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Contractual Risk Transfer: Your Policy or Mine?

By Sherilyn Pastor
September 27, 2007

Companies involved in collaborative undertakings frequently confront risk sharing and transfer issues. After they identify a project's hazards, they then decide who will bear what risk, in what way, and in what amounts. They also need to consider whether either party (or both) will maintain insurance for the other's benefit. When negotiating a contractual risk transfer agreement, the parties need to understand their bargaining position and relevant contract and insurance principles. They need to be cognizant of risk transfer limitations. They need to consider if the risk transfer will be supported by insurance, and if so, the scope of coverage required and their willingness to share it in the event of a loss. The companies also need to put in place measures to assure compliance with their contract. This article examines these matters and offers practice pointers for those confronting contractual risk transfer decisions.

Factors Impacting Negotiations

A number of factors are likely to influence the parties' risk sharing decisions. What are the involved risks? Are they avoidable? Are they insurable? Which contracting party is likely to create the hazard? Which party best understands the hazard? Is either party better equipped to control or minimize the risks? Which party can financially absorb losses? Who has the superior bargaining position and is therefore better positioned to offload its risks? Are there legal or other limitations impacting the risk transfer? What are the industry customs? Is, for example, the project a commercial real estate endeavor where the developer typically transfers construction-related risks to its general contractor, who then shifts those risks to its subcontractors?

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