Construction subcontracts have specified types and limits of insurance coverage to ensure that responsible subcontractors are considered for work. Supervisory contractors should review a subcontractor’s insurance certificate before directing the subcontractor to start work. If the contractor waits until after subcontractors have started work to reject insurance coverage as failing to conform to the insurance requirements, it may withhold the subcontractor’s payment based on breach of the requirements. This can create a serious cash flow problem for a subcontractor that has already started work.
Consolidated Insurance Programs (CIP), commonly called wrap-ups, may be owner-controlled (OCIP) or contractor-controlled (CCIP), and may apply to a single project or to a “rolling” succession of projects (ROCIP).
Wrap-ups originally promised reduced overall project costs, arising from volume discounts to the owner or prime contractor for purchasing worker’s compensation and other insurance for a project from a single source. According to the International Risk Management Institute (IRMI), additional savings may be generated by the ability of a single insurance administrator to enforce a uniform project safety program, helping to “control losses across the large population of workers compensation risks.”
Enforcement of a uniform safety program is easiest when a project is limited to a single site, although CIPs can be applied to multiple sites if they are near each other and the ability to administer the projects and to manage loss prevention and control is not compromised.
Subcontractors need to know the following.
- Wrap-ups may exclude workers compensation coverage.
- Rolling wrap-ups frequently provide insurance for projects that are distant from each other.
- Before purchasing worker’s compensation through a wrap-up, subcontractors should ask their insurance agents if they will continue to receive discounts on auto, general liability, or other lines of insurance for their regular insurance programs.
- The wrap-up administrator works for the owner or supervisory contractor, so watch for payroll reporting errors that may affect the experience modification rating (EMR). The administrators may try to maximize project savings by avoiding, delaying, or minimizing payment of claims, e.g., it might insist that a subcontractor put an injured employee back to work on “light duty” to avoid paying workers’ compensation benefits, and shifting the cost of maintaining the injured worker to the subcontractor’s payroll.
- The fund available to pay claims covered by wrap-up insurance is only available for a limited number of years, which may be shorter than the time period available for claims, particularly construction defect claims. Subcontractors may not have insurance coverage for construction defect claims filed more than three to five years after a wrap-up project is completed.
- Subcontractors may be required to sign “hold harmless” agreements to indemnify the owner and supervisory contractors against claims arising out of their work, essentially guaranteeing the upper tiers against the inadequacy of their own insurance program.
Additional Insured Coverage Is Broad Form Indemnity
Contractual requirements frequently mandate that the seller must name its customer as an “additional insured” on the seller’s general liability insurance policy, and also compel the seller to provide a “waiver of subrogation” for claims paid by the seller’s workers’ compensation insurance, its general liability insurance or both. These requirements can shift the customer’s potential liability for its own supervision and hiring errors to the seller in much the same way as a “hold harmless” clause. The coverage provided to an additional insured is often just as broad as the coverage provided under a broad form hold harmless clause, which requires indemnity by a subcontractor for all claims arising out of the subcontractor’s work, including claims based on the customer’s sole negligence.
The coverage provided to an additional insured is determined by the language of the general liability insurance policy naming the additional insured. An additional insured is typically added to a general liability policy by means of an “endorsement,” which is an amendment to the policy.
Waivers of Subrogation
Generally, when an insurer pays a claim, it steps into the shoes of its insured, or “subrogates” to the claims of its insured. However, the right of the company to “subrogate” can be waived by the insured, because the insured can agree to waive its right to sue for damages based on any claim that is covered by the insurance. For example, the A401-2007 subcontract form, published by the American Institute of Architects, provides that the general contractor and the subcontractor waive all rights against each other, their contractors, agents and employees, and against the owner and architect, for claims covered by property insurance. This prevents the owner’s property insurer from suing the general contractor and the subcontractors after paying a claim for property damage after a fire, for example.
If a subcontractor waives subrogation for claims covered by its workers’ compensation insurance, it prevents its workers’ compensation carrier from attempting to recover workers’ compensation benefit payments from the subcontractor’s customer, even if the underlying, compensated injury is the customer’s fault. Subcontractors are also often asked to sign subrogation waivers for claims covered by their general liability. In either case, subcontractors then absorb losses caused by others.