Don't Retain Your Subcontractor's Risks by Not Requiring Adequate Insurance

Risk management is one of the most important tools available to keep your business's financial bottom line looking good. But, for risk management to be successful, you must be able to identify all cases of risk retention whereby you'd be responsible for any portion of a loss.

If you can't transfer a risk to another party, then you retain the risk by default. There are both known and unidentified risk retentions. An example of a known risk retention would be your insurance policy deductible. This type is considered known since you already know the predetermined deductible amount that you'd be responsible to pay before the policy provides its preset amount of coverage. On the other hand, any amount of loss over what your insurance policy's limits are would also be considered a retained risk, but categorized as unidentified since you wouldn't know the amount of loss beforehand.

General contractors need to be able to identify all their known and unidentified risk retentions in order to adequately protect their business. If you're like most, then the most likely area for problems will be identifying unidentified retentions. Subcontractor negligence is of particular concern. Of course, you can always buy additional insurance coverage to cover subcontractors. However, it's usually more financially feasible to require that your subcontractors carry their own liability insurance with a coverage amount that could potentially replace the entire project if a problem were to occur.

Make sure that you've taken the following five key actions to proactively handle potential subcontractor negligence:

1. A professional should review your contracts to ensure that your insurance policy continues to adequately meet your needs.

2. Either purchase additional insurance coverage yourself -or- require all subcontractors to purchase a sufficient amount of insurance on their own. Gauge the minimum acceptable policy limit for a subcontractor according to the scope and size of the project. Do be sure to specifically specify the minimum acceptable policy limit in the subcontractor's contract.

3. You should also take precautions to ensure continued compliance with minimum acceptable policy limits by periodically asking your subcontractors for their certificates of insurance and checking that the coverage hasn't elapsed.

4. Your subcontractor contracts should specify that the primary coverage for the project will be the subcontractor's general liability coverage, not yours. Stated as such, your insurance coverage will be excess coverage and only be relevant if the subcontractor's insurance coverage isn't enough to cover the damages.

5. Check whether or not a subcontractor indemnity agreement is allowable by law in your area. This agreement would make a negligent subcontractor reimburse you any money that you were made to pay the owner of the project due to the negligence of the subcontractor.

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