What is General Contractors Insurance?
General contractors insurance is an insurance policy that is designed to cover general contractors who are working on major projects, like a large subdivision project. Because many business owners believe that anything that subcontractors touch is covered, they do not find out until after the project is complete that their subcontractors do not have the coverage the general contractor expected to be on their project.
Unfortunately, just like premises liability statutes, general contractors do not get to pick and choose which entities are covered by their policies , and in order to file a claim as a general contractor against any of its subcontractors, you must be listed as an "additional insured" on your subcontractor’s policy.
The specifics of general contractors insurance varies by state, but in general here is what it covers:
General contractors insurance is crucial to contractors in the construction industry for a few different reasons. First, as mentioned above, general contractors insurance acts as blanket coverage to cover contracts that might otherwise be uninsured. Second, the purpose of the coverage is to protect contractors from their subcontractor’s negligent work that causes damage.
Will Subcontractors Be Covered by General Contractors Insurance?
It’s essential to understand general contractors insurance and the coverage offered for subcontractors who work on a project. Obviously, subcontractors are not going to be covered under the general contractor’s insurance policy in most instances, and the policy is generally going to exclude coverage for injuries or damages arising out of accidents in the performance of subcontracted work.
Standard exclusions found in general contractor insurance policies would include exclusions for bodily injury or property damage arising out of (or in the course of) operations performed by subcontractors. Also, most policies will exclude coverage for bodily injury or property damage caused by or involving structural work performed by subcontractors where the type of work performed requires a licensed engineer or architect to develop plans and specifications. A typical general contractor insurance policy will not cover work that requires an architect or engineer for any reason.
A general contractor insurance policy will generally exclude from coverage some form of aggregate deductibles or exclusions pertaining to subcontractor coverage. Policies normally have an aggregate deductible that applies to any claims arising out of subcontractor work.
It’s important to have specific discussions with your general agent on this issue, as some polices will pay 10 or 20 percent of the subcontractor work, with a corresponding state of limitation, and a remaining 80% or 90% being subject to the subcontractor’s own insurance policy. In addition, the general contractor’s policy usually stipulates that those subcontractor exclusions and limitations only apply where the subcontractor has its own insurance that is primary, rather than secondary, to the general contractor’s own policy.
What’s not covered? Where a subcontractor’s own negligence results in injuries or damages, or where the subcontractor’s work caused bodily injury or property damage, the resulting claims will generally be excluded where the subcontractor has not purchased additional insurance. Even small working crews of three or four employees would need additional insurance to be able to recover for loss from injuries or damages.
Risks That Subcontractors Can Expect
The specific risks and liabilities that subcontractors may encounter on a project generally fall into two categories – damages to third parties and damages to their employer. The vast majority of project contracts include indemnification provisions where the subcontractor assumes responsibility for the acts, errors or omissions of itself or the subcontractor’s employees. This is often regardless of whether the conduct was negligent or intentional. As a result, the subcontractor will usually attempt to pass some or all of the liability onto its subcontractors under similar indemnification provisions in its sub-subcontract.
Substantial liability can occur if a subcontractor or sub-subcontractor’s employee causes injury to a third party. Subcontractors are generally required to have general liability insurance that covers third party injuries, property damage and personal injuries (like defamation for example) caused by its negligent acts. This is known as premises liability. Premises liability results from negligence in the construction or maintenance of a physical structure or premises. It is not limited to just a slip, trip and fall. That is a common example, and it fits within premises liability, but acts of omission or commission causing personal injury can also result in premises liability.
Employment practices liability is another risk that subcontractors may face under a typical contract. These may be included in an umbrella or excess policy or at times be a stand-alone employment practices liability policy. Employment practices liability policies cover claims of property damage or personal injury arising from employment-related wrongs such as sexual harassment, wrongful termination, negligent mismanagement, discrimination and wrongful discipline, among other things. It is not sufficient to simply have general liability coverage to cover liability that arises from employment practices if the subcontract does not require it.
The Importance of Additional Insured Endorsements
A general contractor’s commercial general liability and excess liability insurance policy will usually provide coverage for the acts and omissions of the insured’s subcontractors under the insured’s policy. However, subcontractor insurance policies may not be broad enough to fully cover the work performed for the general contractor’s project. An additional insured endorsement adds coverage and, importantly, will not shift the overall cost of the project from a specific job to the insured’s overall premium. As a result, an additional insured endorsement insures a subcontractor who performs work on behalf of the general contractor on a specific project, often at lower cost than purchasing additional coverage through a subcontractor’s policy.
An additional insured endorsement will ordinarily list the exact number of additional insureds on the endorsement. In a recent case, the California Court of Appeal considered whether a signed subcontract between a subcontractor and a general contractor made the subcontractor an additional insured on the general contractor’s policy. As an initial matter, while a subcontract may not make it clear whether a subcontractor is an additional insured, the endorsement may make clear that it is. The endorsement in this case provided in pertinent part: "The ‘person(s)’ to whom this endorsement is issued is: Saint Paul Fire and Marine Insurance Company on behalf of ABLE Equipment CO., and their affiliates and/or subsidiaries at the location where the work is being performed." Moreover, the endorsement specifically defined "person" as "any person or any organization, including any partnership, joint venture, or other association, trust or corporation." The court in this case held that "[i]t is reasonable to conclude that Able[Equipment Co.] is either a person or an organization under . . . the endorsement." Therefore, the endorsement clearly extended additional insured coverage to Able Equipment.
