June 28, 2023

You Thought You Were Insured? The Hidden Dangers Every Contractor Needs to Know

Many contractors believe that if they hire subcontractors to help with the work, they won't be held responsible if a subcontractor employee gets hurt or even dies on the job.

But that's not always the case. This belief is a common misconception, and even if the contractor does everything right, they could still face serious problems if something goes wrong.

Unfortunately, based on this misconception, many contractors decide to be less engaged with their subcontractors regarding safety. 

The hard truth is that even when a contractor is fully insured, has obtained adequate proof of insurance from subcontractors, and has implemented solid agreements, they can still face significant financial repercussions. The repercussions can be harsh if an employee of a subcontractor suffers a severe injury leading to long-term disability or, in the most tragic circumstances, death. Contractors inherently shoulder the risk associated with their subcontractors.

It's time to clear up the misunderstanding that insurance and agreements completely shield contractors from problems if a subcontractor gets hurt on the job. It's important to understand that real risks exist as a construction site manager. We will delve into these risks and show you ways to lessen them.

We sought insights from construction insurance and risk management veteran Bill McIntyre to clarify this complex issue. Mr. McIntyre is the Chairman of the American Contractors Insurance Group Ltd. (ACIG) and the International Risk Management Institute, Inc. (IRMI). The National Safety Council (NSC) acknowledged his commitment to safety when they recognized him as one of the nine “CEOs Who ‘Get It’” in 2015. With his invaluable knowledge and extensive experience, Mr. McIntyre provides an expert perspective on the nuanced risks contractors may face.

Two insurance policies will respond when dealing with a construction injury or death: workers' compensation and general liability. 

Let's start with understanding workers' compensation. Suppose a subcontractor has a workers' compensation policy. That policy will be the first to cover any costs if a worker gets hurt. This means the subcontractor's policy pays for any injury-related expenses. It's worth noting that workers' compensation usually covers all of an employee's medical bills and lost wages, with no set limit. So, if an injury triggers a subcontractor's workers' compensation policy, it should completely cover the cost of that claim.

However, situations can quickly become problematic without adequate workers' compensation coverage for subcontractors and proper subcontract agreements.

“It’s critical [for contractors] to get insurance certificates to see if a subcontractor has worker’s compensation coverage,” said McIntyre. “If they don't, and you have an uninsured subcontractor, based on the state, it's likely that the contractor's workers' compensation policy will have to pay.” 1

The takeaway here is simple yet vital. As a contractor, you should always ensure that you’ve signed a proper subcontractor agreement, your subcontractors have a worker's compensation policy, and that it's paid for. Without them, any claims from an accident could directly affect your policy, burdening you with direct and indirect workers' compensation costs.

Speaking to this point, McIntyre further clarifies the potential implications. “The insurance companies may come in and ask for proof of subcontractor workers' compensation coverage, and if they don't find it, they may charge the contractor additional premiums on that subcontractor,” he warns. 

The silver lining here, as McIntyre underscores, is that if contractors meticulously confirm that all their subcontractors have workers' compensation policies in place, the likelihood of the contractor's workers' compensation insurance having to pay for a subcontractor's employee injury becomes exceedingly rare.

“I would say that for the construction industry, probably less than one percent of the claims involve that scenario.” Hence, the extra diligence in confirming insurance coverage can ultimately pay off, shielding contractors from unexpected workers' compensation costs.

Here’s the big question: If a contractor confirms that all subcontractors carry valid workers' compensation insurance, why should a contractor be concerned about injuries to subcontractor employees? Why should a contractor exert additional effort and expense to support jobsite safety for subcontractors?

Enter injury lawyers, lawsuits, and general liability insurance coverage. 

McIntyre says, “Even if a contractor does everything right and a subcontractor gets injured on the contractor’s jobsite, can the contractor end up paying for the loss? The answer is yes.”

McIntyre explains why, “So the contractor, if everything goes according to best principles, will have an agreement with the owner that adds the owner to their general liability policy as an additional insured. And we will also have an indemnity agreement, typically the broadest permitted by that particular state. The additional insured and indemnification agreements ensure the owner will not be responsible or pay for any accidents on the jobsite. 

The contractor would have similar additional insured and indemnification agreements with subcontractors, so contractors won’t be responsible for subcontractor accidents unless the contractor was a negligent participant. 

With these agreements in place, the stage is set. Now what happens if a subcontractor injury occurs? 

If an accident injures a subcontractor employee on the contractor's jobsite, the employee will likely sue the upstream parties, the contractor, and the owner. 

The owner will hand the lawsuit to the contractor and subcontractor. So if the contractor tenders the claim down to the sub. And the contractor only requires that subcontractor to have $2 million worth of liability coverage. And the subcontractor has an additional insured endorsement that says insurance is limited to the amount required under the contract, which is $2 million. And the claim is for $5 million. There's only going to be $2 million worth of coverage for both the contractor and the owner resulting in a shortfall of $3 million.” 

Who pays for the shortfall? The contractor’s general liability insurance will end up paying for the $3 million shortfall. 

McIntyre explains how big General liability claims can be. “Typically a liability claim can be about three times the workers' compensation claim cost. So if the claim is worth, pick a number,  a million dollars, then they will collect $3 million if not more than that.”

In some cases, if a worker dies or lives with a disability for the remainder of his life, claims can be as high as $20 Million or more.

To summarize, there are three reasons why a contractor may end up on the hook for general liability claims due to subcontractor injury or death. 
  1. The subcontractor's general liability policy doesn’t have enough money to cover the whole claim. 
  2. The specific details of the claim prevent it from being covered under the subcontractor's general liability policy.

