As an insurance advisor who specializes in helping contractors, I have strong words of advice for anyone hiring subcontractors: a good, solid subcontractor agreement is a must-have.
The quality of your subcontractor agreement matters because of the risk subcontractors may pose to your company. No matter how good they are, how long they’ve been in business or how well you know them, one mistake in their work can cost you big money if you haven’t clearly agreed upon who’s responsible for their mistakes in the first place. In other words, a good agreement ensures that your subcontractors are willing to stand behind the quality of their own work.
Important provisions often missing from subcontractor agreements:
Once you or your insurance company end up paying out due to a bad subcontractor agreement, you won’t make that mistake again. Claims are not only costly in insurance premium increases, your insurance company may also choose not to renew your business policy. That’s why as an insurance advisor, I review the agreements my clients use with subcontractors very closely. Here are the provisions most often missing:
- Per-project aggregate requirements – This endorsement allows multiple projects to be covered with separate limits under the General Liability limit for each subcontractor. For example, if you have a subcontractor working on two different jobs and each one has a claim due to their work, then each claim is treated separately with each having the same limit of coverage.
- Additional insured requirement for ongoing and completed operations – These two forms list your business as an additional insured on your subcontractor’s policy. If you are sued or have a claim for work the subcontractor has done, then your subcontractor’s insurance would be the primary insurance to pay the claim, not yours.
- Primary and Noncontributory requirement for subcontractor’s insurance – This provides a better stopgap from your policy paying anything out on a claim against a subcontractor by clearly stating a subcontractor’s policy will pay first on any claim tied to the work they provided.
- Notice of cancellation – This requires that you are given a 30-day notice of cancellation if your subcontractor’s insurance cancels. You’ll want to know ASAP if a subcontractor no longer has insurance.
- Waiver of subrogation – In the event of a subcontractor claim, their insurance can’t come after your insurance to subrogate or recoup claim money. For example, if your subcontractor has a loss, but says one of your project managers told them incorrectly, this waiver prevents their insurance from requesting that your insurance “participates” in the claim payment.
When any one or all (I’ve seen it) of these items are missing from a subcontractor agreement, it’s more difficult to protect yourself and your company from the financial implications of claims involving your work.
For example, I have a new client that, before he came to my agency, had a subcontractor demo the wrong portion of a kitchen. Ouch. Of course, a claim was filed, and because the client didn’t have a strong subcontractor agreement in place, their business insurance had to pay out which subsequently also raised their premiums. Now that he’s my client, I’ve reviewed and improved his subcontractor agreement, but unfortunately, this was after several companies declined to even offer a quote for a new policy.
To get good coverage, a strong agreement has become a necessity.
These days, if you want good business insurance coverage, you’ll need a good subcontractor agreement — period. Insurance companies have tightened up their underwriting, so it’s becoming more common for them to decline terms, products and pricing based on a weak contract.
What if your subcontractor refuses to sign your solid agreement? My unabashed advice in that instance would be to go find a new sub. A strong agreement is built to ensure that a quality subcontractor is willing to stand by their work. If they aren’t, or if an agreement makes them nervous, then I’d be nervous about working with them myself. If you’re not convinced, I can introduce you to my client mentioned above…they could show you some convincing reasons.
Take a close look at your agreements and have your insurance advisor do the same.
I welcome you to contact me at Vibrant Insurance Group for questions or for help understanding how to create a great subcontractor agreement! Steve Snavely can be reached at steves@vibrantins.com or (515) 985-8235.
