Construction is a specialized industry that poses substantial risks to everyone involved in it. Contractors need to partner with an agency who understands their business and the risks they face day in and day out.
So you have a subcontractor who strikes your insurance requirements section in its entirety, provides a certificate of insurance and states that their coverages only apply to extent outlined on their certificate of insurance. How does a general contractor know when to push back and what to push back on? With work as plentiful as it is, subcontractors are in a position to negotiate terms with general contractors and are taking advantage of it. Below are some things that general contractors need to be aware of when reviewing insurance provided by subcontractors.
As mentioned in Part I, not all additional insured endorsements are created equal. Our general contracting clients often require specific endorsements and subcontractors sign the agreement, but then when it comes time to provide copies of the endorsements, they don’t match what was required in the contract. This can be one of the most difficult parts of the process because many insurance professionals can’t explain the differences between various endorsements. And how is a general contractor supposed to read the endorsement and determine whether or not it’s sufficient? The best thing is to consult your insurance agent or broker to help determine whether or not the coverage provided is actually equivalent to what is being required.
One of the most common issues with additional insured endorsements provided by subcontractors is that the language will not provide additional insured protection to the project owner. This is often a contract requirement between the owner and general contractor so if the subcontractor does not provide it then the general contractor is technically in breach of their contract with the owner. The key thing to look for is whether or not the additional insured coverage applies only to the party who has a written contract with the subcontractor.
Excess Liability is a term often used interchangeably with Umbrella Liability. While the policies are often very similar, they don’t necessarily provide equivalent coverage. The common areas where Excess Liability policies don’t “follow form” to the underlying policies are additional insured coverage, waiver of subrogation, and primary and non-contributory coverage. Again, even those who work in the insurance industry can have a hard time picking these out so it’s challenging for general contractors to manage this risk on their own.
One of the most frequent areas to see a subcontractor strike language is the umbrella limits. If a general contractor requires $10M from their subcontractors and one of their subs is only willing to carry $5M, how should the general contractor handle that markup? The first thing the general contractor needs to do is determine their philosophy around accepting subcontractor markups. Is the general contractor willing to consider insurance below the requirements or are these the minimum standards where no exceptions will be made? If the latter, then it’s easy. Tell them to provide the limits or you’ll find someone else. If the former, then you’ll need to consider several factors to determine how much of a risk it would be to accept the $5M umbrella. How likely is it for this subcontractor to have a catastrophic claim? I would be more reluctant to accept a $6M limit from a roofing subcontractor when compared to a $4M limit from a plumbing subcontractor. While both subcontractors could result in a serious claim, the roofing subcontractor presents a much higher exposure for a catastrophic claim and therefore the general contractor should be more likely to enforce the $10M requirement. Reputation also comes into play here. How well do you know the subcontractor? Have you used them before? What is their safety record?
All of this being said, risk often has an economic translation. If using that same roofing subcontractor who is reputable would save $50,000 compared to using a higher cost subcontractor on a $200,000 job, I would be hard pressed to go with the subcontractor who is able to provide the full required limit. $50,000 is a significant difference. The general contractor could take the $50,000 as additional profit or they could ask the subcontractor to price additional limits. If it’s only $5,000 in premium to increase the limit to $8M and the general contractor would likely use this subcontractor again, then it would make sense to accept the lower limits compared to the contractor who can provide the full limit, all other things being equal.
While a construction law degree and 30 years of insurance experience might be what it takes to be fully prepared to manage subcontractor insurance risk, the above information was meant to illustrate some areas of concern for general contractors when evaluating subcontractor risk. It’s important for general contractors to partner with an insurance agent or broker who understand insurance and the risks contractors face so they are in a position to properly advise them when hiring subcontractors.