For example, McIntyre explains, “We've seen [subcontractor] policies that are almost impossible to collect on. Provisions in that subcontractor's policy basically say you're covered as long as the [incident] is at midnight on Tuesday and you have a Red Rooster on your left shoulder, not your right shoulder.”

  1. The insurance company providing the workers' compensation policy is a bad actor and will deny most claims. 
But how often does it happen where a contractor’s general liability policy will have to pick up a portion of the claim? 

Bill McIntyre explains, “A contractor does a lot of tendering. And I would say that probably 80% of our claims go smoothly. Although we may need to spend fifty to one hundred thousand dollars to force an insurance company covering the subcontractors to finally pick up the coverage. But even then, they're going to issue you a letter with reservations, and they're going to outline that if these things are included or happen, or we find out about them, you may not have coverage. So if you've got a $5 million claim out there, the insurance company may not pay it.”

McIntyre explains the unseen side effects of a big general liability claim: 

“If you're trying to borrow money and the banks do their due diligence, and you have a claim outstanding, that may impede your ability to borrow money or get surety bonded,” he said. “So you're going to stay up at night worrying about it, your banker may hold back the line, and so is your surety company. So, all those are not good things to be involved with. A lot of times, it goes well, and if you're an optimist, you think it will always go well. But, that's like saying every job you bid, you're going to make money.”

McIntyre explains, “One thing that's not covered by insurance is damage to your reputation. If you have a bad claim, that's going to impact your relationships with that owner.” 

“If you have a loss and there's bad press, it can potentially affect the desirability of you as a contractor to some of these owners. Nobody wants to do business with somebody that's just had a big loss,” he said.

One thing that's not covered by insurance is damage to your reputation. If you have a bad claim, that's going to impact your relationships with that owner.

Here’s the big takeaway - no matter how well contractors button up insurance and agreements, contractors are 100% taking risk on their subcontractor employees.

McIntyre says, “You are responsible for your subcontractors, and if you think you're not, you're whistling Dixie. And, people say it's unfair, but that's life in the big city.”

It's clear that responsibility for a subcontractor employee’s safety ultimately lies with the upstream contractor, which can be costly. But how can contractors justify the additional expense incurred to ensure subcontractor safety? McIntyre offers some perspective.

“When you look at financial statements or contractors who have fewer losses, they make more money. And it really gets down to if you're having losses. It's an indication of other issues within your construction company. If you spend money to reduce the risk of your operations, you're also improving your profits by not having losses. It's not a matter of spending money just to reduce your losses. It's really spending money to have a better construction company.”

“If you do something wrong, whether it involves having an accident or improper quality, it takes 13 times the effort, which means it's also 13 times the expense to correct it versus installing it right in the first place, so if you don't have your $&%! together, how many things are you going to be not doing right out there? And, so, you want to do everything right out there to the best of your ability. And to say that you're saving money by not doing it… you're cutting corners. The graveyard is full of broke contractors that went that route.” 

So what can contractors do to manage subcontractor risk on their jobsites? 

“The best way is just not to have the claim in the first place,” says McIntyre. “What you want to do is have a completely, as much as possible, safe job site because if you have a bad claim out there, you're going to get sued. And over your lifetime as a contractor, you will have problems extracting money from these subcontractors and insurance companies. Or you extract it, and they won't have enough [money]. Or there are going to be contractual provisions in their insurance policies that preclude a full recovery to you as an additional insured. And unless you get their certificates and also get every insurance policy and read them line by line, this is what's going to happen. So, the best way to prevent problems is just not to have losses in the first place.”

Avoiding problems by ensuring safety might seem daunting, but McIntyre breaks it down into more tangible activities.

He emphasizes, for instance, disciplined pre-job planning, clear communication with all craft employees, ongoing safety training, and refreshers to keep relevant safety topics top of mind to increase the odds of a successful and safe project. 

“You want to communicate and have pre-job planning,” he said. “You want to make sure everyone knows what’s going on. Obviously, you don't want to have people having lunch underneath a crane, or even worse, a load being held by a crane,” McIntyre continued. “You want people to be aware of weather that's coming in.”

“It’s also critical to hire good subcontractors who also demonstrate a commitment to safety.”

It’s also critical to hire good subcontractors who also demonstrate a commitment to safety.

In the complicated and high-risk construction world, contractors bear a significant responsibility, not just for their work but also for the safety of subcontractors' employees working under them. The erroneous belief that insurance and agreements absolve them of all liability can result in significant financial and reputational consequences. As Bill McIntyre explains, effective risk management goes beyond securing the necessary insurance coverage. It requires a proactive approach to ensuring jobsite safety and carefully scrutinizing subcontractors' insurance policies. Ensuring safety is not just about avoiding losses but also contributing to running a better, more profitable construction company. Contractors must acknowledge the risks and take all necessary steps to mitigate them, fostering a culture of safety permeating every aspect of their operation, including their interactions with subcontractors. Understanding and implementing these insights can make all the difference between a thriving construction company and one constantly playing catch-up.

Key Takeaways:
  • Know the laws in the state where your company is doing work
  • Ask for documentation of all subcontractor's certificates of insurance.
  • Have proper subcontract agreements in place. 
  • Commit to having a safe jobsite – and ensure subcontractors participate.
  • Document all safety program activities, including training, jobsite onboardings, and communications.
  • Communicate jobsite information to all team members, including subcontractors. 

1 Four states (Alabama, Delaware, Iowa, Texas) don’t automatically require the contractor’s workers compensation policy to pick up the subcontractors workers compensation claim. But, certain conditions could exist in these states that would require the contractors workers compensation policy to respond. To understand your states specific workers compensation requirements, consider using IRMI Online.

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