As the United States emerges from the COVID-19 pandemic, home construction is picking up in key markets. That release of pent-up demand, coupled with the likelihood of at least some new federal investment in infrastructure, point toward an active construction industry. And with construction inevitably comes accidents.
In construction, developers and builders rely on multiple service providers to complete a project: a subcontractor to specialize in windows, another in roofing, and so on. If another party provides services that could injure a third party or damage a third party’s property, it is important to make sure that the risk of such losses resides with the service provider and with the service prover’s general liability insurance. Otherwise, the recipient’s own insurance may have to handle a loss that was the service provider’s fault, and the recipient will suffer the impact on its insurance costs.
It is standard procedure to transfer the risk of loss to the service provider and to have the service provider’s insurance protect you. This transfer must be accomplished before the loss, and the tasks should be documented for your protection. And these transfers are not pro forma: It is important to get the details right.
Transferring Risk Via Written Contract
A written contract with the service provider, documenting the services to be provided, is imperative. The written contract must be executed before the loss. The contract should require that the service provider defend, indemnify and hold you harmless from claims for bodily injury or property damage caused in whole or in part by the acts or omissions of the service provider, or by those acting on the service providers’ behalf, including anyone providing labor, materials, goods or services to you through the service provider.
Some states have anti-indemnification laws, which prohibit a service provider from indemnifying a service recipient if bodily injury or property damage was caused solely by the service recipient’s acts or omissions. These laws apply even if the contract requires unlimited indemnification. But different states have different exceptions to this general rule. Some of those exceptions are identified in the statute, while others are the result of court decisions Review your state’s rules prior to drafting the contract.
Managing Risk by Transferring It
The written contract also should require that you be named as an additional insured to the service provider’s general liability insurance policy. Whenever possible, the contract should be directly between the party requiring additional insured status and the party providing additional insured status. The additional insured status should be primary and noncontributory. That means the service provider’s insurance fully exhausts before other insurance is tapped.
By waiving subrogation rights, the parties may eliminate cross-suits over the party responsible for the bodily injury or property damage. An insurance company may more readily grant such waiver when there is an additional insured relationship.
Your contract can require the service provider to name you as an additional insured for completed operations as well as for ongoing operations. Statutes of limitations are long enough to expose you to risk years after the service provider’s work was completed. During that time, you can still be an additional insured to a service provider’s insurance for completed operations, protecting you if a lawsuit is filed years later.
In situations where a more remote party is required to provide additional insured status, check the language in the insurance policies that are involved. Some policies only extend additional insured status to a party “with whom” the primary insured has directly contracted to confer such status. This differs from a policy more broadly extending additional insured status to someone “for whom” the primary insured had contracted to confer such status. Obtaining the broader language can prevent unexpected coverage denials.
Limitations of Certificates of Insurance
A certificate of insurance is not sufficient to determine whether you actually obtained the additional insured protection for which you contracted. At minimum, you should see the insurance policy declarations page and list of endorsements. The best practice is to obtain a complete copy of the service provider’s policy. You will be glad to have it when a loss happens, and stress levels are high and cooperation from the service provider may not be easy.
One reason to obtain the insurance policy is to review exclusions. Some exclusions added to a policy through an endorsement may eliminate the coverage you expected to receive. The policy’s main language might appear to provide the needed coverage, but that coverage may be restricted or excluded by language on a separate policy form. For example, some endorsements exclude coverage for work at heights. Some exclude indemnification from lawsuits brought by a subcontractor’s employee. Some exclude losses relating to collapse, or underground hazards.
As in all types of risk management, clearly establishing the terms of contractual indemnification and additional insured coverage can pay off when done properly in advance of the loss. Review and revise these important parts of the contract with a service provider before the work begins. Approach the contract as a living, negotiable document, not a simple formality.