the job site. It needs to cover all aspects of a company’s business, from the initial contract documents to operations and post-construction. Implementing risk management practices can help the General Contractor:
- Protect assets
- Control insurance costs
- Preserve limits of insurance
- Reduce the chance of being involved in protracted legal disputes
In the construction industry, risk transfer means shifting the risk of loss for injury or damage among the parties of a contract. For example, General Contractors may be held legally liable for any injury or damage caused by work performed by their subcontractors. They may also be responsible for the job-site safety of their own employees, as well as those of their subcontractor and on-site visitors. In many instances, an injured employee of a subcontractor may take legal action against the general contractor.
By insisting that provisions such as indemnification, hold harmless agreements and additional insured requirements are included in all contracts entered into with subcontractors, subject to state law, the general contractor can transfer the risk exposure.
For these reasons, a contractor’s risk management strategy should be contractually transferring as much risk as possible. Three of the most commonly used methods to provide risk transfer include: indemnification, hold harmless and additional insured endorsements.
The Indemnification Agreement: Indemnification agreements are typical of a construction contract and critical because they are the contractual tool that transfers risk and responsibility to other parties. One of the most common examples is the contract between the General Contractor and the subcontractor.
Hold Harmless Agreement: It’s typical for both the hold harmless agreement and indemnification agreement to be included in construction contracts. What’s important to know is that a hold harmless agreement states that the subcontractor agrees not to try and recover payment for damages from the General Contractor.
The Additional Insured Endorsement: When you hire a sub-contractor, it’s critical to have them add your business to their liability policy as an additional insured. This protects you against liability for injury or damage, caused by work the subcontractor performs on your behalf.