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Difficulty: MediumMethods of Handling Risk

A commercial real estate investor drafts a lease agreement for a new restaurant tenant. The lease contains a hold-harmless clause that requires the tenant to assume all legal liability for any bodily injury claims resulting from slips and falls inside the dining area. From the real estate investor's perspective, which method of handling risk does this contractual clause represent?

  1. Risk transferAnswer
  2. B
    Risk avoidance
  3. C
    Risk retention
  4. D
    Risk reduction

Answer

Risk transfer
Risk transfer involves shifting the financial burden of a loss to another party. While purchasing an insurance policy is the most common form of transfer, utilizing hold-harmless agreements in legal contracts (such as commercial leases) is a primary example of non-insurance risk transfer.

Step-by-Step Solution

1
Identify the action taken by the property owner in the scenario.
The owner includes a hold-harmless clause in the lease agreement.
Understanding the specific mechanism used is necessary to categorize the risk management technique.
2
Analyze the effect of the hold-harmless clause.
The clause shifts the financial and legal responsibility for bodily injury claims from the investor to the tenant.
The method of handling risk is defined by how the financial burden of a potential loss is managed.
3
Match the effect to the corresponding STARR method (Sharing, Transfer, Avoidance, Reduction, Retention).
Shifting the burden to another entity is defined as risk transfer.
Risk transfer can be accomplished through insurance policies or non-insurance contracts like lease agreements.

Key Concept

Methods of Handling Risk
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Topics

Methods of Handling Risk

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