The Risks and Rewards of Subcontractor, Vendor and Supplier Contracts
Understanding the dynamic role insurance, specifically liability, plays in the construction industry is vital. Many contractors hire subcontractors to perform specific tasks or vendors and suppliers to provide materials, which often leaves liability and vulnerability in the form of contractual agreements. How can Illinois contractors protect themselves from liability associated with the acts of subcontractors and vendors or suppliers? The answer is simple transfer risk through contracts.
Make Sure You're Covered
The first step is to make sure your contracts have the appropriate coverages and limits outlined. Although Illinois prohibits contractually transferring your liabilities to other persons/entities, the state does permit contractors to require other persons/entities to purchase or carry insurance that will protect the contractor's interests. Often times, you will 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/noncontributory language and additional insured status on appropriate policies.
Do a Double Take
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. One of the most important portions of the review is to confirm that the contractually required parties have been properly named as additional insured on the subcontractors, vendors or suppliers policies and that the status mirrors the contract.
Most contractors dont consider this process to be a priority until its too late. In such cases, and assuming the contractor's own policies provide the necessary coverage, the contractor can rely on their own insurance carrier to protect their interests; however, this impacts the contractor's loss experience and defeats the purpose of contractual risk transfer.
If you don't have the time or expertise internally to validate whether the coverages provided meet contractual requirements, outsource the process. Various companies offer services to review certificates to ensure they meet contractual requirements. Talk to your insurance advisor to find out if outsourcing your risk transference process makes sense for your business.
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