Will Your Insurance Align With Contractual Exposures?

SEPTEMBER 2, 2025

Every day, businesses enter into agreements with third parties such as suppliers, contractors, and vendors. Amid supply chain challenges, increased material costs, project delays, and evolving lease agreements, companies tend to prioritize the products or services they’ve agreed to provide. Unfortunately, that means contractual insurance requirements may go unnoticed — which can result in coverage gaps and noncompliance with contract terms, leading to uninsured losses and lawsuits.

Practice Better Contractual Risk Transfer

Typically, one party assumes the liabilities of another as part of a business agreement. But when these assumed exposures aren’t covered by insurance, one of these businesses can suffer significant uncovered losses.

Contractual risk transfer is a strategy that involves the use of business agreements, i.e., contracts, to shift risk from one party to another. If you’ve ever been asked to name another business as an “additional insured,” you’re basically agreeing to assume some of their liability and are affording them access to the coverage and limits provided by your policy.

Common examples of contractual risk transfer include hold-harmless agreements (clauses in a contract that limit the other party’s liability) and waivers of subrogation (an agreement where the right to seek reimbursement from the at-fault party is forfeited).

Businesses that enter into contracts must determine:

1. Which risks can be transferred to a third party
2. Where more favorable contract language can be established
3. Whether the coverage provided in the current policy will satisfy the contractual obligations being assumed, and if not, what coverage is needed

It can be challenging for businesses to implement an effective contractual risk transfer strategy, and to execute it consistently. Attorneys may not understand insurance coverage enough to advise a business, and many insurance agents are often uncomfortable engaging in serious consultation on contract language.

To fulfill your contractual obligations in a cost-effective manner, seek guidance from insurance experts who specialize in your industry and understand the various contractual risk transfer methods, and who can also quantify the liabilities being assumed under contract and develop custom insurance programs.

Case Study: Reducing Uninsured Exposures

A plumbing company signed a contract with a general contractor (GC) who was renovating a hospital. The construction contract contained two requirements that wouldn’t be covered in the plumber’s general liability policy:

1. The plumber was required to provide coverage for damage caused by mold or fungi resulting from the plumber’s work. However, the plumber’s policy contained a total pollution exclusion that defined mold and fungi as “pollutants.”
2. The plumber was required to include both the GC and the hospital as additional insureds for ongoing and completed operations.

After USI Insurance Services uncovered these contract and policy issues, we recommended that the plumber get a pollution liability policy to address the mold and fungi exposure. We also shared that the additional insured endorsement on their policy wouldn’t extend coverage to the hospital.

After the plumber made USI their broker, we worked with the insurance company to have the appropriate additional insured endorsement added to satisfy the coverage requirement for the hospital. This resulted in the following reductions in uninsured exposures:

• Losses due to the presence of mold and fungi caused by the plumber’s work, which removed a potential $1 million gap in coverage.
• The plumber was able to include the hospital as an additional insured, which eliminated an exposure up to the policy limits of $1 million.

In addition to the exposures discussed in this article, USI’s analysis of general liability insurance programs can identify other opportunities to reduce uninsured exposures and create premium savings. To learn more about the risk management services available through USI, email select.business@usi.com.