Part 1: Protecting Your Company from Subcontractor and Supplier Liabilities
It is important to understand the dynamic role that insurance, specifically liability insurance, plays in the construction industry. Many contractors hire subcontractors to perform specific tasks or vendors and suppliers to provide materials. This often exposes the contractors to a range of liabilities and vulnerabilities. How can contractors protect themselves from liability associated with the acts of third-party providers?
Transfer Risk through Clear, Effective Contracts
The first step is to transfer risk through the issuance of contracts, agreements and purchase orders. Although Illinois prohibits contractually transferring your liabilities to other persons or entities, the state does permit contractors to require other persons or entities to purchase or carry insurance that will protect the contractor’s interests.
In such contracts, you’ll often see requirements for workers’ compensation, employers’ liability, general liability and umbrella insurance coverages. Where appropriate, auto liability, pollution and professional coverage might also be required. Limits can be mandated based on trade and exposures or can be comprehensively required for all persons and entities involved in the construction job.
In addition to specific coverage and limits, contracts should require waivers of subrogation, primary/non-contributory language, and level of additional insured status on appropriate policies. Once the contract is in place, the next step is to require each subcontractor, vendor or supplier to provide evidence of insurance. Review the evidence to validate that the coverage provided matches the requirements of the signed contract. During this review, be sure to confirm the contractually required parties have been properly named as additional insured on the subcontractor’s, vendor’s or supplier’s policies and that the status mirrors the contract.
Most contractors don’t consider this process to be a priority until it’s too late. In such cases, and assuming the contractor’s own policies provide the necessary coverage, the contractor can rely on its own insurance carrier to protect its interests; however, this impacts the contractor’s loss experience and defeats the purpose of contractual risk transfer.
You should review contracts often to ensure the language and requirements are kept up to date with laws and regulations and that insurance requirements are in line with the types of exposures anticipated. Contracts can often be long and overwhelming. If you don’t have the time or expertise internally to validate whether the coverages provided meet contractual requirements, you should consider outsourcing this process. Various companies offer certificate review services to ensure it meets contractual requirements.
Talk to your insurance advisor to find out if outsourcing your risk transfer process makes sense for your business.
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