Adjust Third-Party Contracts to Reduce Risks and Costs

MAY 6, 2025

Organizations today are doing more to protect themselves when conducting business with vendors and other third-party contractors. According to the National Law Review, the use of insurance, indemnification, and limitation of liability clauses in business contracts has increased 20% over the past five years. A study by Evident also shows that at least 10% of third-party vendors fall out of insurance compliance without notifying the companies that hire them.

Three Crucial Steps

With every third-party contract, organizations should evaluate contractual exposures to:

1. Transfer risk to third parties. Review all contracts to determine where risks can be transferred (to suppliers, contractors, and other third parties).
2. Negotiate contract language to reduce risks and costs. Collaborate with attorneys and your insurance broker to establish favorable contract language for retained and assumed risks.
3. Appropriately assume risk. Compare current insurance policies with contractual exposures, aligning coverage to fully protect contractual obligations.

These proactive measures help safeguard the organization against potential liabilities and provide comprehensive protection.

Step 1: Transfer Risk to Third Parties

If you are engaging with a subcontractor that doesn’t have appropriate coverage, you may be liable for any losses that they cause. For example, a construction company putting up a new building hired a masonry subcontractor to do exterior work. The mason dropped some materials on the street and injured pedestrians, who filed lawsuits. The masonry subcontractor didn’t have coverage to indemnify the construction company, whose insurance policy then had to pay the associated claims costs of nearly $200,000. As a result, at the next renewal the insurance carrier viewed the construction company as a higher risk and increased their premium by 50%. A simple adjustment to the masonry contract would have made a massive financial impact over time.

The construction company partnered with USI, and we reviewed all their contracts and relevant insurance policies. We transferred more liabilities to third parties as appropriate, eliminating certain risks, and covered other risks with insurance to avoid further financial loss.   

Step 2: Negotiate Contract Language to Reduce Risks and Costs

An effective insurance broker can work with clients and their attorneys to establish favorable contract language for retained and assumed risks. This calls for expertise tailored to your organization, your industry, and how you operate. There’s no one-size-fits-all solution — what works for a distributor may be entirely different from what’s effective for a real estate company.

Many landlords may require more coverage than necessary, and a thorough risk analysis can identify specific aspects of the contract that are inconsistent with exposures. By partnering with the right broker, insureds can negotiate lower coverage requirements with landlords and save on premiums.

For example, a manufacturer wanted to open a new facility. The lease required them to hold the property owner harmless from liabilities related to hazardous substances, with limits of $25 million — which translated to a $100,000 premium. After completing a comprehensive risk assessment, benchmarking, and analytics study, USI demonstrated to the property owner that their liability exposure was minimal. We negotiated lower limits in the contract, reducing the premium to $25,000 — a 75% reduction.

Step 3: Appropriately Assume Risk

Every organization should compare its current insurance policies against its contractual exposures to ensure coverage aligns with obligations. But the risks — and the solutions — can vary widely. A trucking company concerned about cargo theft faces very different exposures than a retailer dealing with a slip-and-fall claim.  

Consider the case of a motor carrier that signed a contract making it responsible for losses not automatically covered by insurance — including theft, dishonest acts, improper temperature, and spoilage without apparent damage.

Soon after signing a contract to transport goods, the carrier’s trailer (worth about $100,000) was stolen, along with $150,000 worth of client cargo. Lacking proper theft coverage, the motor carrier was responsible for the full loss, and the shipper withheld a $7,500 payment — leading to a total financial hit of $257,500.

Following the incident, the motor carrier engaged USI to conduct a comprehensive review of its contracts and insurance policies, transferring appropriate liabilities to third parties and ensuring other exposures were properly insured.