Jason Tunney, Executive Vice-President and General Counsel, Duro-Last Inc.
David Hop, President, Van Wyk Risk Solutions
What insurance should contractors should require of their subcontractors? Alternatively, if you’re subcontracted to do the work from a general contractor on a large job, below are some insurance issues you should expect.
A. Certificate of Insurance
Prior to the beginning of the project, the subcontractor should provide two certificates of insurance to the contractor of record showing that the subcontractor has coverage for itself and its employees, agents and subcontractors. The subcontractor’s insurance must provide adequate coverage for:
1. Workers’ Compensation obligations,
2. Employer’s Liability, and
3. Automobile Liability.
Moreover, if any of the above policies are terminated, the subcontractor should provide certificates of insurance showing replacement coverage. All coverage must be placed with insurance companies duly admitted in the state or in the desired licensing jurisdiction in which the work is being done, and all coverage must be reasonably acceptable to the primary contractor. All of the subcontractor’s insurance carriers should be required to maintain an A.M. Best rating of “A-” or better.
The certificate of insurance should provide that the insurer give the contractor of record a written notice of cancellation and termination of the contractor’s coverage at least 30 days prior.
B. Additionally Named Insureds
The subcontractor’s policy must name the contractor of record as an additional insured. Coverage must be afforded to the contractor as an additional insured whether or not a claim results in litigation. Additional insured coverage must apply as primary insurance with respect to any other insurance afforded to the owner and contractor.
C. Insurance Coverages Subcontractors Should Possess
1. Workers’ Compensation
- The subcontractor should secure a workers’ compensation insurance policy. The workers’ compensation policy must cover all of the subcontractor’s work and performance and provide coverage for all employees, executive officers, sole proprietors, and partners and members of a limited liability company, in the amounts required by all applicable laws.
- In addition, the subcontractor should secure an employers’ liability insurance policy (part II of the standard workers’ compensation policy). This type of coverage covers the damages that become due in case of bodily injury, occupational sickness or disease or death of subcontractor employees that are not covered by the workers’ compensation policy.
- If a subcontractor does not have his or her own workers comp insurance, the contractor of record risks seeing the work comp premium rise during an audit. This is why it is so important that the subcontractors you hire provide proof of insurance before any work is done.
2. Commercial General Liability (CGL)
- Subcontractors should secure a CGL insurance policy to cover the damages that become due in case of bodily injury, property damage and personal or advertising injury arising out of or related to:
- All of the subcontractor’s operations and premises;
- All of the subcontractor’s products and completed operations;
- All liability or responsibility assumed by the subcontractor;
- All liability assumed in a business contract;
- The contractor as an additional insured; and
- Defense expenses paid in addition to the policy limits.
- There should be no endorsement or modification of the CGL for risks arising from pollution, explosion, collapse, underground property damage or work performed by the subcontractor.
3. Auto Liability
- The subcontractor should secure an automobile liability insurance policy to cover the damages that become due in case of bodily injury, death of a person or property damage arising out of ownership, maintenance or use of any motor vehicle or trailer owned, hired, leased, used on behalf of or borrowed by the subcontractor. The policy must also include coverage for any equipment subject to motor vehicle laws, contractor and owner (if different than the contractor) and any subcontractor liability or responsibility.
4. Umbrella (Excess Liability) Coverage
- The subcontractor should secure an umbrella liability insurance policy to cover the damages that become due in case of bodily injury, property damage and personal and advertising injury, with at least the same terms and conditions as the policies mentioned above.
D. Completed Operations Liability and Obligations
Even quality workmanship is not immune to potential claims of property damage or bodily injury. All operations carry the risk that injury or damage may occur as a result of the work, leading to costly lawsuits. Considering the complicated mix of contractors and subcontractors that contributes to each project, who is liable for this risk?
In insurance terms, “your work” as used in an insurance policy is a broadly defined term that includes operations performed by the policyholder or on the policyholder’s behalf, including material, parts or equipment in connection with the operations. Operations or work performed on behalf of the policyholder means work done by a subcontractor is considered the contractor’s work. Therefore, faulty roofing workmanship performed by a roofer that causes leaks or other damage could be considered the contractor’s liability, but would be covered under a standard CGL policy.
Because a contractor or other involved party could be held liable for defects in a subcontractor’s work, years after it has been completed, and filing the claim under the contractor’s CGL policy could cause the premium to rise, many construction contracts now require that subcontractors provide insurance coverage for claims resulting from their completed work for a finite period of time, typically the one- to five-year range. Typical contracts also require that the subcontractor name the owner, the architect, the general contractor and other third parties as “additional insured” parties, entitled to coverage under the insured subcontractor’s CGL policy. Naming additional insured parties requires a separate endorsement to that policy.
This means that subcontractors can be held liable for claims of property damage or bodily injury resulting from a defect in a contractor’s work. It is also critical to maintain this coverage into the future; failure to do so could lead to a breach-of-contract lawsuit brought by the contractor of record or another party.
It is important for subcontractors to understand this commitment when signing the contract—the insurance commitment doesn’t end with the project. Further, in the event of a large claim, subcontractors could be faced with a substantial increase in premiums on the policy.
What can subcontractors do to reduce the risk of a claim being filed against them for a defect in their completed work? First, to reduce the chances of litigation, it is crucial to know local regulations and adequately document proper performance. Second, subcontractors must either create and maintain a corporate record retention policy, or if a record retention policy already exists, know their company’s documentation practices relative to each subcontract, and carefully keep records of all processes.