In this case, the subcontractor did not qualify because the additional insured endorsement limited coverage to claims arising out of the ongoing operations of Able Equipment in performing work for the named insured and to claims arising directly out of the named insured’s work under the subcontract. In other words, an additional insured is only covered when it is added by endorsement. While an insurer may choose to make the endorsed party an additional insured by endorsement, an insurer is not required to do so. Accordingly, it is important for potential additional insureds to review the endorsement to determine the scope of coverage available.
For a general contractor, or an additional insured, to claim coverage under the additional insured endorsement, the work must fall within the scope of coverage provided by the endorsement. A general contractor’s insurance company should carefully review the endorsements to ensure that the insurer has not excluded the additional insured if the work falls within the scope of coverage. Typical additional insured endorsement forms are ISO forms CG 2033 and CG 2037.
How to Confirm That Subcontractors Are Adequately Covered
One of the most important steps in making sure your subcontractors are sufficiently insured is to have a rigorous contract. You will want your subcontractor agreement to require subcontractors to maintain their own insurance. Subcontractor agreements can do more than simply direct the subcontractors to obtain coverage, however. They can be used to actually "plug" and fill in specific coverage gaps in the general contractor’s own commercial general liability and/or workers’ compensation policies. On the flip side, they can also create gaps by severely limiting what is called the horizontal coverage trigger. Where those limits are, of course, will be highly dependent on each state’s law , as well as the language in the various policies involved. It is also a good practice to ask for and review copies of your subcontractor’s proof of insurance. You will want to compare that to any requirements in your subcontractor agreement. You will also want to review it as leverage should you ever find it necessary to pursue a claim under your own policy and to apply pressure on any insurer you may need to obtain excess insurance from. Indemnification agreements also play a role in whether your own insurance will respond. Indemnification agreements can exist between two general contractors as a way of ensuring that one GC takes on the liability of another, placing the risk of paying the costs of a claim that would normally be insured on the shoulders of another GC who has a bigger payroll, better safety record and so on. Whether this practice is a good idea will very much depend on the particular facts of each case.
Legal Issues With Inadequate General Contractors Insurance Coverage
One of the central issues in general contractor liability for the actions of a subcontractor, is whether the subcontractor is "independent" or an "employee" of the general contractor. It seems obvious to many that anyone hired to work on site is an employee of the general contractor. However, there are many different varieties of workers. They could be an independent contractor, a W2 employee of the subcontractor, or a 1099 contractor for the general contractor. Furthermore, even if they are theoretically a 1099 contractor, they may act as an employee, which could still create legal liability for the general contractor under respondeat superior.
Even subcontractors who are license contractors themselves, do not always carry adequate insurance coverage, and their protection may not extend into any liability created from a construction defect, but via the subcontractors negligence. For example, if a subcontractor had a claim against the general contractor for failure to provide safe work premises, that negligence claim may have insurance coverage, but if he had a claim for negligence against a third party due to a defective product, or claim against the general contractor for breach of contract, then his policy may have an exclusion for that. Furthermore, even if he has the $1 million required by state statute, that may not be sufficient to cover the damages incurred by the plaintiff. So the commercial general liability insurance that provides protection for the subcontractor, may not extend to adequate protection of the general contractor. Under a joint venture or a loan agreement, a general contractor is typically required to provide additional insurance coverage that names the other parties as additional insured, and provides them additional protections. It is also common for the general contractor to require this level of insurance from its subs as well, and possibly even cover it.
There is a very real possibility of loss caused by the lack of adequate subcontractor’s liability insurance; or even the lack of any liability insurance. This could lead to a very significant loss of profit for a general contractor, and could even result in bankruptcy. The general contractor may then have to sue the negligent subcontractor to recover that loss. For example, if a subcontractor built a defective barn that collapsed, the general contractor may have to pay for the damage to the barn, even if the general contractor didn’t personally do anything wrong. Granted, the general contractor could have a contractual right of indemnity, but what if the subcontractor doesn’t have the money to pay? If the general contractor has inadequate coverage, he may have to go after the subcontractor’s individual assets, which likely means suing him in his personal capacity. Many small developers are structured as LLCs these days, leaving them with little protection from liability. While these attorneys will be thankful for the extra work, these issues can be avoided through the use of careful subcontractor selection and a review of their insurance contracts to ensure that they provide the necessary coverage.
Conclusion- Best Practices for Risk Management
It is obvious that the rules related to insurance are exceedingly complex and vary from state to state. The best way to prevent potential future litigation and fines is to conduct regular policy review and possibly stay on top of changes in your state’s insurance requirements . You should also reach out to an insurance compliance and construction attorney who is experienced in both fields. This protects not only the insured, but its clients as well.