Insurance transfer

Insurance transfer is a risk-financing model for contractors. The contractor purchases commercial insurance, usually with standard deductibles, and so passes most of the financial risk of a loss to an insurer in exchange for a premium. The Government of Canada uses this exact term in its CanadaBuys Buyer's Guide, in the guidance on liability and risk management.

The term describes how a contractor pays for risk, not how a buyer assigns it. A federal buyer decides which risks the contractor must carry, and the contractor then finances those risks through an insurance policy. The cost of that policy is part of the contractor's cost of doing business with the Crown.

How the Buyer's Guide defines insurance transfer

The Buyer's Guide lists insurance transfer under risk financing models for contractors. It is the model in which commercial insurance, with standard deductibles, takes on most of the financial exposure. The insurer accepts that exposure and the contractor pays a premium for it.

The guidance sits within the planning stage of federal procurement, under other planning considerations. It is written for buyers who must decide how to manage liability and financial risk before a solicitation is issued. Suppliers see the result of those decisions as insurance requirements in the solicitation and the resulting contract.

Insurance transfer, transference and self-insured retention

The same CanadaBuys guidance separates three related ideas.

• Transference uses contract conditions to move the risk of loss, or the obligation to control loss, to the contractor.
• Insurance transfer is the contractor's risk-financing method, where commercial insurance carries most of the financial risk.
• Self-insured retention means the contractor keeps financial responsibility up to a specified level and transfers the risk above that level to insurers.

The guidance names indemnification as the most prominent contractual form of transference. Under an indemnity, the contractor compensates the buyer for losses the contractor causes. Insurance is the usual way a contractor funds that promise.

Insurance requirements in Canadian contract documents

In federal solicitations and contracts, the concept shows up as a requirement to obtain and maintain specified commercial insurance at the contractor's cost. A CanadaBuys contract document requires the contractor, at its own expense, to obtain and maintain insurance in accordance with a Certificate of Insurance. It also requires the coverage to be placed with an insurer licensed to conduct business in Canada.

Typical requirements of this kind cover the following points:

• the contractor obtains and maintains the specified coverage;
• the contractor pays the premium and any related cost;
• the contractor provides evidence of coverage, such as a certificate of insurance;
• the insurer is licensed to conduct business in Canada; and
• coverage stays in place for the period the contract specifies.

The insurance types, limits, deductibles, evidence requirements and duration are set in each solicitation or contract, so the bid documents govern what a supplier must carry.

NATO insurance obligations for suppliers

NATO procurement uses the same approach. Its General Terms and Conditions require the supplier, at its own cost, to maintain legally required insurance and suitable third-party liability insurance. That coverage applies to damage to NATO premises and to injury to persons. Suppliers pursuing allied or defence work should expect the same pattern of supplier-funded cover.

What insurance transfer means for a supplier bidding on Canadian public contracts

Read the insurance clauses and the Certificate of Insurance requirements before you price. The premium and deductibles are costs you carry, so include them in your bid. Confirm early that your insurer is licensed to conduct business in Canada and that your policy can meet the coverage and duration the buyer specifies. Where a contract also includes an indemnity, check that your insurance responds to the losses you are agreeing to cover.