A contractor is hired to remodel a store in a busy commercial area. The contractor’s painting subcontractor leaves a bucket of oily rags in the alley next to the store overnight, and they ignite, completely destroying the neighboring building. The cost to replace the building and its contents is over $2.8 million. The contractor’s contract with the painting subcontractor contains an Additional Insured provision, but it only requires the subcontractor to carry liability limits of $500,000. The subcontractor has no assets beyond the policy’s $500,000 limit, and the contractor is sued for the additional $2 million plus in damages. The contractor’s own liability insurance carrier must defend against the lawsuit and pay any covered amounts up to the limits of liability coverage. This is where knowledge of Contractual Risk Transfer is crucial.
What exactly is Contractual Risk Transfer (CRT) and why is it important for businesses to have contracts in place? It is essential to use a written, signed and dated contract if you are a property owner or contractor that is hiring a subcontractor. Having a written contract that clearly allocates risks, roles and responsibilities helps protect assets in the event of an accident and saves time and money when a loss occurs.
One key item to consider in any contract is a hold-harmless, defense and indemnification provision drafted in accordance with the risk transfer laws of the jurisdiction where the work will be performed. This provision should pass the liability back to the party that will have had the most direct control of the situation, giving rise to the alleged loss (i.e. the subcontractor performing the work). Indemnification language should require the subcontractor to defend and indemnify the contractor and hold the contractor harmless against liability arising out of the work performed by the subcontractor (including expenses, attorney’s fees and other costs of defense) to the fullest extent permitted by the law. In addition to the foregoing, a waiver of subrogation clause should be included whereby the subcontractor agrees to waive any right against the contractor for loss or damage to the extent covered by applicable insurance.
The second key item to consider in any contract is an insurance procurement clause outlining the limits and type of insurance (i.e. workers’ compensation and liability insurance) that must be carried by the subcontractor. This provision should state that the contractor, along with any other party for whom the contractor must name as an additional insured on its own policies for the project, must be named as an additional insured on all applicable liability policies of the subcontractor. In addition, the insurance procurement clause should state that the additional insured coverage under the subcontractor’s liability policies will be primary and non-contributory to any other applicable insurance the contractor may carry and that the additional insured status afforded will be for both ongoing and completed operations arising out of the work of the subcontractor. Required limits should be determined with the help of the contractor’s agent or attorney, but as a rule of thumb, they should at least be equal to the limits of liability coverage under the contractor’s own policies.
The third and final key item is that the written contract should clearly explain the term and scope of work, the payment terms, and to the extent possible, clearly state the respective duties, obligations and responsibilities of each party to the contract. If the work being subcontracted is also the subject of a master contract, then to the fullest extent possible, the subcontractor agreement should incorporate by reference the terms and conditions of the master contract and state that the subcontractor assumes all of the duties and responsibilities of the contractor under the master contract for all of the work under the subcontract. The contract should include a “governing law” provision stating the jurisdiction the parties intend to govern the agreement; a “severability” clause that provides to the extent any word or provision of the contract is found to be unenforceable by a court of competent jurisdiction, the remainder of the contract remains valid and enforceable to the fullest extent permitted by law; and an “entire contract” clause confirming that the contract reflects the entire agreement of the parties and supersedes any prior agreement.
An important insurance requirement in a construction contract is a general contractor or owner asking a subcontractor for additional insured status for ongoing and completed operations under the subcontractor’s general liability policy. If the correct additional insured forms are not in place, subcontractors will often not be able to get on the jobsite or even get paid for work until the correct endorsements are on the policy. For this reason, these endorsements can be added in the bidding process to save subcontractor’s time and reduce the hassle connected with meeting any contractual requirements.
What is additional insured status? Additional insured status provides certain protections to the general contractor or owner through the subcontractor’s general liability policy for accidents for which the subcontractor is responsible. It is important for general contractors and owners to require this on the subcontractor’s policy in the event that the subcontractor causes an accident that results in injury on the jobsite and the general contractor or owner is sued because of the subcontractor’s negligence. The two important exposures for which owners and general contractors will need additional insured coverage is for ongoing operations and completed operations. Ongoing operations provides insured contractors protection for accidents that occur while they are doing work on the jobsite. Completed operations covers injuries and damages resulting from an insured contractor’s work once they have finished their part of the project.
There for You: Acadia Insurance
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Acadia is pleased to share this material for the benefit of its customers. Please note, however, that nothing herein should be construed as either legal advice or the provision of professional consulting services. This material is for informational purposes only, and while reasonable care has been utilized in compiling this information, no warranty or representation is made as to accuracy or completeness. Recipients of this material must utilize their own individual professional judgment in implementing sound risk management practices and procedures.
