By Megan Prince, Senior Proactive Risk Executive
As we enter into the first few months of 2020, the absence of a true winter has left many contractors running through their backlogs quicker than they anticipated. The increase in jobs with the lack of available tradesman means only one thing: hiring sub-contractors is necessary for construction survival and business continuation.
While a mild winter is a construction company owner’s dream, it can quickly become a nightmare if proper Contractual Risk Transfer is not in place.
Contractors or those acting as the “upper tier” can attempt to avoid the financial risk that may arise out of sub-contractor negligence. This includes bodily injury or property damage to a third party for which a General Contractor may be held vicariously accountable. The first step is Contractual Risk Transfer.
What is Contractual Risk Transfer?
Just when you thought you were finished with paperwork, an indemnity agreement becomes highly important for the financial safety of your company. Contrary to common belief, Contractual Risk Transfer is not an insurance contract. It is a written contract between upper tier and lower tier contractors that states one party is to indemnify and hold another party harmless. This may include property damages when completing a job, or personal injury to a third party on a job site. The importance of this boils down to financing (who will pay the claim), and mitigation (how to avoid or reduce the financial implications).
The ideal use and true purpose of contractual risk transfer is to place the financial burden of a loss on the party best able to control or prevent the incident leading to injury or damage. In other words, this insures the negligent party is responsible. By entering into a written contract with your sub-contractors and requesting specific verbiage, your level of protection increases significantly.
How Can I Protect My Company?
General Contractors have many options to protect their business from their sub-contractor’s mistakes. As a Senior Proactive Risk Executive, I see these attempts and requests daily. They arrive in the form of certificate requests, which include the following risk transfer tools:
- Additional Insured Status
- Waiver of Subrogation
- “Primary and Non-Contributory” requirements
The general contractor requests proof that the sub-contractor has fulfilled all the requirements by providing a Certificate of Insurance. Similar to the way in which banks pre-qualify a prospective buyer’s credit score, general contractors are able to pre-qualify a subcontractor based on their insurance credentials. This ensures the general contractor, employees and clients are fully protected in the event of a catastrophic loss.
While certificate compliance is extremely important, there are a few additional best practices to follow:
- Obtain performance history, safety culture, references and license information
- Review audited financial statements from the past two fiscal years
- Obtain supporting safety documentation such as Experience Mod Rating and OSHA Compliance history.
A quality subcontractor will comply with the general contractor’s requirements. When reaching workload capacity, both new and established companies look to secure subcontractors. Now is time to review the your hiring process. You will realize that a pre-qualification phase works as a risk blanket, protecting both yourself and clients from a disastrous loss. Among the major benefits, you will also establish a relationship built on quality craftsmanship and high regard for safety compliance.
Taking these steps combined with the proper protective coverage and meticulous risk transfer requirements can ward off disasters that could place your business in jeopardy.