By Brian Cafritz, Esq.
When claims are made against your company, one of the quickest ways to clear that loss from
your company’s books is to transfer the risk to a third party. A good Risk Transfer Plan can not
only remove the risk of indemnity, but it can also prevent expensive litigation costs and
attorney’s fees. Indeed, a well-planned and firmly executed Risk Transfer Program can change
the internal perceptions of the risk management and claims management departments. By
taking a few simple steps, your risk management strategies will create reduce the number of
pending claims and create a flow of incoming money, rather than being seen solely as a
source of outgoing payments.
Key Principles of the Risk Transfer Program
In order to compile a useful Risk Transfer Program, one must understand a few key principles
regarding the available theories behind Risk Transfer:
Contribution: The right of one tortfeasor to get reimbursement or payment from another
tortfeasor to equally or proportionally share the amount owed to a Plaintiff.
Contractual Indemnity: A promise in a contract to pay full amounts owed by another. The
scope and breadth of the obligation are determined by the language of the contract, but it can
often be limited by state laws depending on a state’s public policies. It is common to see a
duty of defense attached to the duty to indemnify, but it must be expressly stated in the
contract for it to exist.
Common Law/Equitable Indemnity: If no indemnity contract is available, Equitable Indemnity
exists to shift liability from one who is only passively liable to the party who was actively at
fault. Equitable indemnification is available to one who is liable by operation of law for the acts
of another but is otherwise without fault.
Additional Insured Status: a person or organization that enjoys the benefits of being insured
under an insurance policy, in addition to whoever originally purchased the insurance policy,
while doing the business of the named insured.
Loss Payee Status: a person or organization listed on an insurance policy’s declarations
page that is entitled to receive property damage claim payments before the named insured due
to a financial interest in the insured property
Reservation of Rights: when an insurance company issues a letter stating that it may deny
coverage for some or all of the claim even while the company is investigating the claim or
beginning to treat the claim as if it were covered.
Building a Tender Demand
To successfully transfer the risk of loss and litigation to a third party, one must “tender” the
claim to the third party and demand that the tender be accepted. The following should be
included in Tender Demand letter:
The letter should Include objective facts such as date, time, location of claim and the parties
involved, along with a statement of the claim that is being asserted against your company.
The letter should identify the document and clause that creates the duty to indemnify, as well
as any clause or policy that creates a duty to defend. Note that this letter is discoverable, so
statements should be couched in terms that cannot be used against you in litigation.
Attached a copy of a Complaint, Accident Report, or Demand Letter to evidence the nature of
Attach a copy of the Indemnity Contract that contains the duty to indemnify.
Attach a copy of the Certificate of Insurance (COI) that identifies your company as an
Additional Insured or Loss Payee, depending on the type of claim. Note that the COI does not
create coverage. Only the policy or its endorsements can create coverage. However, the COI
does provide strong evidence that the coverage exists and can put the carrier in an
uncomfortable position with its insured and agent if the coverage does not exist. Note: Always
make sure your COI is for the correct policy period!
Issues Common in a Response to a Tender Demand
If a tender is fully and immediately accepted, all is good. But sometimes, things are not always
clear. Here are some common responses and your rights in response. Note that it is not
unusual for the insurance company to resist a tender when your vendor does not object.
There is a difference between them, and the vendor cannot escape his contractual obligations
simply passing the demand onto its insurance carrier.
If a tender is denied, look at why. Often the denial may be because the vendor does not think
they did anything wrong. However, most duties to defend are triggered by claims; not by the
ultimate outcome of the case. A duty to defend may exist, even though ultimately there may
not be a duty to indemnify.
If tender is accepted under a reservation of rights, this can create a conflict of interest and
afford you the right to select your own counsel, rather than one chosen by the insurance
If the tender is denied, you can file a Complaint for Contribution, Contractual Indemnity, or
Equitable Indemnity. This can be part of the Plaintiff’s lawsuit or separately. If you wish to
recover legal fees for enforcing a contractual indemnity claim, there must be a separate
attorney’s fees clause in the contract. Otherwise, the only fees recoverable are fees incurred
in defense of the Plaintiff’s case.
The time from when fees are recoverable depends on your state. Most take a position that no
fees are recoverable until after notice of claim is given. Thus, it is important to send your
Tender Demand package as soon as possible.
Typically, pressure form the business partners can be more effective than legal pressure for
Knowing the language of your indemnity provision in your contracts and having a system of
regularly obtaining and securing COIs can make all the difference in successfully transferring
risk. Moreover, maintaining a professional relationship with your contractors and making clear
that indemnification and defense are a critical component to your relationship sets the tone as
to what is expected. By the same token, tender demands should be reserved only for
instances where you believe in good faith that it is owed. This even and balanced handling of
issues increases trust and makes it easier to successfully transfer risk when it is appropriate.