One of the many challenges general contractors — both commercial and residential — have faced over the past five years involves subcontractor insurance.
The subcontractor marketplace has always been volatile. However, the influx of low-priced subcontractors, changing state laws and regulations, increasing opportunities for exposure and other factors, has made it increasingly difficult for even good subcontractors to find quality, affordable coverage.
This places a tremendous burden on brokers and agents who work with general contractors who hire subcontractors. The broker’s task is not only to identify appropriate coverage. They must also ensure that contracts are written so the general contractor is protected and state laws are complied with, while also safeguarding the overall project and ensuring the viability of quality subcontractors.
While the marketplace is challenging, there are solutions. Important steps brokers can take include:
• Ensuring appropriate contract language is used;
• Knowing all relevant state laws and regulations;
• Finding the right insurance partner;
• Considering new options, including wrap policies.
Ensuring appropriate contract language
Perhaps what is most frightening to general contractors and their brokers — not to mention insurance carriers — is that even the most basic of tasks related to a project could lead to litigation.
For example, one general contractor in California hired a subcontractor to install HVAC systems. Unfortunately, there were problems, resulting in moisture intrusion and fires. Ultimately, more than 200 claims were filed, and the insurance carrier ended up spending more than $300,000 in indemnity claims and more than $1.2 million in defense of those claims.
Both the general contractor and subcontractor had solid reputations before the installation. However, because of the claims, the subcontractor declared bankruptcy and the general contractor lost thousands of dollars in claims costs and attorney fees.
General contractors can limit their liability by moving the defense of their case through contracts that include indemnity clauses that outline whom is responsible for what under insurance coverage. However, often the indemnity and insurance language is not clear, leading to potential exposure for the contractor.
While there are multiple ways that contractors can protect themselves, one of the most important is to ensure that contracts with subcontractors include an indemnity agreement with a separate clause covering insurance requirements.
The inclusion of clearly worded and distinctly separate clauses is a vital step. Many states have laws that limit or bar certain types of indemnity agreements in construction contracts. If a state or court rules that the indemnification clause is against public policy, then the insurance requirement, if standing alone, will provide the needed protection.
Legislative knowledge is crucial
Current legislation makes it increasingly important for general contractors to have carefully worded contracts as well as other programs designed to provide necessary protection. For example, many brokers encourage contractors to document that work is inspected as it is done.
In terms of the contract, additional important clauses include additional insured status for premises as well as for completed operations.
While most carriers will provide ongoing operations coverage, not all will provide coverage for completed operations. Unfortunately, this type of protection represents a significant potential source of risk. Contractors are often sued several years after the completion of a project. If the subcontractors involved are no longer in business — as often happens — it will be the general contractors’ duty to defend.
In some states, notably California and Oregon, contractors continue to face significant challenges with regard to subcontractor contracts. In California, it is very difficult — some would say impossible — for subcontractors to obtain completed operations coverage. Many industry analysts predict that the case law precedence in the West will slowly work its way east, leading to even greater risk for contractors and more difficulty in finding affordable, quality coverage.
Finding the right partner
While the marketplace is challenging, there are a number of simple steps brokers can take to help their clients find optimal subcontractor coverage.
As a first step, it’s important for brokers to develop close relationships with their carriers. In addition, they should ensure that the carriers they work with are committed to maintaining communications within their own organization.
For example, typically claims staff and underwriters do not work together. Their relationship is often referred to as the Hatfield and McCoy of the insurance industry. But when claims and underwriting do communicate frequently, policies are more accurately developed, risks are better assessed and contract language more fully protects contractors. The result is an enhanced reputation for the broker that identified the carrier and improved profitability for all parties in the process.
A good carrier will also help brokers identify the optimal coverages, and in most cases will review contracts to ensure that they contain the correct language and have covered all bases in terms of liability. In a complex marketplace, partnerships with teams of experts dedicated to helping brokers help their customers is vitally important.
Innovative solutions on the horizon
There is some good news in the subcontractor marketplace. Some carriers are beginning to adopt innovative solutions to help protect contractors and subcontractors. One of the most promising is an owner-controlled insurance program (OCIP), also referred to as “wrap insurance.” In an owner-obtained OCIP, all parties involved in a particular project — from contractors to subcontractors — are insured under the same policy. The policy usually includes workers’ compensation insurance, general liability insurance, umbrella liability insurance, payment and performance bonds, and builder’s risk insurance.
By insuring all the project participants with one policy, duplication of coverages is avoided and premium costs are reduced. However, wrap policies are still not common nationwide. In addition, to date, most wrap policies have been used primarily by larger companies — projects with at least $100 million of hard construction cost. However, when brokers and carriers have strong relationships — and when both know the contractor and the firm’s claims experience — some carriers will be willing to offer wrap coverage to even smaller firms.
Building a future
While the marketplace continues to be complex for contractors, it also continues to offer tremendous opportunities for brokers. Those willing to work with insurance partners that are knowledgeable about the industry, and committed to helping their customers find the best insurance coverage, will find success.
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