Certificates of Insurance: When entering into a contractual relationship with a subcontractor it is important to obtain Certificates of Insurance from that contractor which demonstrates the existence of necessary insurance coverage. The inability of a subcontractor to supply this information could mean no coverage is in force and that you or your insurance carrier may be required to provide coverage to the subcontractor for compensable Workers’ Compensation injuries or assume other liability exposures. This is generally an undesirable event for a prime contractor for they often do not have direct control over the employees or work procedures of the subcontractor and thus have limited control over the exposure they have assumed.
Limits of Liability: While it is important to check for the existence of subcontractors’ insurance coverage it is equally important to ensure that the limits of insurance are adequate for the exposures being subcontracted. If the subcontractor being utilized becomes liable for 2 million dollars in damages and has a liability limit of only 1 million dollars, the prime contractor may become liable for the balance. With this in mind, prime contractors should evaluate the exposures presented by the operations being subcontracted and ensure the subcontractors utilized are adequately covered.
Hold Harmless Agreements: This is a risk management technique where the financial consequences of certain liabilities are contractually transferred to another party. This may occur when a subcontractor contractually agrees to hold a prime contractor harmless for any liability incurred during the agreed work. In this example the prime contractor would be limiting it’s liability by inserting the “Hold Harmless clause” into the contract and the subcontractor may be assuming liability for the actions of the prime contractor. While it is generally advantageous for a prime contractor to limit it’s liability by inserting Hold Harmless Agreements into contracts, a subcontractor’s assumption of liability may dramatically increase it’s exposure to serious financial loss. It is for this reason that it is important to diligently review all job contracts and to be aware of and actively manage any exposures contractually assumed. While Hold Harmless Agreements are not upheld by the courts in all cases, they are generally looked upon as the first line of defense in any litigation that may ensue.
Formalized Safety Efforts: While Workers’ Compensation, “as the exclusive remedy”, generally protects a subcontractor from suit from his employees, it is not uncommon for the subcontractor’s employees to bring a third party liability suit against a prime contractor. Additionally, the prime contractor may also be exposed to third party liability suits from the general public or be held responsible for OSHA violations as the party ultimately responsible for all work performed under the contract. With this in mind, it is important that the prime contractor have a formalized, implemented and documented pro-active safety management program that will manage subcontractor safety performance and provide a defense against any claim of negligence or OSHA violation.
Communicating Subcontractor Safety Expectations: Once the prime contractor has established a working safety program it is important that the safety standards are communicated to and utilized by the subcontractor. This should be done at the start of the job and periodically thereafter to ensure that the subcontractor understands the prime contractor’s expectations and standards. It may also be beneficial for the prime contractor to insert statements into contracts with subcontractors which specify safety standards and enable the prime contractor to control the safety performance of the subcontractor with less fear of walkouts and job delays. It is also important to note that many conflicts with subcontractors are really only confrontations with individual management personnel. Given this, it may be advantageous to negotiate safety performance concerns with subcontractor owners, controllers or financial officers who understand the financial aspects of the exposures in question.
Rating Subcontractors: It is generally accepted that an organization’s safety and loss control experience is not only a good indication of how safe a company operates but also says a great deal about the management efficiency of an organization. Safe production in most cases leads to more efficient and profitable production. It is also important to recognize that subcontractors with ineffective safety and loss control programs often expose the prime contractor’s employees to work hazards and present the prime contractor’s management staff with numerous headaches relating to the coordination of work and the enforcement of safety standards. Additionally, the potential increase in general liability exposure and threat of OSHA inspections are costs and exposures that can not be overlooked. Given these considerations, prime contractors may find it beneficial to obtain and evaluate the safety experience of the subcontractors they consider utilizing. Two widely used measurements of this nature are the experience modification factor which is developed and utilized by the insurance industry and or OSHA incident or loss work day rates.
I hope this information has given you a better understanding of some of the exposures, controls and issues surrounding subcontractor relationships. These obviously are very delicate and complicated issues and the purpose of this letter was to address these topics in the general sense. Given this fact and the legal and risk management nature of this topic, we strongly recommend that specific implementation of the controls noted be reviewed with your legal counsel and insurance broker or advisor. Please do not hesitate to contact me should you have any questions concerning this letter or any safety or loss control issue.
—Courtesy of Jane Anthony, LP Insurance Services