What Constitutes a Subcontractor Agreement?
The subcontractor agreement is a contract between a general contractor and a subcontractor. The general contractor has a project to complete and brings in a subcontractor for certain parts of the project. These agreements generally include the scope of work, payment terms and other specifics that apply to that project. They may have specific time limits as well. The subcontractor agreement may have provisions that push liability onto the subcontractor . By signing the subcontractor agreement, the subcontractor accepts the risks of performing the work and that their work is up to the satisfaction of the general contractor. Depending on the project, the subcontractor may have additional insurance requirements added to their obligations. Because of the liabilities present in this chain, it is important to have a valid subcontractor agreement signed by both parties.
Why Coverage Matters in Subcontractor Agreements
In subcontractor agreements, the general contractor often requires that the subcontractor maintain insurance. This can often take a few different forms, such as commercial general liability insurance, workers compensation insurance, or professional liability insurance, just to name a few. Depending on the type of work that is to be performed by the subcontractor (or even sometimes the general contractor), this list may be longer or shorter.
Just as an example, let’s say that the subcontractor is to perform work involving the maintenance and removal of asbestos, the agreement is likely going to require some form of professional liability insurance, since the proper maintenance and removal of this substance is critical, and a failure to do so could result in serious issues. Conversely, this isn’t to say that there aren’t circumstances outside of a specific job that aren’t going to require similar provisions. A good example of this is the general contractor requiring that the subcontractor maintain general liability insurance covering bodily injury and property damage.
First, these requirements are important because they can, and often do, define the scope of the project. Often times, the subcontractor will be required to maintain insurance in an amount that corresponds to the contract amount with the general contractor. Also, the general contractor, much like in the original example, can name additional insureds under these policies, as well.
For the general contractor, this serves a dual purpose. First, it provides assurance that the funds that are paid out to the subcontractor aren’t immediately available to other competing creditors of the subcontractor. Also, the general contractor can review the policies, require substantiating documentation (i.e. certificates of insurance), and verify that they are properly maintained by the subcontractor.
In short, inclusion of these insurance requirements in the subcontractor agreement is critical to protecting the interests of both the general contractor and subcontractor, and should not be overlooked. This is true, of course, if the general contractor is looking to maintain its business interests, and not necessarily acting as a conduit for another party.
Types of Coverage Required for Subcontractors
When you hire a subcontractor for a construction project, your subcontractor agreement should address the types of insurance your subcontractor must carry. Typically, the owner or general contractor of a construction or renovation project requires subcontractors to obtain specific types and minimum amounts of insurance. The following is a brief overview of the most common types of insurance required of subcontractors:
General Liability
The most common type of insurance required of subcontractors is general liability insurance. General liability insurance provides coverage for third party bodily injury and property damage that occurs as a result of the subcontractor’s home improvement work. It is important to require that the subcontractor partner with only reputable and skilled local subcontractors. However, it is equally important that subcontractors be required to obtain general liability insurance in a minimum amount so that the general contractor or homeowner is covered for third-party claims if the subcontractor’s work is inferior, or if the subcontractor damages someone’s property. When hiring subcontractors to perform work on your property, be sure to require proof that the subcontractors have obtained general liability insurance.
Workers’ Compensation
In New Jersey, workers ‘ compensation insurance is mandatory. While you do not need to require your subcontractors to provide you with workers ‘ compensation insurance if they have employees, you must require that they provide you with proof of workers’ compensation insurance coverage for their employees. If your subcontractor hires workers who are not covered by workers ‘ compensation insurance, you may need to pay compensation benefits to subcontractor employees injured on your property, including lost wages and medical expenses. In addition, if a subcontractor loses employees because you demand that the subcontractor provide you with proof of workers ‘ compensation insurance coverage for its employees, a court may find that you had an obligation to protect those workers and were therefore responsible for paying benefits to them.
Professional Liability Insurance
Home improvement professionals, such as for example architects and engineers, should be required to carry professional liability insurance that covers errors and omissions committed by your subcontractor in his or her professional capacity which result in harm to the owner. Your subcontractor agreement should require subcontractors to obtain professional liability insurance coverage with regard to the services they will provide. Some subcontractor agreements require subcontractors to name the other contracting parties as additional insureds under the policies which it obtains.
