Does your contractor's insurance protect you?

If your company uses contractors to provide services, materials and/or labor, it has a liability exposure arising from the contractors' performance of the work. The liability exposure frequently arises when a third party (for example, a contractor's employee) performs work on a job site you own or control. If the contractor's employee or another third party is injured on the job site, he or she can sue your company under several theories of liability.

Often, the claimant will allege that your company negligently maintained the work site, thereby causing the injury. The suit will add you as an additional deep pocket defendant. If the claimant is a contractor's employee, the claim against you will circumvent the limitations on a recovery imposed by workers' compensation.

Your objective is to manage this risk of loss by transferring it to the contractor who is directly responsible for the work site, the work and its employees. This transfer of risk can be accomplished by requiring the contractor to add your company, by endorsement, as an additional insured to its general liability policy.

The following is an example of a situation in which an additional insured endorsement on your contractor's general liability policy is needed and what it would accomplish:

Your company is a manufacturer. It contracts with a general contractor to perform maintenance on heavy equipment in your plant during downturns. The general contractor has complete control over the work site and is responsible for getting the work completed. It subcontracts some of the work.

A subcontractor's employee is seriously injured on the job site when he trips and falls. He alleges a known defect in the floor and that your company was negligent by failing to warn and/or to correct a known hazardous condition. The employee files a workers' compensation claim against his/her employer and a lawsuit against your company and the general contractor.

If your company required the general contractor and/or the subcontractor to name it as an additional insured in regard to claims arising from the performance of the work, you would be covered. The contractor's and/or subcontractor's general liability insurer would be required to assume your company's defense and indemnify it for liability.

Your company should specifically request additional insured status during negotiations and at renewal of the contract. Satisfaction of the insurance requirements should be a condition precedent to executing or renewing a binding contract. Additional insured status must be added by endorsement to the contractor's policy and evidenced by a certificate of insurance naming your company as an additional insured.

A copy of the policy containing the endorsement and the certificate of insurance should be obtained to confirm compliance and retained to enforce coverage. When the contractor's insurance policy is renewed, your company should obtain updated policies, endorsements and certificates. In addition, your company should require the general contractor and all subcontractors to carry sufficient coverage for property damage and personal injury liability and to be insured with an acceptable insurer.

Additional insured coverage is not a substitute for your company having its own general liability insurance policy.

Your company's insurance coverage, liability exposures and the potential to transfer risks through additional insured endorsements should regularly be reviewed. Your insurance agent/broker, legal counsel, contract administrators and internal risk management/insurance professionals should all be involved. If opportunities exist for an economical transfer of risk, a team approach is needed to implement and manage an effective program.

—Richard G. Witkowski