Greg Pierce Participates in Q&A Session on Risk Transfer

Should the board require all contractors hired by the association to have a certain minimum limit for general liability and workers’ compensation no matter how small or routine the job?  What are best practices for types of insurance required, collection of certificates of insurance and coverage limits? 

 

When hiring contractors to perform construction or other contracting operations on behalf of a community association, it is prudent to adhere to insurance and contractual risk transfer “best practices,” regardless of the job size or perceived simplicity of the work being done.  The fact of the matter is that very large problems (i.e. bodily injury or property damage claims) can arise from very small or seemingly innocuous construction projects, so it’s paramount to consider risk management with any and all contractors working on behalf of the association, regardless of size of company and/or project.

While it’s obviously critical to ensure that contractors have adequate insurance coverage and limits in place before performing work at a community’s premises, a very important first step when hiring contractor(s) is to work with a qualified attorney to draft a suitable contract document.  Within that contract document, there should be two key areas pertaining to “risk transfer”:  (1) a properly structured indemnification clause in the Association’s favor and (2) a comprehensive “insurance requirements” section that features at least the following specifications:

Coverage AreaLimits/Notes
General Liability$1,000,000 Per Occurrence / $2,000,000 General Aggregate Limits
Auto Liability$1,000,000 Combined Single Limit
Workers’ CompensationPart 1:  Statutory

Part 2:  $500,000 Limits

Umbrella Liability$1,000,000 Per Occurrence & Aggregate – limit requirement is discretionary

 

“Additional Insured status” should be required in favor of the Association and any appropriate affiliates with respect to General Liability, Auto Liability and Umbrella Liability coverage.  This generally means that the Association  would be afforded defense and indemnity by the contractor’s insurance policy in the event of an eligible claim caused by or arising from the contractor’s operations, thus allowing the Association to potentially avoid having to use their own insurance program (or other resources available to them) to defend and ultimately potentially settle a claim.

A ”Waiver of Subrogation” should be afforded in favor of the Association and affiliates with respect to all lines of coverage listed above.  This is a very important clause which states that the contractor’s insurance companies waive their right to subrogate against (recover from) the Association after paying an eligible claim on behalf of their policyholder.  For example, if a contractor’s employee is injured on Association property, without a waiver of subrogation, the Workers’ Compensation carrier could seek recovery vs. the Association, alleging the Association was somehow liable for the injury occurring.

A main reason a written contract is so critical to the risk transfer process is because within most contractors’ insurance policies, Additional Insured status and Waivers of Subrogation are afforded automatically, on a “blanket basis,” when required by written contract.  However, without a written contract to trigger this language within the policies in question, most of the time an Association would miss out on receiving this favorable treatment, by virtue of the fact that the arrangement lacks such a written contract.

In other words, the contract itself is extremely important in terms of establishing liability in the event of a loss, and also when it comes to triggering favorable treatment within a vendor/contractor’s insurance policies.

Finally, once a properly executed contract with appropriate risk transfer language has been employed by the association with its contractor, it’s important to then request and obtain a “Certificate of Insurance” evidencing the contractor’s acknowledgement that it’s in compliance with contractual requirements.  A COI should be collected, reviewed and deemed to be “in compliance” with insurance specifications before a contractor is permitted to start work.  While this documentation is an important signal acknowledging compliance with requirements, it’s important to note that a COI alone confers no rights to the Holder (in this instance, the Association) without the underlying contract and insurance policy documentation being appropriately structured.

Risk management and insurance best practices are not always easy/convenient to employ, and it’s not always possible in reality to reach 100% compliance with all vendors and contractors.  That said, endeavoring to keep these best practices top-of-mind when hiring contractors is very much worth the effort.  As Benjamin Franklin once said, “an ounce of prevention is worth a pound of cure” – and nowhere is that more relevant than when it comes to the up-front risk transfer/management procedures outlined above.

Condo Media interviewed board member Greg Pierce, CPA, Senior Vice President, Northstar Insurance Services, Inc.