How to Prevent a Breach of Contract in Construction
Nowadays in the construction industry hiring subcontractors (subs) is an activity just about every trade contractor must do to handle specialized aspects of a contract. Often lower-tier subs are brought to the jobsite to perform work on behalf of the primary subcontractor. It’s common for these lower-tier subs to leave without anyone making sure they have the proper contract and insurance to be on the jobsite.
As long as nothing happens, no one would think twice about this occurring. However, what if something were to happen? What if an employee of that lower-tier subcontractor was to get injured? This is one of many scenarios that can cause a ripple effect of serious coverage and breach of contract issues for the general contractor.
In today’s insurance environment, most prime contractors require the subcontractor and any lower-tier contractors meet the prime contract insurance requirements. It’s the obligation of the primary subcontractor to make sure their subcontractors comply with the insurance requirements. When this verification doesn’t occur and a noncompliant sub is allowed on a jobsite the primary subcontractor is breaching their contract.
Let’s look at an example of an injured worker…
A lower-tier sub is hired to perform work and while in the scope of this work is injured. That injured worker will file a workers’ compensation claim through their employer’s policy. They can also file a liability action against the general contractor for an unsafe work environment which led to the injury. From here, usually the general contractor would tender the defense of that loss to the primary subcontractor and the lower-tier subcontractor.
However, what happens if the lower-tier subcontractor has an additional insured form with wording that provides additional insured status “in the presence of” a written contract? When no contract exists between the general contractor and the lower-tier sub, the result will be a denial of that tender. Because of this action, the primary sub is now in breach of contract and subject to a suit against them by the general contractor.
There are many ways to prevent this from occurring, but the best method is to use a third- party (or your insurance broker if they provide the service) for subcontractor tracking and risk transfer compliance. Utilizing this process puts the responsibility on them to review the contract and make sure that all lower-tier subcontractors are in compliance with the prime contract. In summary, minimize your risk and leave it up to the experts.
Explaining risk transfer is a whole new discussion. In the meantime, I recommend you talk to your insurance broker or a member of the ‘A’ Team and ask them what they do to ensure you’re never in breach of contract.
- The Scoop on Construction Contracts (Part 1)
- Damages, Limits of Liability and Indemnification in Construction Contracts (Part 2)
- Insurance and Construction Contract Terms (Part 3)
- Standard Form Contract Precautions (Part 4)
ABOUT THE AUTHOR