Unlike Books, It’s Okay to Judge a Subcontractor by Its Cover(age)

Prequalifying subcontractors to confirm they are qualified and capable of performing their scope of work on the project should be a common practice of general contractors. Creating and implementing a program requiring proof of compliance with the general contractor’s prequalification program is not only prudent, but may also be required by its commercial general liability (CGL) policy as a precondition to coverage.

Prequalification programs will vary based on a variety of factors, such as the type of work the company performs, the company size, the subcontractors and the scope of work on each project. Generally, a prequalification program should require documentation showing the subcontractor signed an indemnity agreement, proof of insurance displaying the general contractor listed as an additional insured, proof the subcontractor is properly licensed and certified to perform the work as required by law and proof the subcontractor has appropriate insurance coverage (e.g., general liability, auto liability, workers’ compensation, etc.). The construction subcontract should clearly identify these requirements so the subcontractor is aware of its duties early on and its efforts to obtain these records do not delay the project. Upon receipt, the general contractor should maintain these records as long as the CGL policy requires.

General contractors should consider maintaining these records at least a few years after the completion of the project even if their CGL policy does not require record preservation as a precondition to coverage. To properly enforce a prequalification program, the company must collect and maintain these records and make sure the documents provided reflect compliance with the terms of the subcontract. For instance, merely requiring proof of insurance showing the company is an additional insured on an insurance policy does not mean the subcontractor obtained adequate insurance coverage. There are a variety of additional insured endorsements and exclusions that may modify or alter the scope of coverage. After receiving the records, the company must then vet the records to ensure proper compliance.

CONFIRMING THE SUBCONTRACTOR ADDED THE GENERAL CONTRACTOR AS AN ADDITIONAL INSURED

The construction subcontract should specify the additional insured endorsement and minimum limits the subcontractors must attain for the project. To ensure compliance, the general contractor should require the subcontractor to provide proof it obtained the agreed upon coverage by furnishing a copy of the declarations page and the additional insured endorsement listing the company as an additional insured. Some CGL policies require the insured to obtain a certificate of insurance from its subcontractors or independent contractors showing they listed the general contractor as an additional insured on the policy and obtained the appropriate minimum limits. If the company’s insurer requires proof through a COI, it is still recommended to acquire a copy of the declarations page and additional insured endorsement because a COI may not accurately reflect the additional insured coverage and does not create coverage.

CoNFIRMING THE SUBCONTRACTOR PURCHASED THE AGREED UPON COVERAGE

Coverage can vary drastically depending on the language in the additional insured endorsement. Generally speaking, most insurers use Insurance Services Office CGL forms for primary layers of coverage, including either CG 00 01 (occurrence) form or CG 00 02 (claims made) form. General contractors must confirm the endorsement properly reflects the coverage agreed to in the contract. At a minimum, they should require their subcontractors procure additional insured coverage for bodily injury and property damage claims arising out of the subcontractor’s negligence. Additionally, they should confirm the additional insured coverage satisfies the agreed upon limits of liability set forth in the construction agreement. Failure to do so could result in potential gaps in coverage and violate the terms of the company’s CGL policy.

UNDERSTANDING THE LANGUAGE AND EXCLUSION(S) IN THE ENDORSEMENT

The specific language of the additional insured endorsement is critical. For example, the language in the newer ISO additional insured endorsements covering liability for injury “caused, in whole or in part” by the named insured’s acts are almost universally interpreted more narrowly than the “arising out of” language from prior iterations of the ISO additional insured endorsement. As evidenced by, American Guarantee and Liability Insurance Co. v. Norfolk Southern Railway Co., 2017 U.S. Dist. LEXIS 178808, *20-21 (E.D. Tenn. Oct. 6, 2017), and Burlington Insurance Co. v. New York City Transit Authority, 79 N.E. 3d 477, 485 (Ct. App. N.Y. Jun. 6, 2017), more and more courts interpret the “caused, in whole or in part” language to prevent coverage for the additional insured when the additional insured was the sole cause of liability.

General contractors should also identify applicable exclusions in the additional insured endorsement and ensure they do not stray from the terms of the construction subcontract. For instance, some additional insured endorsements may include a “care, custody, or control” exclusion eliminating coverage for damage to property within the general contractor’s care, custody or control. Most recently, in McMillin Homes Construction, Inc. v. National Fire and Marine Insurance Co., 247 Cal. Rptr. 3d 825 (Cal. Ct. App. Jun. 5, 2019), the court ruled this exclusion required exclusive control over the site as opposed to shared control and held it did not bar coverage for the general contractor. Although the California court interpreted the exclusion this way, it is important to know other states may interpret the exclusion differently.

PROTECTING COMPANY INTERESTS IN THE EVENT OF A LOSS OR CLAIM

As an additional insured, general contractors receive direct rights under a subcontractor’s policy. Depending on the language of the additional insured endorsement, the company’s rights, exclusions and duties will be different than those of the subcontractor. The subcontractor’s policy will specify certain actions and duties the insured must comply with after a loss, which generally require cooperation and timely notice. Be aware of these duties and, in the event of a loss, claim or occurrence, take adequate steps to establish compliance with the terms of the policy.

Some of the documentation general contractors should request as part of its prequalification program may be more extensive than confirming compliance with the additional insured requirements. For instance, proof of requisite insurance, certifications and licensure may warrant additional considerations and follow up.

Creating and implementing a prequalification program is essential to protect the company in the years to come. Not only does it confirm the subcontractors on a general contractor’s current project comply with the terms of the contract, but it also may be required by the company’s CGL as a precondition to coverage.