Contractor's Liability: The Hidden Facts

Contractors are exposed to several types of liability. Oftentimes they are not even aware of the exposure until it is too late and a claim has been made – with a majority of the claims alleging negligence.

However, there are several risk management best practices, which are easily implemented, that can help limit these liability exposures.

Basis of liability

The primary basis of liability is whether there was any negligence on the contractor’s part. Negligence, in its simplest definition, means failing to exercise the standard of care that a reasonably prudent person would have exercised in a similar situation. The standard of care may be established by local, state and federal law, the terms of a contract or subcontract, plans and specifications, and/or the general standard of care of contractors in the community.

If a contractor is not prudent, the company may face a negligence claim. The negligence can be “simple” (an honest mistake) or “aggravated” (recklessness). The primary difference is that aggravated negligence can trigger what are called punitive damages. These are damage awards intended to punish the wrongdoer and are awarded in addition to the actual financial loss associated with the loss.

Examples of liabilities due to negligence could stem from accidents where:

• Public access to the site has not been restricted (public liability).
• The company allows a driver with a poor driving record to drive on company business (auto liability).
• A subcontractor’s employee is injured due to safety measures not being enforced (premises liability).
• A loss arises due to a construction defect (completed operations liability).

Reducing potential for liability

There are a several ways contractors can help reduce their liability exposures:

• Knowledge - The contractor must be aware of what laws or standards he or she is expected to follow. These laws or standards can differ from state to state and city to city, so knowing what applies in the areas where the contractor is working is crucial.
• Written contracts and/or purchase orders - These must outline responsibilities, indemnifications and insurance requirements. Since liability laws/standards/indemnification clauses/insurance laws change over time, a lawyer should review all contracts when they are drafted. Since many standard contract templates are used repeatedly, they should also be reviewed periodically to ensure they meet current laws. This can help you comply with standards, ordinances, laws, etc., that apply to your specific project.
• Read the contract before it is signed - This should help ensure that contractors are not signing their legal rights away, or agreeing to compensate owners for something they have no control over. For example, if a general contractor agrees to take responsibility for building materials, and the architect specifies the wrong materials, the general contractor can be held liable for the cost of replacing them.
• Contractual risk transfer (CRT) – A good CRT process is essential. It should provide the correct indemnification and insurance requirements that effectively transfer risk to a lower tier subcontractor. Indemnification clauses are specific to the state where the work is taking place. A competent construction contract attorney for that jurisdiction should be consulted to ensure the correct clause is used prior to executing the contract. Subcontractor insurance requirements should specify:

• • Type of insurance and minimum limits
  • The general contractor is named as an additional insured on a primary and non-contributory basis for both general liability (GL) and auto coverage
  • The forms to use for GL additional insured coverage so that both premises and completed operations are included
  • A copy of the additional insured endorsement is provided

Your agent/broker/insurance company underwriter can assist with ensuring these requirements are met. Also, a Travelers Risk Control specialist can review the overall CRT process and provide guidance on having one set up properly.

While not inclusive of all measures that can be taken to reduce liability, if general contractors follow the above measures in their subcontracting process and contracts, they will have taken a large step toward reducing their exposure to several types of liability inherent with construction operations.