The Importance of Risk Transfer Strategies Construction

Risk transfer strategies can help a contractor defend and resolve construction related claims and lawsuits.
By Shawn M. Cestaro
January 28, 2020

Most attorneys, insurance claims professionals and in-house risk transfer specialists would likely agree that initial risk transfer efforts and strategies are the primary objective in defending and ultimately resolving construction related claims and lawsuits. Successful risk transfer efforts save money and the importance of implementing the following risk transfer strategies cannot be understated.

Risk transfer efforts can act to reduce the costs of future insurance premiums. If successful, these strategies can also reduce or remove the enormous burden placed on the industry to pay legal fees in the defense of personal injury and property damage lawsuits. A successful risk transfer could also result in another insurance provider or party to a lawsuit paying the legal fees and potentially indemnifying the party involved for any settlement or judgment.

Wouldn’t it be a far cry from the norm, for an attorney to respond to a question about litigation costs that the party is not responsible to pay anything because of successful risk transfer? Why and how? The answer to “why” is because the associated cost of defending and resolving a claim or lawsuit has been tendered to, assumed and paid by another insurance provider or party. The answer to “how” is based on a relevant insurance policy or contractual obligation owed by another party.

Generally, one would strive to implement risk transfer efforts immediately after receipt of the claim or lawsuit. These immediate strategies include identifying the role the party has in the construction project. For example, is the party the owner of the property, the construction manager, the general contractor or a first tier or lower tier subcontractor?

To further facilitate risk transfer efforts, one would next obtain and analyze all relevant insurance policies (or certificates of insurance if the policy is not available). This will assist in identifying who is named as an insured or additional insured on another party’s insurance policy on a primary and non-contributory basis. If this can be confirmed, the resulting tender will likely reduce the costs associated with future insurance premiums, and potentially diminish or completely remove the high cost of litigation.

Indemnity provisions in insurance policies are risk management tools that are often referred to as hold harmless agreements. These provisions may include three obligations:

  • indemnify;
  • defend; or
  • hold the other party harmless.

Once one has a general understanding of all of the parties’ roles, and have obtained relevant insurance policies (or the certificates of insurance) and construction contracts, one would then prepare a formal written tender seeking a defense and indemnity for the client from the relevant insurance provider and/or party. Within the formal tender one would likely cite portions of the relevant insurance policy (or the information obtained from a certificate of insurance) and the relevant clauses of the any applicable construction contract pertaining to indemnification and procuring insurance.

The insurance provider or party (or both) may then agree to defend and indemnify, which would result in significant costs savings.

They may agree to only defend the client under a reservation of rights, which would also result in cost savings. They could also deny tender that under certain circumstances may require a declaratory judgment action to address.

The efforts, strategies and cost savings associated with this next phase are numerous and may be beneficial after discussion with counsel.

by Shawn M. Cestaro
Shawn M. Cestaro focuses his practice on construction-related litigation. He is a seasoned litigator with a diverse legal career and extensive litigation and trial experience representing large and small companies, including national and international corporations, partnerships, limited liability companies and not-for-profit organizations along with their respective officers and boards of directors.

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