Insurance Requirements: Key Considerations

In today’s environment, virtually all commercial subcontractors are familiar with the presence of insurance-related requirements and strong “risk transfer” language in client contracts.  General contractors and construction managers often (if not always) require that subcontractors carry certain insurance limits and specifications, with the ultimate goal of protecting themselves from liability that may arise as a result of their subcontractors’ work and operations.  While the importance of meeting these requirements is clearly understood and accepted among most subcontractors, it is of equal importance for subcontractors to “pass down” many (if not all) of these requirements when hiring sub-subcontractors and vendors (“downstream parties”).  Failure to do this could result in a subcontractor accepting liability (and paying claims) resulting from acts or omissions committed by downstream parties in the performance of their work.  The purpose of this article is to outline a number of the key insurance-related items that should be required via contract by subcontractors when hiring a sub-subcontractor or vendor.

Types of Policies and Limits

The types of policies and associated limits that should be required will vary based on the type of work involved, as well as the size/nature of the project and the GC/CM’s requirements.  That said, the minimum requirements should generally include the following types of policies:

  • Commercial General Liability Insurance
  • Commercial Automobile Liability Insurance
  • Workers’ Compensation & Employers’ Liability Insurance
  • Excess/Umbrella Liability Insurance

Other types of coverage that may be relevant depending on the situation could include pollution/environmental liability, contractors’ professional liability, or coverage for stored materials or installation property (among others).  It is also important to specify a minimum A.M. Best financial strength rating that will be acceptable among your downstream parties’ insurance carriers; the use of any carrier below A- (Excellent) should be reviewed carefully.

Additional Insured Status

When “Additional Insured” status is provided, the additionally insured party is afforded certain rights under the named insured’s policy for claims brought resulting from acts or omissions in the performance of the named insured’s work.  When a subcontractor is afforded Additional Insured status by a sub-subcontractor or vendor, the likelihood that the subcontractor’s insurance carrier(s) will be required to defend a covered claim resulting from the downstream party’s acts or omissions is significantly reduced.  When hiring a sub-subcontractor or vendor, one should require this entity to afford Additional Insured status at least with respect to the General Liability policy, and ideally with respect to all applicable lines of coverage; one should also be very careful to make certain that Additional Insured status is provided on the downstream party’s General Liability policy with respect to both ongoing operations and the “products and completed operations hazard.”

Primary and Noncontributory Language

When requesting to be included as an “Additional Insured” on a downstream party’s insurance policy, it is also important to require that this status is afforded on a “Primary and Noncontributory” basis.  The “primary” part of this language serves to stipulate that the downstream party’s policy will respond first (on a primary basis, as opposed to co-primary or excess).  The “Noncontributory” part serves to confirm that the Additional Insured’s own policy will not have to contribute to paying a covered claim on a pro-rata basis; instead, the Additional Insured’s insurance will be required to respond on an excess basis (i.e. once the downstream party’s insurance limit(s) have been exhausted).

Waiver of Subrogation

“Subrogation” (in this context) is the process through which an insurance company, after paying a claim on its policyholder’s behalf, may then seek recovery from another party that it contends caused the claim.  For example, consider a subcontractor that hires a sub-subcontractor to perform work.  If an employee of the sub-subcontractor is injured on the jobsite, the sub-subcontractor’s Workers’ Compensation carrier will respond by paying a claim.  If this insurance carrier has reason to believe that the injury was somehow caused by the subcontractor (or any other party other than the sub-subcontractor), it could opt to seek reimbursement by “subrogating” the claim to the subcontractor.  By requiring a “Waiver of Subrogation” on all applicable insurance policies, a subcontractor can protect itself from having to defend claims that are subrogated from downstream parties’ insurance carriers.

Per Project Aggregate Limit

The General Liability insurance policy can typically be endorsed to stipulate that the aggregate limit of liability (the maximum limit the insurer will pay over the course of the policy period) applies separately to each construction project.  By requiring downstream parties to implement a “Per Project Aggregate” limit, a subcontractor can ensure that these parties’ liability limits are not exhausted by other, unrelated claims prior to starting work on a project.

Conclusion

This article is by no means an exhaustive list of insurance requirements that should be considered when hiring a sub-subcontractor or vendor.  That said, in conjunction with a well crafted indemnification clause, the correct use of the aforementioned specifications in a contract’s insurance section could be the difference between avoiding claims altogether vs. paying for the wrongs of one’s own hired “downstream parties.”  Though proper risk transfer through contract requirements may require some up-front effort, Benjamin Franklin’s famous quote comes to mind:  “an ounce of prevention is worth a pound of cure.”  To avoid bearing unnecessary risk associated with uninsured, underinsured or improperly insured subcontractors, I would urge subcontractors to discuss this topic with their insurance broker and a qualified contract attorney.

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