Consider your liabilities when contractors are on your property.
By David Parkhurst
It seems the business of protecting your business gets tougher and tougher each year. Every time we pick up the newspaper and read about a jury awarding large sums of money in a lawsuit, it makes us wonder if there is anything we can do to protect ourselves. Although there is no protection against an uninformed jury, you can do a lot of things to manage risk.
Risk is the possibility that something, usually negative, will occur. The management of this risk – or Risk Management – is the evaluation of these risks, taking steps to reduce the risk, assessing the possible negative impact of the risk, and determining how to avoid or minimize the financial impact.
Precast concrete producers, like many other manufacturing companies, face the risk of financial damage from many different angles every day, including those from injuries, lawsuits or equipment loss. When we think of these risks, we usually think of our employees or our real property. However, this leaves out one very important risk: our subcontractors. Consider the construction crew building a new expansion, or the roofing crew, or the HVAC system installer or even the contractor who delivers your products. These are all people who pose serious risks to your business. When you consider contractors who should be on your “risk radar,” consider any company with which you do business.
Listed below are some different ways to provide protection for your company.
Risk transfer is the shifting of risk among the parties of a contract. Some of the tools that help to achieve this are written contracts (when at all possible); indemnification agreements; hold harmless agreements; and additional insured requirements.
Written versus Oral Contract. Having a written rather than an oral contract is the first area of defense. This does not mean the days of “a deal on a handshake” are gone. But if you can shake on it, why not put it in writing? Oral contracts are still valid in most states; however, they are very hard to prove. They also usually focus on things like scope of work and price and leave out risk transfer.
Indemnification Agreements. Indemni-fication agreements transfer the risk to other parties. There are several types:
• Broad Form Agreement. These agreements transfer all risk of loss described in the contract to other parties. If something happens in the scope of the contract, you are not at fault.
• Intermediate Form Agreement. These agreements transfer all risk of loss described in the contract to other parties except when the loss is entirely your fault. If something happens and another party has just a little bit to do with it, the other party – not you – is responsible for all damages.
• Limited Form Agreement. These agreements transfer only the amount of risk that the other parties share in any loss described in the contract. In other words, if you are 60 percent at fault and the other parties are 40 percent at fault, then you are responsible for 60 percent of the loss.
When you are drafting indemnification agreements, consult your attorney. Most states have anti-indemnification statutes that limit what these can do, and an invalid agreement is worthless!
Hold Harmless Agreements. Hold harmless agreements are different from indemnification agreements. In a hold harmless agreement, the party assuming the risk agrees not to attempt to recover payment from you for damages that it incurs.
Additional Insured Endorsement. An insurance policy is a contract between your business and an insurance company. When an insurance company issues a liability policy, it agrees to pay those sums that you are legally obligated to pay according to the coverage in your policy. If a claim occurs, the insurance company will defend all insureds and will pay the amount of any settlement or judgment up to the policy limits.
When you hire a contractor, ask to be added to the contractor’s insurance
company as an additional insured onto its liability policy. By doing this, you are protected under the contractor’s policy against liability that arises as a result of work it is doing for you.
When looking at the additional insured endorsement, there are a few other things to consider:
• Whose policy pays first? If you request coverage as an additional insured on a primary basis, that means the policy will pay first and your policy will pay in excess. If the additional insured is being provided on an excess basis, your policy will respond first and the contractor’s policy will respond in excess.
• How long should you require additional insured status? This is something you should discuss with your attorney, and it depends on the statutes in the states in which you are operating.
• Which form is it on? The most effective includes work in process, referred to as ongoing operations coverage; and completed work, referred to as completed operations coverage. Your insurance agent should be able to help you with this.
Limits of your contractor’s insurance policy
When spelling out the specific risk transfer items in your contract, it is important to specify that the contractor have the same limits as your company or higher. For example:
• $1 million Each Occurrence (Bodily Injury and Property Damage)
• $2 million General Aggregate that applies on a per project basis
• $2 million Products/Completed Operations Aggregate
• $1 million Per Person or Organization (Personal and Advertising Injury)
There are many reasons that you should require adequate limits of insurance. Your attorney and insurance agent can help you with this as well.
Certificates of insurance
Requiring certificates of insurance from the contractors you are doing business with is one of the easiest and most important risk management tools. Once you get a certificate of insurance, there are certain things you should look for:
• Name of the business
• Policy number (This may be pending if it was just issued. In this case ask for another certificate when the
policy number is assigned, or e-mail the insurance company to verify coverage. E-mail is a good way to document a conversation, so it is preferable to a phone call.)
• Name of insurance agent
• Name of insurance company
• Type of policy (General Liability, Automobile Liability, Excess/Umbrella Liability, etc.)
• Policy effective date and expiration date
• Limits of insurance
• Exclusions added by endorsement
• Special provisions
• Terms under which you the
certificate holder must be notified if the subcontractor’s policy is
The certificate should have your company’s name on it, should name your business as an additional insured and should have the form number on it. This again is something that your insurance agent should be helping you with.
Make a log to track your certificates and keep them on file in an organized manner. This will come in handy in the case of an insurance audit. It can also be set up to notify you when a certain contactor’s policy expires.
There are other things to think about regarding the risk of having contractors on your property. When a construction project or other work is being done on your property, there are several things to consider for reducing the risk of loss:
• Erecting fences or safety barriers around the perimeter of the premise
• Making every worker responsible to report any unauthorized visitors or breaches to these perimeters
• Requiring the site supervisor to monitor the security of the perimeter
• When necessary, posting a guard or security to keep the public out
• Monitoring entry of all vehicles to the job site
• Maintaining a record of entry and departure for all vehicles
Warning Signs. Post warning signs to let the public know that they are in a restricted area or on private property, and that unauthorized entry is prohibited.
Special Considerations for Children.
• Children are attracted to work site areas and have different safety perceptions than adults. They tend to minimize common sense rules and believe they are invincible.
• Try to keep equipment away from the perimeter of the premises where it is easily accessible, and closely monitor the premises when your property or the job is near a school.
Ground Hazards. All elevation changes and excavation areas should be clearly marked, as they are usually hard to see.
Construction Materials. Pay close attention to all materials that are kept on site. Trip hazards are common as are injuries that result from scrap materials lying around.
These are several ways that business owners have been successful when implementing risk management. Both an attorney and an insurance agent who are fluent in business liability and risk management are key people who should be on your team. These key players should be willing to provide you with the same type of hard work and service you and your employees provide every day to your customers. Risk management is a complete team effort, and the protection and financial stability of the company is in everyone’s best interest.
David Parkhurst is a commercial agent with IBG (Insurance Benefits Group) of Kansas City, Mo., and a member of NPCA’s Safety, Health & Environmental Committee.