There is a contractual issue and an insurance issue which, together, combine to create a “perfect storm” liability exposure for Owners/Developers and Contractors.
The exposure begins with the contracts you sign. Most state the contractor’s liability under the contract is not limited by the insurance coverage limits specified.
This exposure is then magnified by the fact that in many insurance policies the additional insured endorsements now contain wording to the effect that the additional insureds are covered for the lesser of the policy limit or the limit specified in the contract.
This “perfect storm” creates a potential uninsured risk to each of you.
For example, as a contractor:
- You are required by contract to add the Owner/Developer or GC as an additional insured to your Liability policies. You do so.
- That contract requires you to maintain a limit of $1,000,000. Since your insurance policies provide you with a total of $5,000,000 you feel you are fully protected.
- Then there is a loss, due to your negligence, totaling $1,500,000. This is when you find out that things may not be so fine.
- Your policy contained one of those additional insured limiting endorsements. The additional insureds would therefore only be covered by your policy for the first $1,000,000 as required by the contract. However, under that contract you are still required to defend and indemnify the additional insureds for the full loss. Where are you covering them for the next $500,000? Take a guess. That’s right – it would be out of your own pocket!
As the Owner/Developer or GC under the above example:
- Are you ready to place your fate in the hands of the contractor’s ability to self-fund any losses beyond the insurance limits required in the contract?
- Sure, you have your own insurance as the ultimate protection. However, any claims paid will negatively impact your premiums for the next 5 years. The increased cost could hurt your ability to compete for jobs.
The solution is simple and would add no additional cost to his bid. First, make sure you are requiring a limit which is sufficient for the exposure. Next, check the limit the contractor is showing on his certificate of insurance. If his available limit is higher, change the contract to match that limit. Example: You feel the exposure requires a limit of $1,000,000. The contractor’s certificate of insurance shows he has a limit of $5,000,000. You then change the contract to require a limit of $5,000,000.
Also make sure to ask about Risk Rocket! Risk Rocket is our insurance verification and analysis system designed for General Contractors, Developers and Real Estate Owners that do not want to rely solely on the Certificates of Insurance their Sub Contractors or Contractors provide.
Photo by Clark Young on Unsplash 
