Many contractors hire subcontractors to perform specific tasks or vendors and suppliers to provide materials on jobs for which the contractor has been hired. We are going to explore, how contractors in Illinois can protect themselves from liability associated with the acts of these subcontractors and venders or suppliers.
The first step in transferring risk is the creation of a contract. Illinois doesn’t allow contractors to contractually transfer their own liabilities to other persons/entities. However, Illinois does allow contractors to contractually require other persons/entities to purchase or carry insurance that will protect the contractors’ interests. Therefore, it is important that XYZ Construction, for example, has a contract which requires each subcontractor, vendor or suppler to provide the types and limits of coverage XYZ Construction deems appropriate to properly protect their interests. Commonly, you will see requirements for Workers’ Compensation, Employers Liability, General Liability, and Umbrella insurance coverages. Where appropriate, Auto Liability, Pollution and Professional coverage might also be required. Limits can be required based on trade and exposures or can be comprehensively required for all persons and entities involved in the construction job.
In addition to requiring specific coverages and limits, contracts should require waivers of subrogation, primary/noncontributory language, and additional insured status on appropriate policies. There are generally three categories of additional insured status and XYZ Construction needs to determine and specify in the contract what level of additional insured protection it requires. Currently, most additional insured endorsements require that there be a written contract in place. This requires the extension of additional insured status. Without such a contract in place, additional insured status will not be conveyed onto XYZ Construction.
Once the contract is in place, the next step is to require each subcontractor, vendor or supplier to provide evidence of insurance and review the evidence to validate the coverage provided matches the requirements of the signed contract. Best practices mandate that the endorsement providing the additional insured status be submitted along with the certificate of insurance evidencing the coverages and limits. One of the most important portions of the review is to confirm that the contractually required parties have been properly named as additional insured on the subcontractor’s, vendor’s or supplier’s policies and that the additional insured status mirrors the contract.
Most contractors, such as XYZ Construction, don’t consider this process to be a priority until it’s too late. In such cases, and assuming the contractor’s own policies provide the necessary coverage, the contractor can rely on their own insurance carrier to protect their interests. However, this impacts the contractor’s loss experience and defeats the purpose of contractual risk transfer.
If XYZ Construction doesn’t have the internal time or expertise to validate whether the coverages provided meet contractual requirements, they can chose to outsource this process. Various companies, like Assurance, offer services to review the certificates to make sure they meet contractual requirements, check A.M. Best ratings of each certificate’s insurance carrier or even interrupt the additional insured endorsement to verify the additional insured status meets the expected level of protection. Talk to your insurance advisor to find out more and to determine if outsourcing your risk transference process makes sense for your business.