Managing risk is a critical component of operating any business. Nowhere
is this more apparent than in construction where the product is seldom cloned.
Each project is unique as to one or more of the following factors.
- Owner
- Location
- Plans and specifications
- Trade or subcontractors performing the work
- Project management
- Inspectors
Because each project is, to some degree, a new venture, managing the associated
risks becomes more important. Much of the contract surety underwriter’s focus
when evaluating a contractor is on how well does the applicant/client manage
risk.
Insurance Risk Transfer
Risks can be avoided, controlled, mitigated, retained, and/or transferred
to others. The transfer of risk to others is usually by contract and incorporates
an indemnification provision. A contractor will usually purchase some level
of insurance to provide indemnify for insurable events. Where the risk of loss
is transferred to others by contract, as in the case of a subcontract, it will
also include an insurance requirement to “back-up” the insurable hold harmless
provisions in the contract.
The surety underwriter today will pay particular attention to both the insurance
carried by the applicant/client and the parties with whom they contract since
any uninsured loss could have a material adverse affect on the financial condition
of their bonded principal. The underwriter will also examine how effectively
risk is transferred to others vis-à-vis contracts and what risks are assumed
by contract.
Financial Stability
Before moving on in this discussion, it is important that everyone understand
why the principal’s financial stability is so important to the surety underwriter.
The surety underwriter approves the bond based on certain representations including
the financial condition of the principal. Once the bond is issued, the bond
cannot later be recalled if the principal’s financial condition deteriorates
because of an uninsured loss.
If the surety suffers a loss, they are entitled to be indemnified by their
principal and any guarantors, which are usually the owners of the business.
Thus, an uninsured loss may not only adversely impact the principal’s financial
condition but also that of the guarantors.
Underlying Premise. It is an axiom of risk
management that the party best able to control and manage the exposure should
be the responsible party. On most construction projects, that party is the trade
or subcontractor performing the work. Therefore, it is vitally important to
the owner, general contractor, and others that all trade or subcontractors carry
insurance. Actual coverages and limits appropriate to a particular project have
to be evaluated on a case-by-case basis. Nonetheless, I thought it might be
of some benefit to outline a sample or template of basic insurance specifications.
| The following summarizes basic insurance
requirements for Trade (Sub) Contractors. Trade Contractor shall at
his expense, procure and maintain required insurance coverages on all
its operations in companies acceptable to the Owner and/or Contractor. |
- Workers Compensation (Statutory) and
Employer’s Liability:
$1,000,000 each accident for bodily
injury by accident; $1,000,000 each employee for bodily injury by
disease; $1,000,000 policy limit for bodily injury by disease. If there is an exposure of injury to Trade Contractor’s employees
under the U.S. Longshore and Harbor Workers Compensation Act, the
Jones Act, or under laws regulations or statutes applicable to maritime
employees, coverage shall be included for such injuries or claims. - General Liability Insurance (CGL):
Commercial
general liability on an occurrence coverage form. The limits of
liability shall not be less than: $1,000,000 each occurrence (combined single limit for bodily
injury and property damage); $1,000,000 for personal and advertising injury liability; $1,000,000 aggregate on products and completed operations; $2,000,000 general aggregate. Additional Insured Endorsement: Blanket additional insured coverage should be requested to include
the Contractor, his officers, directors and employees, the Owner,
and any other party, as may be required. - Automobile Liability Insurance:
- $1,000,000 Combined single limit each accident for bodily injury
and property damage. Include coverage on all owned, hired, and nonowned
automobiles.
- Certificates of Insurance:
- Trade Contractor shall furnish certificates of Insurance and
applicable endorsements to Contractor before Trade Contractor commences
any work.
- Insurance Requirements for Sub-Trade
Contractors:
Trade Contractor shall ensure that all
tiers of his Sub-Trade Contractors shall maintain insurance in like
form and amounts, including the Additional Insured requirements.
Each Sub-Trade Contractor shall provide Certificates of Insurance
and applicable endorsements to the Trade Contractor prior to the start of the Sub-Trade
Contractor’s work on this project. - Acceptance/Compliance:
The required
insurance shall be subject to the approval of the Contractor, but
any acceptance of insurance certificates by Contractor shall in
no way limit or relieve Trade Contractor of the duties and responsibilities
stipulated in the Trade (Sub) Contract Agreement. If higher limits
or other forms of insurance (e.g., professional liability, aircraft
insurance, builders risk, hazardous materials or pollution liability)
are required by the Owner, the Trade Contractor will comply with
such requirements. Owner or Contractor may take such steps as necessary
to assure Trade Contractor’s compliance with insurance requirements.
In the event Trade Contractor fails to maintain minimum insurance
coverage as required or provide written evidence of required Certificates
and/or endorsements, Contractor may maintain such coverage and charge
the expense to Trade Contractor, terminate this agreement and/or
withhold payment. |
Conclusion
It must be emphasized that the foregoing is only a “sample” of basic insurance
requirements. There may be unique exposures or issues for a particular project
that might dictate additional coverages and/or different limits. The reader
should consult with their insurance agent/broker and other risk advisors to
determine what additional requirements may be needed.
The important thing to remember is that the owner or general contractor has
the primary exposure if there is bodily injury or property damage growing out
of the construction activities. By communicating upfront what your minimum insurance
requirements are, it will allow the trade and subcontractors time to secure
and price the needed insurance. Ability to obtain the insurance may become a
competitive factor in evaluating bids from various trade or subcontractors.
The insurance requested of others is intended to defend and indemnify you
for claims and losses caused by others. It is a risk management tool to, in
part, backup the indemnification obligation to you. Protecting yourself from
unexpected insurable losses will provide stability to your financial balance
sheet and enhance your attractiveness to a surety.