When you, as a general contractor, need to bolster your project team, it’s imperative to establish a written agreement with each subcontractor you use. There are several vital components to include in the contract (hold harmless and indemnity agreements, for example) in order to mitigate risks and reduce your liability.
The first, and perhaps somewhat obvious, task is to confirm the sub you’re about to hire is insured. Never use an uninsured subcontractor. And beyond recommended coverage requirements , the subcontractor’s GL policy should always include an Additional Insured Endorsement that is explicitly defined in the agreement. Jeff Lenhart, Claims Manager for Litigation at Builders Mutual, explains more about this protective and often misunderstood coverage feature.
What is it?
In some ways, the name says it all. The Additional Insured Endorsement adds the general contractor as an insured to the subcontractor’s General Liability insurance policy. Although this policy enhancement is paid for by the sub, the additional cost is typically very small – $25 to $30. Adding very large builders to the sub’s policy may increase the endorsement price to $300. Usually, construction contracts for the GC, or any prime subcontractor who may also use subs, will include a Contractual Indemnity clause, often called a “Defense and Indemnity” or a “Hold Harmless” clause. Indemnity is the promise to pay for damages related to the negligent acts of the subcontractor performing work under the contract—but those clauses are generally difficult to enforce, as most states have Anti-Indemnity Statutes that put strict limitations on what liability may be transferred to whom in a construction contract.
Many states have held that, as a matter of public policy, a contractor should not be able to transfer his own liability for the job. That’s where the obligation comes in for the subcontractor to name the GC as an Additional Insured on a primary and non-contributory basis on the contract established between the GC and sub. Rather than take your chances that the Contractual Indemnity clause holds up under your state’s laws, you become an additional policyholder under the subcontractors Additional Insured policy endorsement. So, if a claim comes to fruition, rather than your primary insurance covering the loss, it becomes secondary, or excess, to the subcontractor’s policy. This can be true for each subcontractor whose GL insurance policy was properly endorsed with an Additional Insured Endorsement. For example, if a job has 10 subs, and there’s a $1 million verdict for covered damages, everyone pays their responsible portion of $100K. Just as important, if not more so, the insurer of each subcontractor that accepts the Additional Insured tender is responsible for providing a defense and paying legal fees.
Why require it?
The Additional Insured Endorsement actually has been around for a while. But it wasn’t until after the recession in 2008-2009 that GCs really began to enforce the contractual requirement to add them as additional insureds, as well as to aggressively seek defense and indemnification under their subcontractors’ policies. Initially, it was the big builders that pushed the Additional Insured programs. However, with a growing volume of case law, insurers and builders of all sizes are paying closer attention to and using these endorsements. Some larger builders even have attorneys on retainer solely to enforce the Additional Insured Endorsements.
When the GC is named as an additional insured, he or she will be eligible, along with the insured sub, for indemnity payments and defense funds. The defense funds are particularly important, as this can be a costly risk that transfers to the subcontractor’s policy. An Additional Insured will follow the coverage fortunes of the Named Insured, so any limits, limitations, exclusions, and duties of that Named Insured will apply to the Additional Insured.
Ensure you’re insured.
Just as you would do with your own General Liability policy, be sure to request and maintain updated copies of the Certificate of Insurance (COI) for the additional endorsement from the subcontractor. Better yet, ask for and read the policy. This way, you’ll be certain that the endorsement has been added and that it is accurately defined according to the agreed-upon terms. Often the COI doesn’t delineate the terms, and you can be left without coverage.
For instance, you may be contractually requiring an Additional Insured Endorsement for both ongoing operations and the completed operation. Insurers generally sell these endorsements separately, so be sure both are in force for your subcontractor if you require them. Additionally, clarify the length of time covered by the Additional Insured Endorsement. The standard endorsement may be for a period of one to five years, but your state’s statute of repose (the time during which you could be held liable) may be much longer. So, verify that the endorsement is written to cover the entire statute.
If you are a subcontractor yourself, take heed: You may not be awarded the project without an Additional Insured Endorsement in place on your policy. Make sure you know what you’re supposed to provide per the contract, understand what you’ve signed, and follow up with your agent so the proper coverage is added. This will ensure you are not in a breach-of-contract situation.
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