Are you as protected as you think?
Development risk comes in all shapes and sizes, however many developers may be overlooking a critical question when it comes to selecting a general contractor. Sure, most of us understand the relationship between a client and GC, but many developers don't fully understand the tiered relationship between the GC and subcontractor which can result in a costly lesson.
During your GC selection process it's important to understand the standard operating procedures performed by your prospective contractors in order to better understand how they handle risk management. Risk is inherently found throughout the project, however most of it can be mitigated through the use of a competent and experienced GC.
As a developer, having basic knowledge of your GC's practices arms you with the tools needed to help identify risk and ask the questions needed to protect yourself. For example, understanding insurance limitations between you and the GC is standard, however it's not as common for developers to ask how the GC passes those risk down to the next contracting tier. In other words, if your GC does not transfer risk to their vendors through the use of insurance certificates required by a written contract then the GC and client may be liable for additional cost through unforeseen conditions and lacking insurance coverage.
The information below is a basic summary of a common relationship between the GC, client and subcontractors.
THE RELATIONSHIP BETWEEN AN OWNER – GENERAL CONTRACTOR AND SUBCONTRACTOR, IN REGARDS TO INSURANCE
This is a very broad topic that could involve multiple types of coverage and limits, we are going to just touch the surface here – the basics.
Owner – the owner wants all contractors on their property to carry, at a minimum, general liability – in order to be indemnified in the event of a loss
General contractor - Contractor liability insurance benefits your business in three ways:
Asset protection. If a third party alleges your business caused bodily harm or property damage and you don't have General Liability coverage, you would have to pay for those damages out of pocket. As you can imagine, that can really hurt your bottom line.
Survival plan when things go wrong. Accidents are unpredictable and happen to even the most careful business owners. General Liability coverage helps ensure you can handle these unexpected expenses without jeopardizing your ability to stay in business.
Protection for your business and employees. With this coverage, you can carry out daily work knowing you and your employees are protected from uncertainty. General Liability coverage protects your business against claims brought against the company as a whole, as well as claims brought against individuals employed by the company.
Subcontractor – if a contractor’s, hired, subcontractor does not carry a liability insurance policy, of their own, then a loss created by the subcontractor will fall back on the contractor – furthermore some policies require the contractor’s, subcontractor to have general liability limits that match the contractors limits or there is no coverage provided if that subcontractor causes a loss.
Example – an owner of a coin operated laundromat needs a roof replaced on a building, owner meets the contractor at the building to receive an estimate, owner likes the contractor and his quote is in line with others he has received so owner hires contractor. This particular contractor doesn’t actually do the work themselves, they sub everything out. In this claim, on this particular day, the subcontracted roofer removes the roof mounted sign in order to work on that area of the building - while working in that area they decide to take a lunch break, leave the job site to go get a bite to eat, but what they didn’t do was turn the sign off, sign gets hot and starts a fire, the total claim was $750,000 and incorporated building damage, property loss and loss of income, thank goodness the owner, at the request of the contractor, did close the business temporarily so work could be completed without risk of bodily injury to persons using the facility, which was a very good call, could you imagine if someone had been hurt. So who pays the claim? Who indemnifies the owner? If your sub has no insurance the claim falls back on the contractor, if your sub carries limits of $500,000 the remaining $250,000 falls back on the contractor and if your policy has an endorsement requiring your subs to carry limits equal or higher than yours and they don’t, you may not have coverage at all. But the owner still expects to be indemnified, the goal is to have the insurance companies pay the claim, not you. Use licensed reputable subcontractors, require them to have insurance at limits equal or higher than yours, get a certificate of insurance and have them name your business as an additional insured.