Don’t overlook the need for subcontractor agreements

It’s alarming how often subcontractor agreements are disregarded by companies that subcontract work to vendors. The biggest exposure tends to be for contractors who subcontract work regularly. However, manufacturers, building owners and any other company that utilizes vendors or suppliers can also have this exposure.

“The importance of risk transfer is frequently overlooked by many industries. It is surprising how often businesses — particularly in construction — do not utilize subcontractor agreements. We often hear that a company has used the same subcontractor for many years and trusts them. However, the right risk transfer mechanisms have not been put in writing,” says Nate Bell, CIC, commercial insurance specialist at Zito Insurance Agency, Inc.

“The need for risk transfer is starting to be recognized, but has not become universal.”

Smart Business spoke with Bell about tools like subcontractor agreements to transfer risk.

How do subcontractor agreements work?
Subcontractor agreements outline the responsibilities of each party, to ensure that if a claim were to arise, the responsible party is accountable. A subcontractor agreement provides protection to the company that hired the vendor or subcontractor by transferring the risk back to the party performing the work.

There isn’t necessarily a template or standard subcontractor agreement. They are often written by the business’s attorney. The agreement should include hold harmless and indemnification language. Many insurance companies require that specific insurance form numbers be incorporated as well.

When a business subcontracts work to a third party, it should complete a signed subcontractor agreement and obtain a certificate of insurance from the subcontractor. This certificate should reflect that the hiring company is an additional insured and needs to be retained and updated annually.

Why have both indemnity language and additional insured status?
Indemnification contract language outlines which entity or entities would be responsible to provide compensation for injury, loss or damage.

An additional insured is an endorsement added to an insurance policy. The endorsement ensures that the business contracting work coverage is on the subcontractor’s insurance policy. It’s a mechanism to transfer risk.

Do insurance companies require subcontractor agreements?
Insurance companies regularly consider the implementation of subcontractor agreements when underwriting a business. While a company may not accept or reject a business based on its use of the agreements, businesses that utilize subcontractor agreements consistently see more favorable pricing. The same holds true for businesses keeping track of subcontractor certificates of insurance.

Where do you see companies make mistakes with certificates of insurance?
There are typically two concerns with information provided on certificates of insurance. The first is if the limits shown meet or exceed the coverage requirements outlined in the subcontractor agreement. These limits should be determined based on the extent and scope of the work performed, industry and size/assets of the company, among other variables. Therefore, it’s a good idea to have both an attorney and insurance agent review the agreement.

The second concern is verification that the additional insured endorsement is correctly in place and the business is not solely listed as a certificate holder.

When should a company have these documents in place?
It is key that subcontractor agreements and certificates of insurance be completed and obtained in advance of work being started. Getting these documents in place upfront prevents the need to chase down documents after work has started. More importantly, it ensures that the mechanisms to transfer risk are in place before it is too late.

Insights Business Insurance is brought to you by Zito Insurance Agency Inc.