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How to Transfer Risk through Insurance, Indemnification, and Additional Insured Endorsements

When it comes to hedging risk, there’s no surefire way for businesses to protect against every loss. But with the right combination of insurance policies, indemnification clauses, and additional insured endorsements, you can get close to full coverage. 

It’s helpful to think of each of these risk management tools as a circle in a Venn diagram. The trick of positioning your business as close to the center of a perfectly overlapping Venn diagram of coverage is to understand each type of risk transference. 

How do you Define Insurance?

Insurance is a tool that transfers and hedges risks. When you take out an insurance policy, the insurer agrees to assume a portion of your risk in exchange for compensation – your premiums. If you incur losses that the policy covers, the insurance company reimburses them up to specified amounts. 

Insurance hedges against losses effecting either the insured, the insured’s property, or a third party you financially injure. While there are many types of business insurance, at a minimum, most businesses purchase commercial general liability (or “CGL”) insurance. 

This common and important insurance has three standard coverages:  

Coverage A: Bodily Injury and Property Damage Liability 

Coverage A protects you from losses for bodily injury or property damage to a third party. If, for example, a client tours your factory, falls and breaks a leg, and sues, this coverage would pay out for those damages.

Coverage B: Personal and Advertising Injury 

Making outlandish claims in your advertising copy? This coverage protects the insured against liability from legal issues that could crop up as a result of advertising, including libel, slander, copyright infringement, and invasion of privacy. 

Coverage C: Medical Payments 

Even if the customer didn’t sue after falling and breaking their leg, they would incur medical bills. This coverage reimburses medical payments for non-employee injuries sustained on a policyholder’s premises or during the normal course of business.

Each of these common coverages protects a business from a different type of risk of loss related to conducting business.  An insurance policy is a type of indemnity agreement, where one party agrees to assume another party’s risk. 

What does Indemnification Mean?

Indemnity is the contractual obligation for one party to provide compensation in the event of losses on the part of another party. It releases that second party from responsibility and assumes that responsibility on their behalf. The indemnitor agrees to pay damages the indemnitee might sustain for legal liabilities and claims of a third party.

Indemnification is not the same as insurance, and can exist separate from an insurance policy. It explicitly transfers responsibility for losses within the contractual relationship. A business contract between two parties could have an indemnification clause, but is not an insurance contract. 

An insurance contract will always have an indemnification clause. Without one, there would be no way for the insurer to establish their accountability for provided protections.

Indemnification clauses, also known as hold harmless agreements, are commonly found in construction and service provider contracts. A hold harmless agreement might state that a subcontractor (indemnitor) assumes the liabilities for work on a property owner’s (indemnitee) building project as required by the contract. 

Three classifications of indemnity agreements exist: 

• Broad Form Indemnity – in the contract, the indemnitor agrees to hold an indemnitee harmless, regardless of who is at fault, for 100% of the liability. Even if the indemnitor bears no responsibility for causing the loss, they still own the entire financial burden. Twenty-six states allow broad form indemnity. 

• Intermediate Form Indemnity – with this clause, the indemnitor assumes the full liability obligation only if at least partially at fault for the loss. At least half of US states allow this type of indemnity agreement. 

• Limited Form Indemnity – limited indemnity splits the liability obligation between the indemnitor and indemnitee on the basis of each party’s fault. Each party pays a percentage toward the damages based on their contribution to causing the loss. All states accept limited form indemnity agreements.

What are Additional Insured Endorsements? 

When you purchase a CGL policy, you’re insuring against your losses. If you work with vendors, subcontractors, and other third parties, your contracts with them likely include indemnity provisions requiring them to pay for affiliated losses. But another powerful tool exists to transfer risk – additional insured endorsements.

When listed as an additional insured, you receive coverage under another party’s policy. If listed as an additional insured on their subcontractor’s policy, and the subcontractor contributed to a loss, the contractor could file a claim against it. Because they wouldn’t have to file a claim against their policy, their premiums wouldn’t rise. 

Additional insured endorsements have two versions in use today, the 1985 and current 2013 versions.

• 1985 Edition – if the loss is at all connected to the work of the named insured, the additional insured has coverage. Coverage extends to the named insured’s ongoing and completed operations. Since the broad protection favors the additional insured, even for negligent acts, some insurers no longer allow this form. 

• 2013 edition – this version of additional insured coverage limits coverage. It separates ongoing and completed operations into different endorsements. Coverage excludes the additional insured’s sole negligence. This edition also essentially makes the agreement an extension of the endorsement by strictly following the work contract. 

Tracking COIs and Additional Insureds

Because being listed as an additional insured gives your business added protection, it’s a good idea to track those subcontractors who have you listed. While some businesses have relied on manual processes to track certificates of insurance in the past, digital tools now exist to automate and simplify the process. TrustLayer can help your business stay on top of this important layer of risk management.