In each case, it is advisable that the subcontractor agreement you enter into with the subcontractor require that the subcontractor maintain at least $1 million in general liability insurance and maintain workers’ compensation insurance for any of its employees working on your property. Also in each case, the property owner will want to be named as an additional insured under the policies. If your home improvement professional will be offering professional services as part of its contract to do work for you, a home improvement contract should require that the subcontractor also obtain professional liability insurance coverage.
Crafting Clear Insurance Clause Provisions
Should your subcontractor agreement have a section labeled "insurance requirements?" This is a fundamental component of my contracts but not everyone agrees. Here, I will provide my typical clause as well as suggestions for how to tailor the clause to your specific needs.
It is essential that your subcontractor essentially buys into your insurance requirements by specifically agreeing to be bound to all of them in the subcontractor agreement.
This is the clause that I typically use in subcontracts which require subcontractors to be bonded and carry commercial general liability ("CGL"), automobile, workers’ compensation, and professional liability coverage as needed:
Insurance. Without limiting the liability of the Subcontractor and its Subcontractors, the Owner and the Contractor require that the Subcontractor procure and maintain during the term of this Subcontract all of the types of insurance described in this paragraph. Failure by the Subcontractor to procure and maintain this insurance shall be considered a material breach of this Subcontract. The purchase and maintenance of insurance under this article is not intended to, and shall not be interpreted to, in any way, limit the liability of the Subcontractor under this Subcontract or under any warranty or guarantee given by the Subcontractor relating to its work under this Subcontract. The Subcontractor shall bear the entire cost of all premiums for this insurance and all costs incurred by its failure to procure and maintain it. These requirements also apply to all of the Subcontractor’s Subcontractors, Suppliers, and other parties performing any part of the work hereunder.
Without limiting the obligation of the Subcontractor under its Subcontract the Subcontractor shall procure and maintain in full force and effect during the term of this Subcontract the following insurance coverages. All insurance required hereunder shall be obtained and kept in effect at the Subcontractor’s sole cost and expense, and the Subcontractor covenants and agrees that all provisions under this Subcontract, including without limitation, payment and performance bonds, guarantees, and insurance risks of loss to the property of the Subcontractor or any of its Subcontractors or Suppliers shall be separate and apart from the insurance coverages required under this paragraph.
(a) A policy of all-risk property insurance covering all risks of loss to its work including coverage for physical damage of every kind, theft, injury to or destruction of equipment and materials, and the theft of tools, and plaque theft, vandalism and malicious mischief. The all-risk policies shall include coverage for property values (i.e. hard costs) on the basis of the completed value form. The Contractor, Owner, and their respective agents and employees must be included as parties insured. Contractor and Owner must pay no coinsurance penalty should the insurance company apply it to a partial loss. Subcontractor must be responsible for the deductible (which shall not be more than $10,000).
(b) Commercial general liability coverage in a sum not less than $1,000,000.00 per occurrence and $2,000,000.00 annual aggregate on a subject only to the Additional Insured Endorsement or the CG 2010-1111 edition. This insurance shall not contain exclusions or limitations for explosion, collapse and coverage for work performed under a subcontract (X, C and U coverages). All of these exclusion or limitations must be waived. The Contractor, Owner, and their respective agents and employees must be included as additional insureds.
(c) Automobile liability coverage including owned, non-owned, hired and rented automobiles and equipment in an amount no less than $1,000,000.00 per accident.
(d) Workers’ compensation coverage as required by law.
(e) Such insurance coverage must include a waiver of subrogation rights, requiring that the insurance company waive all rights of subrogation against the Contractor and Owner, the Architect, and everyone directly or indirectly employed by any of them, and every one of them in respect to any of the work or material covered by this Subcontract. Subcontractor agrees that in the event of a settlement or judgment against it, to look first to the proceeds of its insurance as primary insurance.
In approving insurance coverage, the Contractor and the Owner may, at their option and without any obligation, require the Subcontractor to modify any endorsement, limit any exclusionary or limitation provision, or obtain additional insurance coverage to achieve equivalent coverage in substantially the same amounts indicated above.
