October 30, 2019

Contract Best Practices for Transferring Risk Using Insurance Requirements

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myCOI Team, 

Per your advice, we have zeroed in on insurance compliance with our trade contractors and vendors as part of our new risk mitigation strategy. We review every Certificate of Insurance (COI) for the required coverages and keep all the signed contracts stored in the system. While our loss history is getting better, we still have room for improvement. Our next step is rewriting our contract, but we are not insurance experts. What coverages and clauses would you recommend we include with our third-party companies to minimize our risk exposure? 

This is one of the most frequent questions we get asked. Since risk is never totally avoidable, the best strategy is writing the contract to keep risk closest to the parties most likely to cause it – vendors and subcontractors. myCOI’s team of insurance experts have reviewed hundreds of customer contracts and thousands of COIs. Although it is always best to consult with your broker or legal counsel, our experts have compiled a list of common coverages best for keeping companies using third-parties safe and as far from risk as possible.  

Insurance: Minimum Required Coverages

It’s generally best-practice that these coverages be required of any trade contractor. The liability coverage amounts necessary may vary based on state requirements, property value or job risk. 

Commercial General Liability (CGL) – these policies provide business coverage for bodily injury, personal injury, and property damage caused by the operations and products of a business, or injury incurred on the business premises. The International Risk Management Institute (IRMI) recommends coverage amount requirements be set high enough to cover damages, medical expenses, and litigation judgements. 

Commercial Property – insures against damages to buildings or their contents due to a covered loss like fire. The policy also may cover loss of income or increased expenses resulting from the property damage. 

Workers’ Compensation and Employer’s Liability – this insurance policy covers an employer’s statutory liabilities under Workers’ Compensation laws and liability from employees’ work-related injuries. 

Automobile Liability – covers injuries or damages to third parties and their property caused by a driver operating a vehicle. Coverage should include all owned, hired and non-owned vehicles.

Professional Liability – protects against losses incurred from errors or omissions in professional work. Essentially, this provides protection should a subcontractor make a mistake resulting in a claim or litigation. 

Builders Risk – insurance protecting a person or organization’s materials, fixtures and equipment before or after installation during the construction of a building or structure. This coverage also is known as Course of Construction or Inland Marine coverage. 

Contractors Pollution Liability – covers companies in the event of bodily injury, property damage, and clean-up costs as a result of pollutants. 

Riggers Legal Liability – provides coverage for a contractor’s liability arising out of the moving of property or equipment that belongs to another party. 

Assurance: Endorsements for Risk Transfer

Endorsements extend insurance coverage from the named party to additional parties affiliated with the work or specify how the coverage applies in the event of a loss impacting multiple entities. While the insurance requirements above ensure the subcontractor is covered, the endorsements below dictate how those coverages impact the company hiring the subcontractor.   

Additional Insured – these are third parties (your company) added to the named insured’s (subcontractor) policy. The endorsement protects against claims from work performed by the named insured for the additional insured with coverage limited to specific jobs, activities or locations. Require the endorsement cover ongoing and completed subcontractor work for better risk mitigation.  

(For more in-depth information on additional insured endorsements and their impact on coverage, download our eBook <link>)

Primary and Non-Contributorythis endorsement specifies usage order when multiple policies get triggered by the same event. The clause should state that the subcontractor’s policy is primary to the loss without seeking contribution from the additional insured’s policy. 

Waiver of Subrogation – subrogation is a strategy used by insurance companies to recoup the money paid for a claim by legally pursuing payment from another party affiliated with the claim. This waiver prevents a subcontractor’s insurance provider from seeking reimbursement from the additional insured. 

Alternate Employer – this endorsement works in conjunction with the Workers’ Compensation and Employer’s Liability policy by extending a named insured’s coverage to the companies for which it works. 

This list is not exhaustive, but it is a great start for managing risk. If your contract does not require these items, work with an attorney and insurance agent for a rewrite before your next project. And as always, myCOI is here to help.

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