Shifting financial responsibility for a risk from one party to another.
Risk transfer is the core function of insurance: you transfer the financial burden of potential losses to an insurer by paying a premium. Contracts between businesses also transfer risk through indemnification clauses.
Risk transfer is the process of shifting the financial burden of potential losses from your business to another party. Insurance is the most common form—you pay a premium to transfer risk to an insurer, who agrees to cover specified losses. This allows startups to operate without bearing the full financial weight of every possible risk.
Beyond insurance, risk transfer happens through contractual indemnification and hold-harmless clauses. When you sign a vendor agreement, indemnification provisions may transfer certain liability risks between parties. For example, a cloud provider might transfer some breach risks to you, or you might transfer product liability to a manufacturer.
The two main types are insurance policies and contractual transfer. Insurance transfers risk to an insurer in exchange for premiums. Contractual transfer uses indemnification clauses in business agreements to shift risk between parties. Many businesses use both—purchasing insurance while also negotiating contract terms that allocate risks to the party best positioned to manage them.
Definitions are educational and may be modified by your specific policy language, endorsements, and state rules. For regulatory guidance, refer to the California Department of Insurance or the NAIC.
Last updated: July 2026.