General Inquiries

Confirming sub-contractor insurance is adequate, when a COI is not enough?

  • 1.  Confirming sub-contractor insurance is adequate, when a COI is not enough?

    Posted 06-04-2020 12:15
    I would love to hear some best practices you guys have to confirm that your sub-contractors have adequate insurance coverage. I have heard stories of sub-contractors getting insurance which looks adequate per the COI, meeting the limit requirements, but then has exclusions that may actually make the policy inadequate.

    For example, if a sub-contractor is being hired to work on a high-rise and their policy has an exclusion related to any work over 3 stories high. That does not show up on the COI anywhere.

    It feels a little odd to go and request actual copies of their policy and/or their exclusions, but that is the only way I would know to combat the issue.

    Any thoughts or suggestions would be appreciated.


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    Hunter Young CPA

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  • 2.  RE: Confirming sub-contractor insurance is adequate, when a COI is not enough?

    Posted 06-05-2020 08:46
    Hunter,

    It's not odd/unrealistic to ask for policies, especially for subs that do a substantial amount of work for you every year and have a higher risk scope-of-work. Think about using a tiered pre-qualification process where the depth of your vetting is proportional to both: the volume of work they'll be doing annually (e.g. over $50K/year) and the risk of their scope-of-work. So, for instance, a sub that you use all the time that's doing work over 3 stories, you'd ask for their full polices and send them to your broker to review. For a sub that's doing a one-time job with a lower risk scope, a COI should be sufficient.

    Setting up a tiered pre-qualification process takes some up-front time but will save you time and hassle in the long run. Also, think about creating a couple sub agreements for different categories of subs. I used to have subs that did work at-heights on cell towers so we needed a very long agreement for them but other subs like fencing contractors would balk at the length of the agreement and the requirements. We created a pre-qualification process and agreements for a few categories of subs so each was appropriate to the amount of work they're doing and their level of risk.

    Anyway, good luck and give me a call if you wan to talk about this more.

    Justin



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    Justin Gillette CSP
    Vice President
    Hays Companies
    Minneapolis MN
    (612) 518-6007
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  • 3.  RE: Confirming sub-contractor insurance is adequate, when a COI is not enough?

    Posted 06-05-2020 10:49
    I don't know of this specific exclusion.  Is it listed on the endorsements.  I know it's an extra headache but it's good practice to always ask for the endorsements of each policy.  The one page COI is not proof of insurance.  This is standard practice for some companies so it shouldn't be a big deal to request.  I hope the info you are looking for are in the endorsements then it shouldn't be a problem.

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    Rachel Meyer CCIFP
    Business Manager
    Iron Mike Construction
    Centennial CO
    (303) 407-8690
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  • 4.  RE: Confirming sub-contractor insurance is adequate, when a COI is not enough?

    Posted 06-10-2020 12:09
    Edited by Loretta Kuust 06-10-2020 12:08
    We require endorsements and review them for compliance.  If I have trouble navigating the endorsements (some can be quite complicated) I send them to our insurance provider for their review.

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    Loretta Kuust
    Controller
    HP Civil Inc
    Stayton OR
    (503) 769-2466
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  • 5.  RE: Confirming sub-contractor insurance is adequate, when a COI is not enough?

