Legal Obligations Hiring Employees & Subcontractors

StarTeam – Basic Subcontractor Management

Basic Subcontractor Management:

It takes a well designed plan

As a contractor who at times may subcontract work to others, it is important that you use care when selecting subcontractors. These subs are usually responsible for a large part of your completed construction projects and potentially represent a significant liability exposure for you.

From a legal liability standpoint, you should hire subcontractors who:

· Are skilled and experienced in the functions they are required to perform.

· Possess the licenses required to perform the work they’ve been hired to do.

· Maintain an adequate level of insurance coverage (general liability & workers’ compensation at a minimum).

· Have an adequate number of employees to complete the work in the designed time.

· Have a “quality control” process in place and perform their work to a high standard of quality.

· Are committed to safety as evidenced by loss runs and a workers’ compensation experience mod below 1.0.

· Are financially stable with no bankruptcies in their past and can perform the job per the bid specifications.

· Have worked for you before and has a relationship with favorable contractual terms in place or can provide references from prior employers/job managers.

Why are these factors important?

· You may be found liable for injuries to your subcontractor’s employees (even if the injured worker is covered by workers compensation).

· While there is generally no coverage for faulty work done by you, potential liability exists for damage to your work arising out of a subcontractor’s work. Liability exposures resulting from your subcontractor’s work can have substantial impact on the insurability of your business.

Harleysville looks for subcontractors to carry at least a minimum of $500,000 general liability limits for any subcontractor who works for you (even higher limits are recommended). At the end of the policy period, our auditor will review your books and look for Certificates of Insurance for each of your subcontractors. Subcontractors without Certificates of Insurance or with limits below $500,000 will be charged for as if they were your employees (these additional charges can be significant).

Certificates of Insurance

A certificate of insurance provides evidence that particular types of coverage are in force at a particular time. It also provides evidence of the limits of coverage in force at the time coverage was issued. It is most commonly used to provide the certificate holder (e.g. you or your customer) with evidence that certain insurance requirements have been met.

You should not allow any subcontractor on a job site without first providing you with an up-to-date Certificate of Insurance.

The ACORD Certificate of Insurance form has become the industry standard over the last decade. It is a single page form that provides evidence of the types of coverages that are indicated in the form. The type of coverage, name of insurer, policy term, and limits of coverage are the typical entries on the form. It provides a brief summary of the coverages in force when it was issued.

Since it provides information only, it does not constitute a contract between the insurer and the certificate holder. It is most often issued by an insurance agent.

The Certificate does not guarantee:

1. The coverage will not be cancelled or non-renewed.

2. That limits will not be exhausted by claims in other projects or activities in which the party providing the certificates is involved.

3. Required endorsements will be attached to the policy.

4. The policy has not been altered with restrictive endorsements, i.e. a limited additional insured or limited contractual liability coverage. Note: Limited general liability coverage is being frequently issued in New York to some subcontractors. This limited coverage is inadequate in many cases and can lead to uninsured New York labor law claims. Review all certificates with your insurance agent.

Risk Transfer Agreements (Hold Harmless & Indemnity Agreements)

Another important way to protect your business is to shift liability exposures created by your subcontractors back to them through the use of written contracts. Contractual risk transfer is a legal method of allocating the risk of accidental loss between the parties involved in a project. The best example of this is a general contractor who requires a transfer of risk to a subcontractor in order for the subcontractor to be hired onto a job.

Construction contracts should be in writing rather than relying upon oral agreements.The party who controls the project and has the best bargaining position often controls the allocation of risk among the parties.

The general contractor or primary contractor usually controls the risk and has the leverage to dictate the amount and terms of the transfer. The subcontractor is most often in a “take it or leave it” situation. However, there may be room at times for negotiation for individual situations. When attempting to “shift the risk” you need to confirm that your subcontractor has purchased adequate insurance to pay for any potential losses.

It is the controlling party’s responsibility to be sure those parties who have the majority of the risk have adequate insurance limits to pay for losses. If the coverage and limits are not in place, the risk transfer will not work effectively.

Note: Although you may not be the general contractor, you can still apply the same contractual principle in working with your subcontractors.

What provisions should a contractual risk transfer contain?

A risk transfer should include:

· Indemnity clauses (hold harmless agreements) – Requires one party to indemnify another party for certain types of liability to third parties. There may also be a request to provide legal defense for any claims made.

· Liability limitation and exculpatory provisions – Limits or restricts the amount of liability between parties to a certain amount.

· Waivers of subrogation – Waives one party’s right of recovery against another party.

· Waiver of workers compensation immunity by the subcontractor.

· Insurance requirements – Provides details of coverage requirements for all parties. The requirements often detail minimum insurance limits and coverage, for example, additional insured status for the controlling party for both ongoing and completed operations.

It is important that the person drafting the risk transfer have knowledge of both insurance and contract construction. This will increase the likelihood the requirements of the risk transfer will be satisfied by coverages available in the insurance market and also be upheld by law.

The advice of your insurance agent and an attorney will arm you with an effective risk transfer contract to use with your subcontractors.

Additional Insured Coverage

A compliment/buttress to your risk transfer process is to gain “additional insured” status on your subcontractor’s general liability policy. Additional insured coverage is the granting of a contractual risk transfer that involves an attempt to transfer the risk of loss from you to your subcontractor. Frequently this involves two parties where one has more leverage to control the transfer of the risk than the other.

Usually the risk being transferred is the financial consequences of a law suit brought by a third party. The additional insured relationship won’t absolve you from any legal obligation to an injured third party; it just transfers the financial consequences to your subcontractor. This is why it is important to be sure your subs have adequate limits of insurance in place.

Why Request Additional Insured Coverage?

In general, you are looking for financial protection for your business resulting from the negligence of your subcontractor, their employees or subcontractors that they hire while working on your project. While “hold harmless” and “indemnity agreements” are important ways to transfer the financial risk of a loss, being named as an additional insured on your subcontractor’s general liability policy can provide you with a higher level of assurance that there will be real money available to protect you. Here are other good reasons to seek additional insured status:

· Other types of risk transfer agreements or indemnity agreements may be invalidated in some court jurisdictions. This is why an additional insured relationship is often used as it is recognized more frequently by the courts. In some states, indemnity agreements are prohibited. Many states have anti-indemnity statutes.

· It can give you immediate defense coverage by your subcontractor’s insurer rather than being reimbursed for defense costs at a later time as would be the case through contractual liability coverage.

· It prevents your subcontractor’s insurer from instituting a suit against the you for subrogation.

· It can often provide you with personal injury coverage which would not be available under contractual liability coverage.

· The intent of an indemnity agreement has no effect on the coverage provided to an additional insured. If the coverage is ambiguous, a court may look to the intent of the coverage or the agreement. This in some cases could lead to a wider interpretation than was originally intended.

· It protects your own liability policy’s loss experience. Most general liability policies contain “aggregate limits.” Once these aggregates are used up, you’re out of coverage. Using your subcontractor’s limits will help preserve your limits for any future losses you may have.

We hope this educational introduction will help you develop your subcontractor management plan.

If you have additional questions, please contact or agent or your Harleysville loss control representative.

StarTeam – Basic Subcontractor Management