By Guy Gioino and Brian Clarke
Injuries and accidents can and do occur on every job site. But, when they happen to contractors or sub-contractors at your site, who will ultimately be held liable? Are you responsible for building damages or worker injuries, or are the contractor and sub-contractor(s)?
Consider the following true story: A developer hires a general contractor to construct a high-rise condominium. While working, an electrician falls from a 6-ft. ladder and sustains a severe head injury. Who is ultimately responsible – the developer, the general contractor or the electrician?
While liability in this case, and in many others like it, depends on a host of factors, the first step in assessing liability and indemnity is to review the contracts between all parties. Ideally, liability can be successfully tendered back to the policies of the general contractor and the electrician, assuming their policies contains no exclusions precluding coverage to the upstream party.
Subrogation issues arise when the accident exceeds coverage limits, or the insurance company denies tender for exclusions on the liability policy of downstream contractors, or because the claim is so large that the downstream insurers seek to enjoin the insurer for the upstream parties.
These worst case scenarios can be the direct result of poor contract language and unknown liability policy exclusions – an issue your contractor may not even be aware of – and one that can be addressed and possibly even corrected before engaging the third party in work. In addition to obtaining the typical certificate of insurance from a potential contractor, building owners/operators are now asking third party vendors for a full copy of their insurance policy or policies, as reading through the policy language is the only way to determine your vendor’s actual coverage.
Consider the following liability policy “red flags” that most building owners and operators don’t know about:
- Out of state exclusion. Watch out for inexpensive insurance policies that exclude coverage for businesses working beyond state lines, even just miles across the border. For example, a New Jersey-held policy may not cover losses for work done in New York and vice-versa.
- Business misclassification. One way contractors successfully minimize premium costs is to actually misclassify their business. For example, one contractor said they install carpets, but in reality the business does foundations and super structures. A real building foundation work claim will likely be denied by the carrier because of the misclassification. If not denied, a claim would at the very least, quickly eat through the policy written for a carpet company with little risk, and bankrupt the contractor.
- State negligence laws. The State of New York for example has a sole negligence law which considers property owners responsible for any and all negligence on their property, whether a third party vendor was the cause or not. While there can be exceptions to this rule that can only happen when the right limits and indemnification are in place.
Having an expert - either your broker and/or attorney - that understands real estate and construction do a thorough review of each potential third party vendor’s liability policy is key to minimizing your exposure. It will help you partner with the right contractors and sub-contractors from the start. Contact your HUB construction and real estate specialist to find out how you can successfully transfer risk through your contracts and ensure those you hire have the appropriate coverage.