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Subcontractors and Liability Protection

Posted 10/1/2019

By R. Bruce Wright, CPCU

One commonly used method to transfer risk and avoid liability claims is the  hiring of outside providers, or subcontractors, to handle specialty work or technically challenging tasks.

But finding and hiring the contractor is just the first step in protecting your company’s assets against liability claims. Even after you have taken bids, done your “due diligence” on the bidders’ backgrounds, and made the contract award, there is more work to do. Here’s a basic list of additional issues that need attention every time you hire a subcontractor.

Have we executed a good written contract? Your local attorney should be involved in every contract. We encourage our clients to have properly executed written contracts for every project that is subcontracted, and not to use “roll over” or “evergreen”  contracts even if there is a continuing relationship with the provider. The specifications should pertain directly to the work being contracted for and describe it in clear and comprehensive language. Doing so can prevent questions of fact later on with regard to the scope and nature of the work if something goes wrong. 

For example, ROW work is frequently subcontracted. The contracts should not simply set a cost per mile and delineate the areas to be cleared, but should also include guidance on all foreseeable eventualities. Here’s one example drawn from the claims history: What do you expect the contractor to do if obstacles like locked fence gates block access to areas that are to be trimmed or cleared? The contract should spell out clearly who at the utility the contractor must notify, and the timeframes for such notice, anytime an obstacle is encountered. It is instructive to note that some years ago we had a case where a ROW contractor was blocked by a padlocked gate. The landowner did not live there and could not be reached, so the contract crew skipped that section and continued on to the next accessible portion of the circuit. Eventually, a tenant’s child contacted a line while climbing a tree in the back yard, a tree with branches that extended into the lines due to the lack of trimming in that area. The contract for the ROW work was silent on the issue of blocked access and as a result the utility ended up with the claim. 

A related issue is the fact that the contract should set out a requirement for provision of a current Certificate of Insurance (COI) for the utility to keep on file. Insurance carriers and their agents typically provide COIs as a service to anyone who is a customer of their insured. They are used to being asked for this documents to prove the fact that insurance is in force and the limits provided. What happens if there is no insurance coverage available for the contractor, or if the limits of the policy are too low to cover the loss? Who do you think will be required to come up with the missing funds? If you said the money will come from the hiring company's policy, you are exactly right!

Another element of a good contract is a solid “hold harmless” and indemnity clause in favor of the utility. These clauses make clear that the contractor is responsible for any damage done as a result of his, his company’s, and its employees' actions, and that the contractor will secure the hiring utility from any claims of loss or damage that arise from such actions. 

These clauses are further buttressed by another requirement known as an “Additional Insured Endorsement.” These too are routinely provided to contractors’ clients who request them at no additional cost to the contractor. They simple state that for the purposes of the specified insurance policy, during the project described the hiring company (in our case the utility hiring the contractor) will be treated as an insured entity by the contractor’s carrier. This makes clear the intent of the hold harmless while giving you, the contracting utility, rights under the contractors policy. These include the right to directly report and present claims without having to go through the contractor. 

Finally, even if you do all of this properly, note that in order to preserve your rights under a contract it is critical to ensure that any changes to the agreement be made in writing, acknowledged by both parties. If you voluntarily waive a requirement of the contract, in writing or orally, you open yourself up to voiding other requirement of the contract. Exercise your rights as the contract calls for. If the contract gives you the right to inspect the work, you should actually do so. If it says you will require subcontractors to meet your safety rules, you should do so. And if it says that any changes to the contract must be in writing, you should refuse oral efforts to make changes. If not, you may have waived the rights. And failing to enforce your rights may leave you with no rights left at all!