Commentary: Commercial general liability insurance: The

(This article originally appeared in North Carolina Lawyers Weekly, a sister publication.)

Contractors: Think your insurance will protect you from your subcontractors' mistakes? Think again.

For decades, general contractors and trade contractors who subcontracted work could rely on their Commercial General Liability Policy to protect them from project damage caused by negligent subcontractors. Now, Insurance Services Office Inc. has released an endorsement that may eliminate coverage for work done by subcontractors.

The endorsement's title speaks for itself: Exclusion-Damage To Work Performed By Subcontractors On Your Behalf. Take the following familiar example:

A contractor is successful in his/her bid to construct a major water treatment facility for the U.S. government. This contractor chooses to subcontract all of the water valve work for the project with a very reputable subcontractor. It is later discovered that all of the piping is defective and must be replaced, causing significant delay to the completion of the project.

Typically, contractors in the above situation can rest easy knowing that their insurance policies will protect against faulty subcontractor work. Unfortunately, applying the ISO's endorsement to the above situation results in the contractor paying for its subcontractor's mistakes.

How the change affects contractors

The standard CGL policy contains a your work exclusion, as it has come to be called, that excludes coverage for certain property damage caused by the contractor. In 1969, the Broad Form Property Damage Endorsement was introduced, creating an exception to the your work exclusion if the property damage was caused by work performed by a subcontractor. In 1986, the standard CGL policy was amended to include this popular endorsement, and the overall result of this exception was that a contractor would be absolved of certain subcontractor negligence as follows:

2. Exclusions 1. Damage To Your Work

Property damage to your work arising out of it or any part of it and included in the products-completed operations hazard.

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

The ISO endorsement, applicable to the CG Standard Policy 22 94 10 01, removed the above exception to the exclusion language, resulting in no coverage for subcontractor negligence. An endorsement has also been released for Standard Insurance Policy CG 22 95 10 01, which eliminates similar coverage but limits the exclusion to specific sites or operations listed in the endorsement schedule by the insurance provider. In both instances, insurance providers appear to have taken a major step back from protecting contractors.

How contractors can protect themselves

As so much work today is subcontracted, it is necessary for contractors to take pro-active steps to help manage these risks. One option is to purchase additional insurance. It is almost impossible for a residential general contractor to get coverage for their subcontractor's negligent work. This is, in part, because one insurance company provides about 75 percent of the insurance coverage to residential contractors, and its standard policy contains the new endorsement.

Commercial general contractors probably can purchase additional coverage for subcontractor negligence. However, because this extra coverage will most likely be expensive, some insurance agents are recommending contractors go to the source of the risk - their subcontractors. For example, the following suggestions have been adopted, in part, from a Special Bulletin written by the SIA Group Seashore Insurance & Associates Inc. in Jacksonville, N.C.

The best defense is to make sure that certain requirements are met when entering into a contract with a subcontractor. First, the contractor should require its subcontractor to carry its own insurance. Minimum acceptable policy limits should be specified in any subcontractor contract, and these minimum coverage requirements should reflect the size and scope of the project.

To ensure continued compliance, the contractor should request periodic insurance certificates from its subcontractor showing that its coverage is current. Additionally, contractors should specify in the contract that the subcontractor's general liability coverage is the primary coverage for the project. This will reduce the general contractor's coverage to excess coverage - meaning it won't come into play unless the subcontractor's coverage is exhausted.

If the local law permits, contractors should consider a subcontractor indemnity agreement as an additional option. This is basically a promise by the subcontractor to reimburse the contractor for any money the contractor is forced to pay to the owner because of the subcontractor's negligence. Most importantly, general contractors should also have all of their contracts reviewed to make sure that their policy meets their insurance needs.

While no contractual provisions can prevent mistakes, these and other practices can assist in shifting risk and protecing our clients from paying for the negligence of others.

William A. Oden III practices in the New Bern, N.C., office of Ward & Smith, handling civil litigation in both the federal and state courts with an emphasis in labor and employment law and construction litigation. He received an M.B.A. and J.D. in 2004 from Campbell University, where he was on the moot court trial team and the business editor of the Campbell Law Review.

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