Many general contractors rely on the indemnification and additional insured provisions in their subcontract agreement to manage their risk, but they need to look much deeper than that. In fact, there are two recent examples of McConkey assisting clients where there were significant insurance gaps on subcontractors’ policies.
Every contractor should have their subcontract agreement reviewed by their insurance agent or broker. There should be specific requirements related to coverages, endorsements, and exclusions that the policy cannot contain. The 2017 AIA update took a step in the right direction by including a section related to exclusions that couldn’t be present on the general liability policy.
The Importance of Requesting Endorsements from Subcontractors: Case Study #2
As a client who had previously had their subcontract agreement reviewed by McConkey, the general contractor required a Professional Liability policy if a subcontractor’s work involved design or engineering work in their standard terms and conditions. They required any design professionals, or subcontractors whose scope of work included design work, to provide a certificate of insurance evidencing $1,000,000 of professional liability coverage.
Through previous discussions with McConkey, our client realized that this needed to be a separate insurance policy in order to provide proper coverage for this exposure. Our client brought it to our attention when they received a certificate of insurance from the subcontractor that stated the professional liability coverage was provided on the general liability policy. A discussion with the project team took place related to the type of work that was being completed and how general liability policies typically respond to professional exposures. It was determined that our client needed to get a copy of the endorsement that provided the coverage and we would review it on their behalf as this subcontractor was providing engineering services related to foundation work as part of their scope of work.
After receiving the endorsement and seeing the word “Exclusion” in the title, we suspected that this would not provide the coverage needed. We reviewed the language and determined that this endorsement excluded bodily injury and property damage arising out of “professional services” performed by or on behalf of any insured. Professional services were further defined to include design that was related to construction work that was completed by the subcontractor and not just design for third parties, so these activities were also excluded.
Additional discussions with the project team took place related to the type of design work that this subcontractor would be doing. This subcontractor was stamping drawings in connection with foundation work for a large new construction project. After determining that there was significant exposure related to a potential error in the subcontractor’s design work, we determined the proper course of action was to reject the certificate and require the subcontractor provide a professional liability policy. The subcontractor’s agent did not agree with our interpretation of the endorsement, so a conference call was set up to discuss it.
As the endorsement in question was discussed, the subcontractor’s agent (who was a national broker) explained that the underwriter stated this endorsement provided coverage for design work related to their construction projects. Our client pointed out that the endorsement contained the following exclusionary language:
“Providing…architectural, engineering, or surveying services in connection with construction work any insured performs.”
This language clearly excludes all engineering work, even if the insured is the one performing the construction work. After additional back and forth with the subcontractor, the agent, and their carrier, we all agreed that this endorsement did not provide coverage for the professional services that the subcontractor was providing on this job or that they routinely provided for work as part of other contracts. As a result of our collaboration with our client’s risk management and project team, we were able to ensure proper professional liability coverage was put in place for this job.
Construction is a specialized industry that poses substantial risks to everyone involved in it. Contractors need to partner with an agency who understands their business and the risks they face day in and day out. McConkey’s Construction Division focuses on learning the nuances of their client’s business then educating them on how to best manage that risk through proactive loss control and innovative methods of loss funding. For more information, contact:
Tim Ziegler, CRIS
Business Insurance Executive