Insurance 201

Risk allocation provisions are contained in all contracts. They are used in an attempt to assure the intended economic objectives of the “deal.” The success of an entity’s approach to contractual risk transfer can be considered successful if it meets the following criteria: Risks retained are appropriate and affordable; Risk as an element of the overall transaction and negotiation is incorporated at the onset; Indemnity, insurance, and other pertinent conditions are not so onerous that contact negotiations drag on unnecessarily delaying the transaction or necessitating the use of second-rate service providers to accomplish the contract’s purpose; Contractual conditions allocating risk are not so onerous that a court disallows their operation at a future point in time; Insurance requirements are clear, using recognized terms that can be interpreted both at the time the contract is negotiated and in possible future disputes; Insurance and other support for the indemnity is in place when a loss occurs; A thorough insurance monitoring process keeps the transferee in compliance with the insurance requirements; and/or The performance of the contract is monitored and regularly evaluated. Every provision of a lease or contract is either (a) restating the rule that would be supplied by the court in the absence of the provision (the “common law”) or is supplied by statute or (b) is expressly shifting a risk from one party (the “party to be protected”) to the other (the “protecting party”), to the extent permitted by common law and statute. The most common method of risk management are through contractual provisions for (1) indemnity, (2) insurance and (3) waiver of subrogation (aka the “three legged stool”). Neglecting any one of these three risk management legs may result in a failed risk management program.