Considering Contractual Risk Transfer Mechanisms

Without a properly structured program, owners may unnecessarily assume financial responsibility for losses caused by a third party on their properties.


https://facilityexecutive.com/2017/08/contractual-risk-transfer-mechanisms/
Without a properly structured program, owners may unnecessarily assume financial responsibility for losses caused by a third party on their properties.
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Considering Contractual Risk Transfer Mechanisms

Without a properly structured program, owners may unnecessarily assume financial responsibility for losses caused by a third party on their properties.

Considering Contractual Risk Transfer Mechanisms

By Geoff Pope

Disputes or accidents caused by third parties, tenants, or subcontractors often lead to claims against real estate management and property owners. These contractual liabilities can create significant financial loss especially when there are no appropriate contractual risk transfer mechanisms in place.risk transfer

Without a properly structured risk transfer program or an appropriately worded contract, an owner or property manager would unnecessarily assume financial responsibility for losses caused by a third party who is contractually obligated to control or prevent those losses.


Exposure Due to Contracts that Fail to Provide Indemnification Except for Sole Negligence. Take this real case of a landlord who hired a carting company for sanitation services. The carting company’s standard contract did not provide any indemnification except for sole negligence.

The agreement further required the landlord and property manager to indemnify the carting company for all other claims. Subsequently, when an employee of the building improperly disposed of paint cans, causing a paint spill at a landfill, the landlord had to pay up to $125,000 of clean-up cost because of the poor indemnification agreement.

This issue highlights the importance of engaging professionals to review all contracts, including leases and service agreements, to make sure such agreements align with existing policies.

The following are additional examples of contractual issues that real estate companies need to be aware of when entering into contracts.

Elimination of Subcontractor Warranties and Limitations from General Liability Policies. General liability policies often contain warranty language exclusions that real estate companies and their brokers need to carefully review to avoid exposure to uninsured claims.

One real estate company learned the hard way when, during a project, an employee caused an unstable ladder to fall on a prospective tenant, causing serious injury. The injured party made a claim against the landlord for $1 million but, when the real estate owner placed his general liability carrier on notice, coverage was denied due to wording in the policy excluding coverage arising out of any construction work.

Subsequently, the company negotiated the removal of the language from the general liability policy, filling that potential, costly gap in coverage.

A thorough review of the insured’s general liability policy involves identifying any exclusions or warranties relating to construction, repair, or renovation work by the owner or its contractors. A broker should also request the carrier remove any exclusionary or warranty wording as it relates to the work.

Improvements and Betterments Exposure. Tenants often make alterations, additions, or installations to buildings they rent. These upgrades, known as improvements and betterments, can lead to disputes and create a host of liability exposures for the building owner.

As such, it is important to clearly state in the contract which party is responsible for insuring improvements and betterments and who is liable for a loss involving damaged upgrades.

Alignment of Policy Coverage with Contractual Exposures. During a client’s roof renovation project, several pedestrians were injured by falling debris, resulting in a claim against the contractor and the building owner. Prior to this incident, the building owner had broadened its coverage position with the contractor to include additional insured status.

Doing so allowed the owner to receive coverage from the contractor’s policy for the accident, eliminating a $250,000 claim against his general liability carrier.

Had the broad coverage not been in place, the resulting premium increase would have been between $75,000 and $80,000 per year with a total premium charge of between $375,000 and $400,000.

This incident underscores the importance of aligning insurance and indemnification provisions contained in the insured’s contracts with outside vendors and contractors to protect the real estate owner.

As part of this process, a monitoring process to obtain appropriate insurance documentation for all work performed by outside vendors and contractors should be developed and maintained by the real estate owner and their insurance broker.

Understanding Your Company’s Unique Circumstances Helps to Identify Right Mix of Solutions. 
The strategies listed here represent only a few of the solutions real estate property owners and managers should discuss with their agent or brokerage firm. Since each company’s risk profile and needs are different, understanding a company’s unique circumstances is crucial to identifying the right mix of solutions. As such, using the services of an experienced insurance broker is critical.

risk transferPope, USI Insurance Services vice president, is based in USI’s Blue Bell, Pennsylvania, office. He has an MBA from Columbia University, Columbia Business School, and was a former NFL football player with the New York Giants, Cincinnati Bengals and Philadelphia Eagles.

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