Noninsurance Transfer
What Does Noninsurance Transfer Mean?
A noninsurance transfer refers to the transfer of risk from one person or entity to another through means other than an insurance policy. Common techniques include hold harmless agreements, indemnity clauses, leases, hedging, and insurance provisions in contracts that require adding you as an additional insured, granting you insurance protections under another party’s policy.
While a noninsurance transfer may seem appealing as a way to save on insurance premiums, it carries risks. The contract could be challenged in court, or the party to whom you’ve transferred the liability may be unable to pay, leaving you exposed to the plaintiff’s claim instead. Whenever possible, noninsurance risk transfers should be used as part of a broader risk management strategy that includes adequate insurance coverage.
A noninsurance transfer is also known as a contractual risk transfer. It is important to note that not all contractual risk transfers are noninsurance transfers, as an insurance policy itself is technically a contract.
Insuranceopedia Explains Noninsurance Transfer
One of the simplest and most common methods of risk transfer is the purchase of an extended warranty by a consumer. This warranty acts as a contract that transfers the risk of a defective product from the buyer to the seller or manufacturer.
Noninsurance transfers of risk are frequently used in the construction industry as well. For instance, a contract may require one party, such as a framing subcontractor, to name another party, like the general contractor, as an additional insured on the framing subcontractor’s liability insurance policy. In this case, the general contractor transfers their risk to the framing subcontractor through an insurance provision in the subcontract, rather than purchasing insurance independently.
Another common method of noninsurance risk transfer is through indemnification clauses in contracts. Here are three examples:
- Broad Form Hold Harmless Clause: This clause stipulates that the indemnitor (the party responsible for any loss) will hold the indemnitee (the party protected from the loss) harmless, even if the indemnitee caused the loss.
- Comparative Fault Clause: Under this clause, the indemnitor is only responsible for damages they cause, and not for damages caused by others.
- Intermediate Clause: This clause requires the indemnitor to hold the indemnitee harmless unless the indemnitee is solely responsible for the loss. Intermediate hold harmless clauses are sometimes used between general contractors and owners. In such cases, the general contractor agrees to hold the owner harmless for any loss or damage on the job, unless the owner is solely responsible for the loss or damage.
