Let’s imagine you’ve obtained a construction loan for $1.5 million to build a custom home for a professional person. To make it interesting, imagine the professional is a personal injury attorney.  Now, let’s say you are lining up the subcontractors to build the home for the lawyer and meet them at a bar to discuss the project over a few beers.  After several hours and more than a few beers, everyone has a clear idea of exactly what each is supposed to do and you seal the deal with a handshake.  Nothing is in writing, nor will it be put in writing.  You trust each other.  Your personal injury attorney/customer is a stand-up guy who wouldn’t dream of suing you if anything goes wrong.  Besides, what can go wrong when you’re building a custom home?

Believe it or not, we have had claims involving insured builders who were that trusting.  That’s why I decided to write this blog including links to previous pieces on much the same topic.  Please read what follows and review your practices and procedures.  Feel free to call us to discuss your general liability coverage needs at 866-454-2156.

  • Just to be clear, a General Contractor is in control of a construction project and is responsible for worksite safety.  The actual work is performed by subcontractors who are insured under their own general liability policies.
  • The General Contractor signs a contract with each subcontractor laying out all the specifics of the work to be performed on behalf of the General Contractor.  In terms of general liability, the most important parts of the contract are:
    • The indemnity agreement a.k.a. the “hold harmless” clause or agreement.  Here the subcontractor agrees to be primarily responsible for his/her own claims and to not look to the General Contractor for protection.  In other words, the subcontractor holds the General Contractor harmless.  For example:
      • The roofer fails to install flashing around the chimney on a new house being built and rainwater later causes damage to the interior of the home.  The roofer had agreed in the written contract to perform the work in a safe and workman-like manner and to not look to the General Contractor to pay for claims resulting in the roofer’s sole negligence.  The roofer agreed to purchase its own general liability policy that would respond to this claim by means of a “hold harmless” agreement.  If the damage to the home exceeds the roofer’s policy limit, the General Contractor’s policy will pay for the “excess” amount of the claim since the General Contractor is responsible for the conduct of the roofer.
    • The General Contractor is listed as an “additional insured” on the roofer’s general liability policy.  This contract requirement ensures that the roofer’s general liability insurance company will pay to defend the General Contractor if he/she is sued by the homeowner in the water damage claim arising from the roofer’s failure to install flashing around the chimney.  The homeowner is likely to sue the General Contractor since they hired the negligent roofer. 
  • If there is no “hold harmless” agreement, the General Contractor can be held liable for the roofer’s negligence and his/her general liability insurance company can be forced to pay all or part of the claim. 
  • If the General Contractor is not an Additional Insured under the roofer’s general liability policy, he/she will look to its general liability insurance company for a defense in the suit. 
    • Both the lack of a “hold harmless” and Additional Insured status would require the General Contractor’s general liability insurance company to charge significantly more premium because they are now exposed to paying losses that should first be paid by the subs’ general liability insurance companies.  They might also choose to nonrenew coverage since they have little or no opportunity to underwrite the subcontractors. 

As the builder/General Contractor, you hire roofers, framers, electricians, plumbers, foundation, HVAC and other subcontractors to do the actual work of building the homes you sell.  You expect these firms to be insured in their own right and to be primarily responsible for bodily injury and property damage claims they cause through their negligence.  Because you are responsible for the overall safety and functioning of the jobsite, there are claims that can arise from your negligence only, but these are comparatively rare. 

That being said, why would you do business with any subcontractor without a written contract, including a hold harmless and being named Additional Insured on your subs’ policies?  The following links provide more detailed information on the importance of hold harmless agreements, additional insured status and more. 

Further reading:

*(P.S. We urge the reader to consult an attorney well versed in construction contract language when reviewing contracts for use with your subcontractors.  The author is not an attorney and nothing contained in this blog is intended as legal advice.  It is provided to assist the reader in better understanding his/her general liability policy as offered by the RWC Insurance Advantage.)

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