Contracts as a Risk Management Tool
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What is a contract?

A contract is a legally binding agreement involving two or more people or businesses that sets forth what the parties will or will not do. A contract can be oral (with some exceptions) or written.

The following elements are required for a legally binding contract:
  • Competent parties-this usually means adults of sound mind or business entities
  • Mutual agreement to provide each other some benefit
  • A legal purpose
  • Consideration-that is, some form of service, property, or money is involved

    Contracts are used in transferring risk. The contractual transfer for risk financing can be a matter of insurance or non-insurance. Examples of such contracts include the following:
  • Real estate leases
  • Equipment leases
  • Purchase orders
  • Vendor and service provider agreements

    The categories of liability transfers can be broken down in the arrangement below:
  • Tort liability
  • Warranty
  • Implied warranty
  • Express warranty
  • Tort v. contractual liability
  • Business risk
  • Economic loss
  • Fraud
  • Criminal acts

    Tort liability refers to liability resulting from a wrongful act that does not involve a breach of contract and for which a civil suit can be brought. Tort liability can take the form of strict liability or even negligence.

    Let's now turn our attention to an issue that warrants special consideration, as it is a complex subject that plays a key role in insurance and is something that is frequently contested in court. This issue is indemnification.

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    Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.