Strong on Paper, Weak in Practice: The Gap in Risk Transfer

In underwriting, it is easy to take comfort in seeing strong contractual risk transfer provisions in place. Broad indemnity language, additional insured status, and primary and non-contributory wording may suggest that the structure will operate as intended. On paper, the risk may appear well protected. In practice, however, the contractual structure alone does not guarantee the outcome.

“For example, consider a tenant with strong general liability contractual protections from its general contractor. The contractor accepts the defense and indemnity obligations, and meaningful limits may be available before the tenant’s policy is implicated,” said Joanne Fung, Large Casualty, Senior Regional Underwriting Manager at Safety National. “By traditional underwriting measures, the risk transfer may appear sound. Yet the claim can still develop into a real exposure. The issue may not necessarily be the contract, but how it is executed.”

The gap between contractual protection and claim outcomes may emerge in several areas of execution. The following considerations illustrate where risk transfer can weaken and identify factors underwriters may wish to examine more closely.

Tender Discipline

Risk transfer may break down even when the contract itself is not flawed if the process is not managed effectively. One potential point of failure is tender discipline. Even strong indemnity language may provide limited protection if it is not triggered early, correctly, and with adequate supporting documentation. Delayed tenders, incomplete documentation, or lack of follow-through may weaken leverage at the outset of a claim.

Differing Defense Priorities

Even when tenders are accepted, assuming that the other party is handling the claim may create blind spots. Defense control can then become an important factor. When another party controls the defense, that party’s priorities may not fully align with the tendering party’s objectives, particularly when the tendering party seeks dismissal or other early resolution. In the scenario discussed, the facts and procedural posture may have supported pursuing an earlier effort to remove the insured from the case, but that strategy was not pursued at that time. As a result, the insured remained in the litigation and faced additional settlement pressure.

Active Claim Monitoring

Beyond defense control, claim oversight and disciplined decision-making may also influence outcomes. Weak valuation analysis, delayed escalation, or passive claim management can allow a case to drift. In some situations, claims may deteriorate not only because contractual protections fall short, but also because the claim is not actively guided at key moments.

These considerations may have implications for underwriting. In addition to evaluating contract language, coverage structure, and available limits, underwriters may consider the insured’s processes for responding when claims arise. Relevant factors may include how quickly the insured tenders, how it oversees defense strategy consistent with the applicable contractual and coverage arrangements, and whether it evaluates opportunities for early resolution when supported by the facts and law.

Examining Claims Protections

At renewal, questions may extend beyond whether indemnity provisions and additional insured coverage exist. Depending on the circumstances, they may also address oversight and execution:

• How quickly are tenders issued?
• What happens after tender is accepted?
• Does the insured remain involved in litigation strategy, or does it step back?
• Are claims escalated early when exposure begins to develop?
• Can the insured point to real examples where it successfully exited a claim early?

The answers may provide additional context that is not apparent from the contract language alone.

Contractual risk transfer can be an important component of risk management, but it may not operate as intended without ongoing attention. Even a strong contractual structure may result in unintended exposure if it is not actively managed throughout the life of a claim. Outcomes may depend not only on whether risk transfer provisions are in place, but also on whether they are timely invoked and administered in a manner consistent with the applicable agreements and coverage.