Checklists help ensure risk transfer strategies achieve intended goals

HOUSTON — Contractual risk transfer strategies can help contractors limit their liabilities on construction projects, but they need to be carefully reviewed to ensure they are effective, an insurance coverage lawyer said.

Checklists can be used to focus contractors’ attention on the details of the documents and agreements used in risk transfer strategies, which can help avoid disputes when damage or injuries occur, she said.

Risk transfer in construction contracts is a risk management and control strategy “that involves shifting the risk from one party to another,” said Frances A. Lettieri, a partner at Fowler Hirtzel McNulty & Spaulding LLP in Philadelphia.

In practice, such strategies are often used to shift liability for property damage and bodily injury incidents from general contractors to subcontractors on a project, she said during a session at the International Risk Management Institute Inc.’s Construction Risk Conference in Houston on Tuesday.

Responsibility can be shifted either through contractual indemnification provisions or through additional insured coverage, where a general contractor is named as an additional insured on subcontractors’ insurance coverage, Ms. Lettieri said.

When negotiating such provisions, contractors should use checklists to ensure that the risks are transferred to the extent that they are seeking, she said.

“A checklist requires us to pay attention … it gets you thinking not only about what your goals are under a contract but also what you are assuming and how you are exposing yourself and your business,” Ms. Lettieri said.

Indemnity goals — whether a contractor is looking for broad, intermediate or limited indemnification from a subcontractor — should be part of the checklist, along with the agreed legal jurisdiction for the contract, she said.

In addition, employee injuries and worker comp waivers for independent contractors need to be addressed, Ms. Lettieri said.

And the scope of additional insured coverage should be assessed, she said. “Make it clear how additional insured coverage is to be added, what forms should be used,” and how the policy will respond to a loss, she said.

The checklist should also cover “who indemnifies who.” For example, the subcontractor indemnifies the general contractor or the general contractor indemnifies the owner, among other issues, Ms. Lettieri said.

Using additional insured coverage can help more clearly shift risks from a contractor to a subcontractor, but again the details of the coverage need to be carefully checked, she said.

For example, wordings detailing the scope of coverage, insurance details for ongoing operations and completed operations, policy exclusions, how other insurance coverage purchased by the additional insured applies and the effect that self-insured retentions may have on the risk transfer strategy all need to be examined, Ms. Lettieri said.