Contractual Risk Transfer in Construction: Why It’s Still One of the Smartest Things You Can Do

In construction, most things are done with precision and planning. So why are so many contractors still skipping written contracts with their subs?

If you’re responsible for your company’s insurance and risk management strategy, it’s worth asking the same question, especially when a claim occurs and there is no contract to rely on.

Contractual risk transfer isn't just legal jargon. It's one of the most effective ways to keep your insurance program strong, keep your loss history clean, and protect your business when something goes wrong. Here's what you need to know.

What Is Contractual Risk Transfer?

At its core, contractual risk transfer is about placing responsibility where it belongs. When done properly, it shifts financial liability for certain risks, like property damage or bodily injury, from one party to another, typically through:

• Indemnification and hold harmless agreements
• Additional insured status on insurance policies

Together, these two elements form what many refer to as the “belt and suspenders” of risk transfer. If one fails, the other can still provide protection.

Why It Matters to Your Business

Even experienced contractors question the need for contracts:

“We’ve worked with them for years.”

“It’s a small job.”

“They’re a good guy—I trust them.”

That trust won’t matter when an injured party brings a lawsuit. Without a written agreement, you’ll have a much harder time shifting liability—even when the incident clearly stems from your subcontractor’s work.

Here’s what’s at risk when proper transfer isn’t in place:

• Your company’s assets: If insurance doesn't respond, your business could be on the hook directly.
• Erosion of policy limits: Paying claims that should've been transferred burns up limits you may need for your operations.
• Higher premiums and fewer options: Loss history follows you. Claims paid unnecessarily can drive up costs or even push you into the excess and surplus lines market.
• Lost project opportunities: Many GCs and owners require clean loss runs. If you're absorbing claims that weren't yours, you could be disqualified from future bids.
• Expensive litigation: Without clear contractual terms, even minor claims can spiral into costly legal battles.

What a Strong Risk Transfer Program Looks Like

A solid contractual risk transfer plan includes several key components. Here’s what we recommend:

1. Written Subcontractor Agreements

Always use written contracts with subcontractors, no matter how long you've worked with them. These should include indemnification and hold harmless language tailored to the state you’re working in.

2. Indemnification That Fits the Law

There are three general types:

• Limited Form: Sub is only responsible for its own negligence
• Intermediate Form: Sub covers all liability unless the GC is 100% at fault
• Broad Form: Sub is responsible even if the GC is solely negligent (banned in most states)

Many states limit what kind of indemnity clauses are enforceable. Work with legal counsel to align with applicable statutes and include a savings clause that preserves enforceability where possible.

3. Additional Insured Endorsements

Make sure you're listed as an additional insured on your subcontractors' policies, ideally for both ongoing and completed operations. Ask for ISO forms like CG 2010 (07/04) and CG 2037 (07/04) or their equivalents.

4. Umbrella/Excess Coverage Considerations

If you’re relying on a sub’s umbrella policy, make sure it includes primary and non-contributory language. Otherwise, your own GL may be tapped before the sub’s excess kicks in.

5. Waivers of Subrogation

These prevent the subcontractor’s insurer from coming after your company after paying a claim. Most carriers will honor these if they’re agreed to before the loss occurs.

6. Tail Coverage for Completed Operations

Ask for additional insured coverage to remain in force for the full statute of repose period in your state. Construction defect claims can surface 6–7 years after project completion.

7. Certificates of Insurance Are Not Enough

They’re a snapshot in time - not a guarantee. Always verify policy language directly, and don't rely on certificates to prove compliance with your insurance requirements.

Risk transfer isn’t about shifting blame. It’s about aligning responsibility with the party best positioned to manage it. For general contractors and project owners, that often means pushing risk down to the subcontractors actually doing the work.

Make this part of your process not an afterthought. The cost of ignoring it or trusting a handshake is far higher than investing in contracts that do what they're supposed to: protect your business.