(f) Professional liability coverage, if applicable, shall be in the amount of $[insert insurance value].
(g) All insurance provided in this paragraph shall remain in full force and in effect until: (i) final payment has been made to the Subcontractor; (ii) any period for correcting faulty or defective work of the Subcontractor has expired; and (iii) the period specified in Section 7.18 for commencement of any action against the Subcontractor by the Contractor or the Owner has elapsed.
(h) The Contractor and Owner reserve the right at any time to increase coverage limits specified in this Article to ensure proper protection. Subcontractor further agrees that if it becomes self-insured either in part or in whole, it will immediately notify the Contractor and Owner of that fact and will be responsible for managing the self-insured risks and making the payments that otherwise would have been made by their insurance companies. Subcontractor agrees that this obligation shall survive the completion of its work and the payment of the cost of the work of others.
The subcontractor should add to the above clause whatever additional coverage is required.
Common Mistakes in Subcontractor Insurance Requirements
Common Pitfalls in Subcontractor Agreement Insurance Requirements
Too often we’re contacted by clients who have entered into a written contract with a reason – they recognize the importance of documentation. But, their contracts have key holes or omissions in their insurance requirements for subcontractors.
It will come as no surprise, to anyone who does this kind of work, that each and every contract is unique. Yet, the only uniqueness in all these contracts is that they adopt the same, outdated, standard language when it comes to insurance.
The inclusion of insurance requirements in contracts is intended to protect the interests of the parties to the contract against losses arising from their work. It is therefore necessary that the insurance requirement be not only comprehensive enough to cover all liabilities which may arise from the work being performed under the contract, but it must also fit the specific circumstances of the project. This is often overlooked and many insurance requirements in contracts are not specific enough.
The most common pitfalls I see include:
Not having the insurance requirements reviewed by a professional who knows what they’re looking at.
This insurance requirement section of your contract is a very legalese heavy area. It requires an understanding of the types of insurance that is available, the potential exposures your company is taking on, and the terms and conditions on the policies you’re required to obtain. I routinely review contracts for our clients where they are asked to maintain All Risk Coverage and Bodily Injury and Property Damage coverage under the same policy, or even to have full coverage for work that may be performed by a subcontractor not on site . Still others are asked to obtain insurance required by a third party to the contract who has no business being involved at all, to cover risks that can’t reasonably be covered by insurance. If you’ve ever had to wrestle with an insurance broker over the applicability of some exclusions contained in the sample insurance policies provided with a contract, you know how many different interpretations there can be.
Omitting certain required insurance from the contract altogether.
Work on an existing structure may be subject to a form of insurance known as Builder’s Risk Insurance. Despite being a common requirement for construction projects, I often see clients enter into contracts where the insurance requirement doesn’t require Builder’s Risk insurance at all, or worse, it doesn’t require Builder’s Risk insurance when work is being performed on an existing structure.
Not being specific enough on the insurance requirements under the contract.
The insurance requirement doesn’t detail the required coverage at all, leaving it open to interpretation by the other parties.
Having unacceptable terms in the insurance requirements to the contract.
Limiting the amount of insurance a subcontractor may maintain, imposing a retention or deductible higher than the liability amounts associated with the liability exposures, and not reciprocating some of the requirements are common ways to limit or reduce coverage under the insurance policies in question.
Legal Ramifications of Insufficient Insurance Coverage
Inadequate insurance coverage can lead to a variety of problems. The contractor may be found liable for losses caused by the subcontractor. Concluding an agreement without clear insurance requirements may cause a general contractor to be excluded from its own insurance coverage. A dispute might arise between the contractor and the subcontractor as to whether the subcontractor’s insurance satisfies the contract terms. If the subcontractor carries less coverage than required, commercial clients may not bear the cost of a loss in excess of the subcontractor’s insurance.
