The Importance of Sub-Contractor Agreements and Insurance Requirements

Melinda Leathers | Mar 18, 2022 | minute read

The Importance of Sub-Contractor Agreements and Insurance RequirementsMany of your business projects from design, construction, repairs, renovations, regular maintenance, professional services, and landscaping, rely on contractors and subcontractors to help you manage your operations. When you hire a contractor or subcontractor, you run the risk of them causing bodily harm, property damage, or other loss during their work.

If something unforeseen happens, you could be held accountable for the activities of the contractors or subcontractors you engaged. It is typical for all persons involved in an accident to be sued. Lawsuits can be costly and time-consuming to deal with, so make sure that any contractors you hire, and the subcontractors they hire, have adequate insurance coverage.

It is essential to keep in mind that your business liability insurance policies might not cover losses or damage caused by subcontractors. Businesses often demand subcontractors to carry sufficient insurance coverage to protect themselves, and they frequently require subcontractors to add them as supplementary insureds as well.

It’s critical to know how your agreements with subcontractors affect your commercial insurance and where you might be held liable for the actions of a contractor or subcontractor. It may be necessary to take action to ensure that you have the appropriate insurance coverage to safeguard your organization, or it may require specific contractual language in your agreements.

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A subcontractor agreement, simply described, is a risk management approach that transfers risk from one party to another. With such an arrangement, the business owner is shielded from liability arising from the work of their contractors.

The purpose of risk management in contracts is to transfer risk to the party in charge of the work, as they are best positioned to manage it and control losses. For example, subcontractors are frequently used on building sites. As a result, project owners will delegate risk to general contractors, who will then delegate risk to their subcontractors.

Three Key Terms to Understand

Risk transfer

Risk transfer is a key aspect of the subcontract agreement, and it implies that the risk of loss for the work that the subcontractor is responsible for, is transferred from your firm to the subcontractor. The subcontract agreement should be detailed, and cover all risks and obligations involved with the subcontractor’s job, as well as the responsibilities and insurance requirements of each party.

Indemnification

An indemnification clause gives business owners more protection when a subcontractor performs work. Simply put, indemnification guarantees that the subcontractor will stand behind its work and defend the owner against any claims, including those for defective work, injuries, and property damage. For all complaints arising out of work completed by the subcontractor, its employees, or sub-subcontractors, the subcontractor will assume the defense and pay the legal expenses.

Certificate of Insurance

A certificate of insurance (COI) is a brief document that describes your active insurance policies and serves as proof of coverage. The certificate of insurance will detail the sort of insurance coverage you have in place, as well as the policy limits, coverage dates, and other pertinent details. You can get a COI from your contractor’s insurer, insurance broker, or agent.

The Importance of Sub-Contractor Agreements and Insurance Requirements

Additional Insured

Many types of insurance contracts, including general liability, commercial property, and commercial car insurance, can be endorsed to add additional insured status. Coverage can be added for a certain period, the duration of a specific project, or the duration of the policy.

Because contractors and subcontractors frequently collaborate with others, they may have a blanket supplementary insured endorsement that covers everyone who falls into a certain group.

Hold Harmless Agreement

The subcontract agreement must also include a hold harmless and indemnity clause. This can provide an extra layer of protection and safety for your business by requiring the subcontractor to cover the costs of any potential loss or legal action.

By incorporating this provision in your contract, you may ensure that your overall costs will be reduced in the event of a loss.

What insurance should you require contractors and sub-contractors to have?

The types of insurance policies you will need depend on your specific business, but here are some examples of coverage that are typically relevant while working as a contractor or subcontractor. These may vary depending on the project and services performed.

  • General liability
  • Workers’ Compensation
  • Umbrella Liability
  • Surety and Performance Bonds
  • Construction Wrap-up coverage
  • Professional Liability

Final Thought

The subcontract agreement may also include a variety of other provisions. Inspections, insurance maintenance, the role of sub-subcontractors, safety, equipment, and clean-up are among those provisions.

Business owners can be held liable for mistakes made by contractors and subcontractors in a variety of situations. Ensuring that the contractors you engage are properly insured and identify you as an additional insured can save you money in court fees.

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About The Author

I have cultivated relationships with my clients, which in some cases span over 20 years. I specialize in commercial insurance for agri-businesses and nonprofits. But if you have business insurance needs of any kind, I am open and excited to work alongside you. I look forward to watching your business grow.

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