March 2008

CHECKING YOUR SUBCONTRACTOR’S GENERAL LIABILITY POLICY LIMITS

One of the most important ways in which you make an impact on your bottom line is through risk management. The key to successful risk management is the identification of all instances of risk retention. These are circumstances in which you are responsible for all or part of the loss.

Any risk that you as the insured can’t transfer to another party is retained by default. The deductible on your insurance policy is a classic example of risk retention. This type of retention is characterized as “known,” because you know you’re responsible for paying the pre-determined deductible before your policy pays any additional exposures up to the policy limits. Any amount of potential loss over the policy limits is also a retained risk. However, this type of retention is categorized as “unidentified,” the amount of the loss has not yet been determined.

As a general contractor, it is imperative that you identify both of these types of retention so that you can adequately protect your company. The problem arises when it comes to determining the unidentified retentions. One area in which you might be extremely vulnerable is subcontractor negligence. You can purchase additional coverage for this contingency; but the more financially prudent course of action is to require your subcontractors to carry their own Liability insurance that provides enough coverage to completely replace what you are constructing.

Here are some recommendations for handling the issue of subcontractor negligence:

• Require your subcontractors to carry their own insurance. Minimum acceptable policy limits should be specified in any subcontractor contract, and these minimum coverage requirements should reflect the size and scope of the project.
• Request periodic certificates of insurance from your subcontractors showing that their coverage is current. This will help ensure continued compliance. Additionally, you should specify in the contract that the subcontractor’s General Liability coverage is the primary coverage for the project. This will reduce your coverage to Excess coverage, meaning it won’t come into play unless the subcontractor’s coverage is exhausted.
• Consider using a subcontractor indemnity agreement as an additional option if permitted by local law. This is basically a promise by the subcontractor to reimburse you for any money you are forced to pay to the project owner because of the subcontractor’s negligence.
• Have all of your contracts reviewed to make sure that your policy continues to meet your insurance needs.