The legal implications of inadequate insurance can run the gamut from the easy fix of requiring more insurance coverage, to more serious liabilities. For instance, if a general contractor requires a subcontractor to name the contractor as an additional insured, but the subcontractor does not do so, the additional insured coverage may be held invalid. Or worse, the contractor may be found liable to a third party because a subcontractor’s insurance coverage does not cover the losses. Contract documents also play a crucial role in ensuring that a contractor’s own insurance coverage is not voided by a subcontractor’s failure to secure adequate coverage.
Take, for example, the scenario in which a subcontractor causes damage to some portion of a general contractor’s own work. The general contractor would expect to be covered by its own insurance, but if the subcontractor was required to name the general contractor as an additional insured under the subcontractor’s CGL policy, and did not do so, it is possible that the general contractor may not have insurance coverage for the damages. On the other hand, the general contractor may argue (successfully or not) that it should be covered by its own insurance because obligation to provide coverage under the subcontract should not have been shifted to the subcontractor.
Liability can also go the other way, such as when a general contractor is found to be responsible for unanticipated costs, such as delays, expenses arising from shared storage areas, or damages to the completed work, caused by a subcontractor’s default. The general contractor seeks to pass these costs on to the subcontractor. But if the subcontractor’s insurance does not cover the damages, then the general contractor, as an alternative argument, may seek to hold the subcontractor liable for the damages. The specific provisions in the contract documents will be key to whether the general contractor can prevail.
If you are a general contractor, you are in a position to contractually obligate your subcontractors to carry adequate insurance coverage. For instance, you could require that subcontractors carry insurance that exceeds the minimum amount required to cover the risk. You also can include provisions in your subcontractor agreements obligating the subcontractors to reimburse you for uninsured damages. Lastly, if you require subcontractors to name you as an additional insured, you may obtain coverage from the subcontractor’s insurance, relieving you of your exposure. The reality is that without contractual insurance requirements, both contractors and subcontractors may face liability because the parties were not clear that the insurance provided by the subcontractor was intended to protect the general contractor. The advice of your legal counsel is indisputably helpful in these circumstances.
How to Enforce Insurance Requirements
To ensure compliance with the insurance requirements in the subcontractor agreement, general contractors can take several key steps. First, they should require subcontractors to provide relevant certificates of insurance and endorsements. A general contractor should also check on the status of those requirements and seek evidence of compliance at critical times such as the start of a new project, the renewal of a subcontractor’s insurance policy, or upon the expiration of a subcontractor’s policy. However, it is important to recognize that a COI does not automatically indicate that the subcontractor is in compliance.
To determine whether a subcontractor’s insurance policy or COI satisfies the requirements in the subcontractor agreement, a general contractor should review the types of coverage, the limits of liability, and the exclusions, terms, and conditions contained within the policy and COI. Further, to verify that a subcontractor has complied with its contractual obligations, a general contractor must examine whether the subcontractor’s policy or COI was issued prior to the contractually required date.
A general contractor may also want to conduct periodic audits of subcontractor certificates of insurance to ensure that the subcontractor has provided an updated certificate. When undertaking such audits, general contractors will often request, and should consider requiring, updated COIs and endorsements every six months or annually. Further, if it is discovered that a subcontractor is out of compliance with the contract’s insurance requirements, the general contractor should work with its subcontractor to try to remedy the situation, such as by recommending that they obtain additional insurance coverage.
When to Amend Insurance Coverage Terms in Active Contracts
As with all contract terms, subcontractor insurance requirements should be reviewed by counsel on a regular basis with the overall goals of ensuring compliance with current law and protecting the contractor against risk. Plan Revisions and amendments to contracts should also be reviewed, as plans are updated periodically. The scope of work under an existing contract may change over time, or the law may change over time. For example, many states have recently enacted legislation creating strict liability for an additional insured status, replacing the previous rules that an additional insured must be "actively" involved in the day to day operations of the work giving rise to the damages . In such a situation, the additional insured should review the obligations of the subcontractor to provide coverage, in case the intent of the parties was not effectively captured in the contract.
As a practical matter, if the contractor has any question about whether the contract is up to date, it is better to err on the side of caution and update the insurance terms based on the most recent information available, regardless of whether the changes are legally required. In addition to reducing risk, both from an insurance and indemnification perspective, an updated contract can result in reduced premiums if it provides required insurance defenses and indemnification.