Construction contracts typically include insurance requirements for the subcontractor to meet. For example, the contract may require the sub to carry Commercial General Liability insurance with limits equal to or greater than a specified amount, such as $1 million per occurrence. It may also require the policy to include specific coverages, such as for liability assumed under contracts or for completed operations, and it may require the policy to name the owner and general contractor as additional insureds. These agreements are between the owner or general contractor and the subcontractor. As insurance consultant Don Malecki pointed out in a recent article, however, insurance companies are beginning to insert their own requirements into the writing of contracts by including special endorsements in their policies.
One endorsement he described affects the insured entity’s premium. The endorsement requires an insured who subcontracts work to obtain certificates of insurance from all subcontractors showing that the subs have certain coverages with at least the limits of insurance specified in the endorsement. Further, the endorsement requires that the subs’ insurance companies hold A.M. Best ratings of “A minus” or higher and be size class VII or higher; name the insured (the general contractor) as an additional insured on ISO endorsement CG 20 10 07 04 or a broader endorsement; and cover the general contractor on a primary basis. This endorsement does not affect whether the insurance company will pay for losses arising out of a subcontractor’s work for the insured. Instead, it affects the premium that the insured pays. When the company performs the premium audit after the policy term expires, the auditor examines the certificates of insurance the insured collected during the term. They compare the certificates with the insured’s records of subcontracted work. For every subcontractor from whom the insured failed to get a certificate or obtained a certificate that did not meet the endorsement’s requirements, the company charges a higher premium. Insurance companies calculate premiums for subcontracted work by applying a rate for every $1,000 of subcontract cost. This company charges one rate for subcontracts that meet the endorsement’s requirements and a much higher one for those that do not.
Another example Malecki gives is of an insurer actually requiring its insured contractor to include specific wording in its contracts. In his example, the company is demanding that the contract require the subcontractor to waive any immunity or limits it has for liability beyond Workers Compensation benefits for injuries to employees. Other companies may require special hold harmless wording, such as wording that indemnifies all of the general contractor’s owners, officers, directors, employees, and other interested parties from all liability resulting from any cause of loss. This provision may cause problems for the sub, as it may extend far beyond what the sub’s insurance company is prepared to cover. For example, by requiring indemnification for loss resulting from any cause, the wording implies that the sub will be responsible for pollution incidents. However, virtually all standard general liability policies exclude coverage for pollution.
Contractors should work closely with our insurance agents to determine exactly what requirements, if any, their insurance companies are imposing on their contracts. Some of these requirements might be steps that the contractor should contemplate taking regardless. However, contractors need to become informed about these requirements, so they can make appropriate plans and decide whether to accept coverage from a company that requires this.