What Does Noninsurance Transfer Mean?
A noninsurance transfer is the transfer of risk from one person or entity to another by way of something other than a policy of insurance. Most commonly, the techniques used involve hold harmless agreements, indemnity clauses, leases, hedging, and insurance provisions in contracts that require you to be added as an additional insured, thus granting you insurance protections under their policy.
While the noninsurance transfer of potential financial consequences might be tempting as you can save on paying insurance premiums, it can also be risky. There is the possibility that the contract may be challenged in court or the party you have transferred the liability to is unable to pay and so the plaintiff pursues you instead of compensation. Where possible, noninsurance risk transfers should be used as part of a risk management strategy alongside an adequate insurance policy.
A noninsurance transfer is also sometimes known as a contractual risk transfer. It is important to make the distinction that not all contractual risk transfers are noninsurance transfers as an insurance policy is also technically a contract.
Insuranceopedia Explains Noninsurance Transfer
Perhaps the simplest and among the most common methods of risk transfer is the purchase of an extended warranty on a product by a consumer. The extended warranty is a contract that transfers the risk of a defective product from the buyer to the seller or manufacturer.
Noninsurance transfers of risk are often used in the construction business as well. One method is to require one party, let’s say the framing subcontractor, to name another party, let’s say the general contractor, in the framing subcontractor’s liability insurance policy. In this example, the general contractor has transferred their risk to the framing subcontractor by way of an insurance provision in the contract with the framing subcontractor rather than by purchasing insurance themselves.
Another method is by way of indemnification clauses in contracts. Three examples follow:
- First is what is known as a broad form hold harmless clause. Such a clause provides that the indemnitor (the party that will be held responsible for any loss) will hold the indemnitee (the party that will be protected from any loss) harmless even if the indemnitee caused the loss.
- Second is what is known as a comparative fault clause. With such a clause the indemnitor will be responsible for damages that it causes, and only for damages that it causes.
- Third is what is known as an intermediate clause. With such a clause the indemnitor holds the indemnitee harmless unless the indemnitee is solely responsible for the loss. Intermediate hold harmless clauses are also sometimes used between general contractors and owners.
In this case, the general contractor would agree to hold the owner harmless for any loss or damage on the job unless the owner was solely responsible for the loss or damage.