Are your subcontract agreements helping or hurting your business?
A strong, well-written subcontract agreement is a must for any good contractor.
A strong, well-written subcontract agreement is a must for any good contractor to remain profitable while maintaining good business relationships with their subcontractors. Too often this issue is not thoroughly discussed and reviewed up front. Instead, it's dealt with only when there's a claim and a question of liability at hand. Well-written contracts, with clearly defined responsibilities and appropriate insurance, can save a business relationship. When the unfortunate claim happens, it becomes a matter for two insurance companies to handle. Nevertheless, contractors can maintain good strong relationships with their subs and call on these partners during a time of need … which we all know can happen quite frequently in the contracting world.
How can you make sure your contracts are good for your business relationships and your profitability?
When reviewing a contract, look at these four things:
- The name on the contract should match the Named Insured(s) listed on the insurance policy.
- The Scope of Work and a Clear Definition of Responsibilities among the parties.
- Insurance requirements address adequate limits, appropriate endorsements and other specifics I included below.
- The Indemnification Section is clear and in favor of "ABC Company" (our insured or prospective insured).
Once these are in order, look for these insurance provisions:
- Additional Insured Endorsements, which extend coverage by allowing direct access to insurance policies. These should be written to cover both ongoing and completed operations. Completed operations coverage is essential, as the damage often occurs after the work is done and put to its intended use.
- Primary and Noncontributory language to address which insurance policy responds to the claim. Without this language, a subcontractors' insurer may only pay a portion of the claim, either on a pro-rata basis or excess basis.
- Waiver of Subrogation provision affirming that rights of subrogation against the insured are waived.
- Defense costs in addition to (or outside of) policy limits should be stated in the contract. While most CGL policies are written to meet this requirement, it should be affirmed in the contract because it's not usually reflected on the certificate of insurance. And if defense costs erode the limits, there may not be any money left to fund the actual damages as it was all spent to defend the claim.
- Financial stability of the insurer is critical because insurance is a "funding" mechanism to pay claims. The carrier should be admitted to do business in the state(s) where the work is performed and have an A.M. Best rating of A- or better. Non-admitted carriers with appropriate financial ratings may be acceptable; however, state insolvency funds may not provide a recovery source if the carrier becomes bankrupt.
- Evidence of insurance, or Certificates of Insurance, should be obtained and renewed for the duration of the agreement and the applicable statute of limitations for injuries/damages arising out of the work.
- Insurance requirements of contracted work, noting if any portion of the work is not self-performed and subcontractors are used, there should be identical insurance requirements for all parties hired by the subcontractor. Otherwise, your business may have vicarious liability for the actions of and work performed by others, even if you don't have a direct contractual relationship with them.
A well-written subcontract accompanied with the right insurance protection. Talk to your insurance agent to make sure your contracts fit your business needs.