A risk transfer occurs when one party deliberately shifts risk to a different entity, usually by purchasing an insurance policy. This risk may be shifted further, from an insurer to a reinsurer, so that the original insurer does not accumulate too much of a particular type of risk. An example of a risk transfer is when a doctor purchases malpractice insurance to transfer the risk from any losses incurred from patient lawsuits.
Risk may also be transferred through contractual agreements to a firm's business partners. For example, the partners in a joint venture can agree to share any losses arising from the venture. As another example, a customer demands a one-year warranty on a product purchased from a supplier, which shifts the risk of product failure to the supplier for that one-year period. Another possibility for risk transfer is for a business to be named as an additional insured on another party's insurance policy, thereby extending insurance coverage to the business. An organization may also insist that a hold-harmless clause be inserted into all contracts signed with other parties, which protects the organization from the acts or omissions of the other parties.