by Matthew A. Struck, CPCU, ARM – June 22, 2017

So you’ve decided to hire an outside contractor.  Now comes the easy part…bidding the job, judging the qualifications of the respondents, and determining how to protect yourself and your organization if something goes wrong once the contractor is working.  Ignoring the sarcasm, not all contracts with outside parties are created equal and neither are the insurance requirements that should be included.

For Starters: 

  • Definitely include an attorney in the drafting of the contract
  • Don’t solely rely on the attorney’s insurance recommendations – they are very intelligent but nothing is a good substitute for a great broker/risk manager in this area
  • Include your broker/risk management professional in the process before the contract is signed
  • When available, use standard insurance requirements as a starting point…every job is unique and so are the insurance and risk management considerations!

What can’t I just communicate the insurance requirements to the contractor after the bidding or selection process is done?  Types of insurance coverage, limits, and the claims history of contractors can make it difficult for some contractors to comply.  This isn’t necessarily a bad thing because it makes sure that the contractors that meet the requirements are qualified and have the necessary insurance coverage already in place (or can easily acquire it prior to the contract start date).  If you wait to communicate the requirements, you may have wasted time awarding a contract to someone who can’t perform it.  In addition, certain requirements within insurance policies require that the requirements placed on the contractor are memorialized in a contract signed by both parties.  Omitting insurance requirements from a contract could invalidate the contractor’s coverage…and that means you may be paying!

What is a Hold Harmless and Indemnification Agreement?  Transferring the risk of loss to another entity by contract requires 2 separate and distinct elements.  The Hold Harmless and Indemnification section (and yes it should be separate from the insurance requirements) is the trigger for transferring the risk.  It contractually requires the other party to cover any claims associated with their work and agrees to cover any related damages that may be levied against you.  The insurance requirements then identify the required types of coverage the contractor should carry to fund that commitment.  Both should always be included in any contract with an outside entity doing work on your behalf. 

What Insurance Requirements Should I Include Every Time? 

Unsure of what insurance your contractor should have on their certificate?  Or are you a contractor that wants to know what insurance is reasonable for your clients to require? Follow this link to see our standard certificate of liability coverage recommendations.

Additional Notes on Contracts:

  • Always include Job Safety and Daily/Final Cleanup in the contract requirements
  • Always request a copy of the additional insured endorsement to verify the type
  • Maintain work orders and po’s in the project file to document what contractors are on-site, what work they are performing, and when; just in case of a claim results where it is unclear whose work may have contributed to the loss
  • Keep documentation for at least 10 years to meet the statute of repose (ignore state filing requirements that may be shorter as the federal statute of repose may apply)
  • Pay attention to the type of Indemnification Agreements/Clauses that are being used:
    • Broad – Not enforceable in NJ – indemnifies even if the party being indemnified is 100% liable
    • Intermediate – Best case in NJ – indemnification unless the party being indemnified is 100% liable
    • Limited – Most basic – indemnification to the extent the indemnitor is liable (pro-rata)