After all your planning, estimating, bidding and hard work, the General Contractor’s Compliance Department says you are not getting paid.
Why? Your insurance doesn’t match their requirements. You call your insurance agent and they say- what?
How does this happen? Typically it is a breakdown between your contract obligations and the insurance that you purchased.
It’s Just a Certificate of Insurance
Insurance is difficult to understand and a high expense factor to your business. Many contractors believe that as long as they have general liability and workers’ compensation coverage that is then put onto a Certificate and sent to the general contractor that they have complied with their contract. That is simply not true. A Certificate is a reflection of the coverage purchased by you. The insurance agent you work with must have specialized knowledge about the insurance needs of contractors. The agent must be able to communicate that to you properly and you must purchase insurance that matches what you are agreeing to in the contract. It doesn’t do any good to demand that specific language appear on the Certificate unless it is supported by the insurance policy. Some insurance agents will put anything on a Certificate to keep their client happy. That works short-term but if a construction defect claim arises, you could lose your business trying to pay the defense costs for the General after the insurance company denies the claim. The Certificate is a summary sheet – the important part is what is attached to the Certificate, such as the Additional Insured endorsement. An endorsement is a change to the insurance policy and without that information, the Certificate is useless.
It Starts With The Contract
Check the bid specification requirements to see if the General Contractor has listed any insurance requirements. Your submission should show the types of insurance coverage you carry, including the limits of insurance; the additional insured endorsement that you can provide; primary and non-contributory liability insurance; waiver of subrogation on the general liability policy.
After you receive the work order, review the insurance requirements section. Send a copy of the requirements to your insurance agent and have a discussion. After you do this a few times, it will get easier, I promise. Check the insurance documents to verify that they match the contract (NOT just the Certificate).
Liability Insurance Requirements in the Contract
This term means that if the GC and/or Owner get sued by an injured party as a result of the job or because the ultimate proper owner claims the property is defective as a result of the work performed, you will pay the attorney fees, court costs and any damages won by the plaintiff get to come out of your pocket. But you have insurance right? Well, sort of. One hundred percent of the time, you are agreeing to pay for every type of situation and you purchase insurance with many exclusions removing coverage. For example: a subcontractor brings a fuel tank to the job site. A worker runs into the tank with their forklift, turning the tank over and allowing fuel to run out. Even if you are NOT the party that caused this mess, you may very well be called upon to pay the clean up expenses. This particular claim cost more than $900,000 to clean up and all of the subcontractors shared in the expense on behalf of the GC and Owner. Your general liability insurance will NOT pay for this claim. You will.
Additional Insured – General Liability Insurance
Often the construction contract will require a specific endorsement, CG 20 10 11 85. This November, 1985 edition date is not always available. You insurance agent will have to place coverage with an insurance company willing to offer this coverage. That will almost never happen if you are performing residential work, but can happen if you are a commercial work contractor. Caution: because this endorsement is not common, it means you have limited access to the insurance marketplace and your insurance premium will go up.
I spoke with an insurance agent earlier this week who was trying to cope with an Additional Insured requirement that stated the following:
“The ownership entities of all projects under contract and their respective assignees, members, partners, shareholders, directors, officers, employees, construction consultants, and agents are additional insured solely in regard to work/services provided by the named insured.”
The insurance company was unwilling to add this language to the subcontractor’s general liability coverage and the GC was holding up a $40,000 payment until they received a Certificate with that wording. Look at it this way, you are being asked to hand your insurance coverage over to the GC AND whoever is their construction consultants and agents. This makes no sense. The first call by the insurance agent to the GC resulted in the agent being told – ‘what’s your problem – we get this wording all the time’ but could not provide a copy of an endorsement where this had actually happened. The agent then asked for a copy of the construction agreement and upon discovering the requirement was not in the contract, called the GC’s office again and pointed this out; the requirement was removed and the contractor received their payment.
This situation could have been avoided entirely by a review of the insurance requirements by the contractor with their insurance agent both of whom would have known what to do.
Hire a knowledgeable insurance agent with expertise in construction. Have a discussion with the agent about the type of requirements that you are agreeing to in your construction contracts. Buy insurance that matches those requirements as closely as possible.
Marjorie Segale (AFIS, CISC, RPLM, CIC, CRIS, ACSR, CISR)