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Construction Insurance: Know the Basics of Contractual Risk Transfer

As the contractor on a construction project, you face a multitude of serious risks. When you start bringing subcontractors into the project, those risks go up exponentially.


As the contractor on a construction project, you face a multitude of serious risks. When you start bringing subcontractors into the project, those risks go up exponentially. Suddenly you could be exposed to liabilities for damages or injuries caused by those subcontractors working on your behalf, whether it’s an injury to one of the sub’s employees, an injury to a site visitor, or some type of property damage.

And that could spell disaster – for the project, your profits, and your public image.

That’s why it’s imperative to protect yourself and your business from these exposures with a robust risk transfer best practice strategy – and one of the most crucial pieces of that strategy is the contract with your subcontractors.

Contractual risk transfer is the practice of assuring in writing that liability is shared appropriately and formally between two parties. Typically one party agrees to indemnify and hold another party harmless for specified actions, inactions, injuries, or damages. This method meets both the risk financing objective of finding an appropriate source to pay the cost of a claim and the risk control objective of developing a means to avoid or lessen the cost of a loss.

The basic idea is to transfer the financial burden of a loss to the party that is best able to control or prevent the loss. In this case, that’s the subcontractor directly and actively participating in the activity. If the subcontractor is in the best position to prevent or avoid the loss in the first place, they should be contractually required to protect the supervising or non-participating party (the contractor or general contractor) from financial loss from an injury or damage.

To transfer these risks appropriately, make sure you’re following some best practices:

Require a written contract with every sub before they begin working for you. The contract should include indemnification and hold harmless language appropriate to your state in addition to safety language, and an insurance section that clearly states the minimum limits and coverages required from your subcontractor. Make sure you have someone who is properly trained to be responsible for the insurance program, including monitoring endorsements, exclusions, certificates of insurance, limits, effective dates, and carrier ratings to make sure specified requirements are being met. If you are the sub-tractor make sure that the risk transfer is not unfair or includes work you are sharing with others or not performing.

Request, confirm receipt and file Certificates of Insurance and any necessary endorsement forms from all subcontractors before work begins.

Specify insurance requirements by line of coverage:

  • Your subcontractor contracts should require subs to name the GC, owner, and indemnitees as additional insureds on their general liability and any umbrella policies. This coverage should include completed operations, not just ongoing operations.
  • For commercial business auto coverage, request that your subcontractors provide an occurrence basis covering all owned, non-owned, and hired vehicles; primary and non-contributory wording; and an endorsement listing the owner and GC as additional insureds. 
  • Workers’ compensation coverage should be required of all subcontractors before work begins. Make sure the subcontractors aren’t excluding an employee who is actively involved in the work, because if an injury occurs to an excluded worker, your own workers’ comp policy could be on the hook – and you could even face a costly civil lawsuit.

When you’re taking on a new project, it’s critical to fully understand both the risks you have to assume and those you’re attempting to transfer. Although the best practices above don’t represent an all-inclusive list, they are some of the most crucial pieces of the risk transfer puzzle when establishing contracts with your subs.

Need more advice about effectively transferring risk and protecting your bottom line when working with subcontractors? Talk to a FICOH independent agent today about our specialized construction insurance programs.