5 Contractor Insurance Risk Management Techniques
You can’t assume that you won’t be held liable for an accident or negligence that was caused by someone else on your job site. You must protect yourself. A solid risk transfer strategy will protect you and your business from financial losses and keep your projects on schedule. Following is a list of 5 ways risk transfer protects your business.
Insurance
At the core of every risk transfer strategy is insurance. A commercial general liability (CGL) insurance policy protects your business from financial loss resulting from property damage, bodily injury, personal injury liability, advertising, and more.
Insurance Information Institute (iii) lists three examples in which you’d be covered should they occur on your job site or place of business:
While visiting your business, a customer trips on loose flooring and is injured.
An employee in your painting or construction business accidentally leaves water running, causing substantial damage to a customer’s home.
A class action lawsuit is filed against your business, alleging advertisements constituted misleading information.
Certificate of Insurance & Policy Review
A certificate of insurance doesn’t necessarily transfer your risk to your subcontractors by itself. But it does provide proof that a subcontractor or other party that is performing work for you has sufficient insurance to cover them in the event of an accident or negligence that results in financial loss to you. We also recommend having a professional review full copies of your subcontractors’ policies to be sure coverage is adequate
You may be held liable for losses resulting from bodily injury or property damage caused by one your subcontractor’s employees if they don’t have sufficient coverage or the right type of coverage to cover those losses. By requiring a certificate of insurance and reviewing their policies, you may even find out that one of your subcontractors has little or no coverage at all.
Additional Insured
Another way to insure your business against potential financial losses is a policy provision with your subcontractors known as an additional insured endorsement. This endorsement can complement an existing contract and can help protect you from your subcontractors’ negligence. Additional insured endorsements can cover your business as the additional insured for accidents that arise out of the subcontractors’ involvement with a job.
Requiring your subcontractor to name you as an additional insured can provide a few valuable risk management benefits. According to risk management services provider CNA, a few good reasons include:
May provide coverage even if a court invalidates your hold harmless agreement.
Gives you certain rights under your lessee’s or subcontractor’s insurance policy, particularly with defense coverage.
Discourages your lessee’s or subcontractor’s insurance company from subrogating against you when a loss is caused by your acts or omissions.
Offers more protection than just receiving certificates of insurance.
Contracts
Often the most comprehensive form of risk transfer, contracts are integral to nearly every contractor-subcontractor relationship. Although technically enforceable, verbal contracts or hand-shake agreements should be avoided. A written contract is preferred in nearly every single case, regardless of how honest and trustworthy you believe the other party to be.
Not always intentional, people’s memories of events are often distorted and it can be hard to keep track of named parties and what was agreed upon. And when facing the reality of liability for accidents and negligence, both party’s interests in a contract dispute are usually diametrically opposed.
Indemnification Agreements
Sometimes referred to as hold harmless agreements, indemnification agreements are used to directly transfer risk of loss from one party to another. They are often very common in construction contracts. The way they work is if you are sued by someone who is seeking to recover damages from injuries or financial losses that resulted from your subcontractor’s actions, the indemnification agreement states that your subcontractor will reimburse you for any losses you incur as a result.
As is usually the case, depending on the state you live in, certain things can fall under the scope of indemnity clauses and certain things cannot. It is always advisable to consult with both legal professionals when drafting contracts and insurance professionals when determining what can and can’t be included in a risk transfer contract and to identify gaps in your coverage.