03 Jul Subcontractor Exclusions – What You Should Know

A recent trend in general liability insurance policies adds an endorsement, which excludes coverage for subcontractor acts. The reason for adding this endorsement is it reduces carrier costs.

What Problems Can This Cause?

When a policy excludes coverage for subcontractors, a lawsuit can affect the general contractor, who’s typically always involved in a lawsuit when something goes amiss. Sometimes a subcontractor can add the contractor as an “additional insured” on their policy to protect both parties.

However, recent changes to some commercial liability policies specifically exclude subcontractor coverage. Basically, both the contractor and subcontractor must have their own policies for protection.

In a perfect world this could work, except contractors don’t always vet their subcontractors and, if they don’t have insurance coverage, their acts could lead to a contractor lawsuit.

Additionally, both the subcontractor and general contractor could buy less expensive policies with the subcontractor exclusion. If something unfortunate occurs and a lawsuit ensues, it is an uninsured event and the parties could pay out-of-pocket for expenses.

The “Your Work” Exclusion

Besides the subcontractor exception, the “your work” exclusion can also put contractors at risk. This clause can exclude coverage when damage occurs due to “your work,” but does not apply if the damage arose when a subcontractor worked on your behalf.

While this seems fairly straightforward, the scope of what defines a subcontractor isn’t always clear. For instance, one court case involved a tower collapse due to defective prefabricated steel rods. The contractor had a contract with the supplier to design, fabricate, and deliver the rods. The court held the exception to the “your work” applied and the supplier was essentially equivalent to a subcontractor, and coverage applied.

Defining Roles & Responsibilities

Since contractors don’t control how subcontractors conduct their business, they need to take additional measures to protect their business. Contact your lawyer and draft a subcontractor agreement you’ll use whenever you hire another party. This agreement should:

• Separate the contractor and subcontractor as two distinct identities
• Either describe how each party will compensate the other for a loss, or release them from legal claims
• Require the subcontractor to name the contractor as an additional insured
• Require those hired by a subcontractor abide by the same agreement
• Require the subcontractor notifies the contractor when their insurance coverage ends
• Include a clause stating the subcontractors insurance is primary and noncontributory (can’t go further than subcontractor’s insurance)
• Specify insurance limits, per occurrence and the aggregate total

Contractors should obtain subcontractor insurance certificates and file them based on when they expire.

Need for Proper Insurance Coverage

Contractors and subcontractors need to understand the implications of the general liability insurance policies they choose. With so much at stake, it’s important to have a policy that protects you well.

Gilbert’s Risk Solutions’ is your commercial risk management professional. We’ve served businesses for over 160 years, and we’ll ensure you have the best coverage at the most reasonable cost. We’re local and reliable and easy to talk to, so contact us to discuss how we can protect you, too.

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