Q: What are primary risk management considerations when managing work that is not self-performed?
A: Whether you are a general contractor, a specialty contractor or a subcontractor, the name of the game is risk transfer – and it’s accomplished through Indemnification language and/or Additional Insured requirements in contracts. Indemnification clauses are contractual obligations that push risk to lower-tier contractors. There are various degrees of indemnification language available to general contractors depending on the amount of leverage that the general contractor has in dealing with his/her subcontractors. Additional Insured requirements specify that the subcontractor add an owner or general contractor to his/her insurance policy. In doing so, the owner or general contractor becomes an insured under the subcontractor’s policy. There are dozens of additional insured endorsements available to contractors. As such, it is critical that the general contractor’s requirements are specific and that the general contractor verify compliance with the requirements.
Q: Could “faulty workmanship” claims still leave a GC exposed even if risk is transferred?
A: Even if a general contractor successfully transfers the maximum amount of risk to his/her subcontractors, he/she could still be exposed to risk for claims arising out of “faulty workmanship.” For example, if the subcontractor is not in business when the damage occurs, it won’t be possible to transfer losses to the subcontractor. Also, courts in many states have determined that “faulty workmanship” would not be considered an “occurrence” under a general liability policy. Therefore the resulting damage caused by the faulty workmanship may not be covered by the subcontractor’s general liability policy, and the general contractor could ultimately be responsible. Bottom line: the general contractor’s policy needs to be written in a way that covers them regardless of their subcontractor’s insurance coverage.
