A real estate firm on the third floor of an office building hired a janitorial service to clean during a weekend. The service completed its work by late Saturday afternoon. However, one of its employees left water running in the employee break room after rinsing off some rags, which he also left in the sink. The rags plugged the sink drain. Over the next 36 hours, the sink overflowed, the room flooded, and water seeped into the law office downstairs. The water ruined several desktop computers, left marks on leather chairs, streaked the walls, and soaked a six-month-old carpet. The law firm submitted a bill for several thousand dollars in damages to the real estate firm. Because the real estate firm is legally liable for the actions of contractors it hires, it was liable for the damage to the law firm’s property.
This is the sort of accident for which companies buy Liability insurance. There are multiple ways to insure the exposure to loss from actions of contractors. Each company should investigate alternatives and choose those most appropriate for its situation.
Every business should carry its own General Liability insurance policy. The standard policy will cover damages caused by contractors. Although relying on its own insurance gives the business a certain amount of control (especially over timely payment of premiums,) there are disadvantages to using only this approach. Some policies might contain endorsements that reduce or eliminate this coverage, so business owners should review their policies carefully. Even if the policy does provide this coverage, a few large losses caused by contractors could use up the business’s insurance limits. Also, the insurance company will count the contractors’ losses when it calculates the business’s experience modification, resulting in higher future premiums.
The business might want to include an indemnification agreement (also known as a “hold harmless agreement”) in its contract for the work. This will require the contractor to assume liability for losses resulting from its work. If the contractor has insurance or other financial resources to pay for the loss, this is a good approach. The standard policy covers liability assumed under what it defines as an “insured contract.” However, some policies might carry endorsements that eliminate coverage for liability assumed under a contract. Also, if the business has to sue the contractor to enforce the agreement, the damaged third party will have to tolerate lengthy delays before it receives payment. Finally, unless the business meets very specific conditions, the contractor’s policy will not cover its defense costs.
Another approach is to require the contractor to name the business as an additional insured on its policy. This will provide the business with coverage for both the damages and defense costs. However, the business will share the contractor’s insurance limits with all the other additional insureds named on the policy; the amount of insurance available might be inadequate. The business’s insurance might or might not have to share in the loss, depending on the terms of both policies. Also, as with the hold harmless agreement approach, the business must hope that the contractor keeps its insurance in force.
Finally, the business could require the contractor to buy an Owners and Contractors Protective Liability policy. Issued in the name of the business (not the contractor,) this policy will give the business its own primary limits of insurance for the project, advance notice of cancellation, and keeps the losses out of the business’s loss experience. It does not provide coverage for completed operations; the business may still need additional insured coverage for that.
Every business hires contractors from time to time. Planning ahead can ensure that the business has adequate protection should an accident occur. Call our offices today to determine the appropriate Liability coverages for your particular situation.