Subcontractors can offer advantages, but can also present unique risks. All businesses using subs face this challenge, whether construction, manufacturing, service, or other. Businesses may be held liable for damages or injuries caused by their subcontractors, including injuries to employees or visitors of a site. Even more, a subcontractor’s finished work itself may impose a different kind of risk. For example, in construction, should a subcontracted roof leak or electrical service malfunction, larger portions of the project are in peril.
For businesses to reduce this danger, it is important to implement a risk transfer strategy that addresses subcontract agreements. This is simply a means to ensure subcontractors shoulder the burden of their own actions and work. It shifts risks of loss for damage or injury to the correct party, removing it from the business.
Subcontract Agreement Best Practices
- A written and signed subcontract agreement should be in place with each subcontractor. Contracts can be issued as a master agreement, with individual work orders being issued for separate projects. This method is best for subs often utilized and should be updated yearly. Alternatively, instead of a master agreement, separate agreements can be issued for each project. Separate agreements are easier for infrequent subs.
- The subcontract should require minimum limits of insurance liability. Minimum limits will vary depending upon your industry and situation, but we suggest subs carry at least:
- General Liability: $1,000,000 per occurrence, $2,000,000 aggregate
- Business Auto: $1,000,000 combined single limit
- Workers Compensation: per state minimum requirements
- Umbrella Liability: limits commensurate with size of project and work performed
- The subcontract should require proof of insurance be provided at least yearly.
Commercial General Liability
Commercial general liability insurance protects a business from liability related to bodily injury or property damage. Liability can arise not only from current business operations, but can surface down the road as a result of the finished product.
Subcontract agreements should require subcontractors to name the business as an additional insured on the subcontractor’s policy. Additional insured status is inexpensive (often it is free) and provides several advantages, mainly naming the business as an insured party. Thus, if the business is sued as a result of the actions or work of the subcontractor, the subcontractor’s insurance is required to defend the business. Only after the subcontractor’s policy limits are reached would the business’s own insurance policy come into play.
Commercial auto insurance is an often-overlooked coverage in subcontract agreements. However, auto liability can be significant. Since a subcontractor is performing work on behalf of the business, auto accidents, on and off the job site, can result in large claims against the business’s policy. Just like general liability, the subcontract agreement should require additional insured status, and the proof of insurance should evidence this.
As a business, ensuring your subcontractor carries proper workers compensation insurance is vital. This cannot be overstated because most states allow injured workers of the sub to make a claim against the business’s own workers compensation insurance if the sub has none. And even if a subcontractor carries proper coverage, if it is cancelled for nonpayment or other reasons, the business is again at risk. Claims against the business’s policy can impact premiums for years to come.
For this reason, workers compensation should be carried by all subcontractors on a job, whether required by the state or not. No employees of the subcontractor should be excluded, especially any working on the job site.
Before bringing new subcontractors on board, always require a certificate of workers compensation insurance evidencing coverage in place. However, unlike general liability or business auto, it is not possible for a subcontractor to name a separate business as an additional insured. Thus, extra care should be taken to ensure subs keep workers compensation coverage in place.
Umbrella liability insurance is also a necessary coverage. The limits needed depends upon the scope of the project, the type of work performed, and the job’s inherent risk. Limits start at $1,000,000 and should be increased to match need. Professional liability, directors and officers insurance, and cyber liability insurance are others that may be advisable depending upon the nature of the job.
Be sure to contact your Bankers Insurance agent with questions. Not a client of ours? Let us compete for your business! Each client is assigned a personal agent in our office, given their email address, and provided a phone number that rings right on their desk.
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