    Posted 06-08-2020 10:20
    Hunter

    Regrettably the ​stakes are getting too high in the industry for you not to request and inspect subcontractors insurance policies. First, a Certificate of insurance is only an illustration of coverage and does not provide you any granting of coverage. At a minimum you must request a copy of the 20-10 and 20-37 endorsement that grants you coverage as well a COI.  Be weary there are numerous endorsements and numerous editions of each endorsement. The older the edition of the endorsement typically the broader the scope of coverage- without specific verbiage modification to your subcontract agreement it is ill advised to accept 2013 editions as they potentially reduce coverage limits and restrict coverage to the scope of your agreement.  This is a full day seminar to educate people on this...so when you see a CFMA class or Trade Seminar on additional insured endorsements I would advise you take it. Finally, due to the fact carriers continuously change policy language it is always wise to collect policies and review. Standard ISO polices require numerous modifications to be acceptable in the construction trade - ask your broker to provide you with a matrix of changes or modification he requests on your behalf at each renewal. In addition to the modifications to the Standard ISO form you should inspect for- A large pitfall regrettably is the fact that several carries have in the past few years begun inserting restrictive provisions on their own that are harmful to upstream parties e.g Travelers "Primary"-modification in 2019. https://www.sdvlaw.com/insights_view.asp?key=273 A wise Best Practice is to create a list of Carriers and their associated harmful provisions and create a quick reference guide when reviewing policies. It typically takes 6 months to a year to perfect a Subcontractor Insurance Review program, but once complete you will come to realize how much you overlooked in the past.  Trades will likely push back at first, but I am confident that they have to provide this much to the large construction firms.

    Kind Regards

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    Mark Janes
    Senior Vice President
    USI National Construction Practice
    Grand Rapids MI
    (616) 336-5514
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  • 6.  RE: Confirming sub-contractor insurance is adequate, when a COI is not enough?

    Posted 06-09-2020 13:07
    Mark,

    I'm on your side of this in that owners, GCs and subcontractors need to be educated on what is required under the various contracts, what is provided and what is actually covered by the carriers. Then, depending on your risk tolerance, spend your G&A $$ to ensure compliance accordingly.

    However, the reality is that if you have a big claim, the owner, GC and subcontractors, their brokers and carriers plus all their attorneys are going to sit in a big room and try to divide up the responsibilities for the loss. If there has been a long span of time such as a 10 year residential warranty, some of those parties may not even exist anymore including some of the carriers, and the others will need to negotiate on how to cover for them. With luck you can agree. But, if there is no meeting of the minds, it eventually will end up in the hands of coverage attorneys to battle it out. Then they can argue about what the contracts require, industry standards, which forms were used, when, what they really cover, exclusions, etc.

    The mere fact that we have coverage attorneys tells me that my compliance department, as educated and as good of a job that they can do, will still be inadequate for this complex legal area. So, it really depends on how much you want to spend on compliance given your claims experience. No sense having a $1M a year complaince deparment if you have not had any claims over the past 10 years.

    Thanks.

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    Michael Grant CPA
    Chief Financial Officer
    Cahill Contractors
    San Francisco CA
    (415) 986-0600
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  • 7.  RE: Confirming sub-contractor insurance is adequate, when a COI is not enough?

    Posted 06-08-2020 12:55
    Hunter,

    There is good information here. How much time and what resources are you able to put into this process? Is the path chosen one that you can finish with your team?

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    Jon Erickson CRM, CIC, CWCA, MLIS, CIRS
    Producer
    Insure Forward
    Fargo ND
    (701) 893-2750
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  • 8.  RE: Confirming sub-contractor insurance is adequate, when a COI is not enough?

    Posted 06-09-2020 10:44
    Prime contractors utilizing subcontractors MUST establish and embrace a robust subcontractor prequalification program that includes, among other things, a review of the insurance coverages that the sub would be bringing to a project. This can be done in-house with a small team supervised by the CFO and/or the General Counsel or contracted out to a third party service provider that can just review insurance coverages or perform a more detailed background check including a financial health assessment. Over time, this is far less expensive than self-insuring uncovered claims and subcontractor defaults.

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    David Harris, CPCU, ARM, CRIS
    Senior Vice President
    Marsh
    San Francisco, CA
    (415) 290-1308
    david.harris@marsh.com
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  • 9.  RE: Confirming sub-contractor insurance is adequate, when a COI is not enough?

    Posted 06-09-2020 14:56
    David,

    Our prequal process does not involve a review of insurance. We hold off on that until we negotiate a subcontract agreement with them and then we look at what the contract says and whether or not they are in compliance with their contract (the one they signed and agreed to be in compliance with). We ask for job specific coverage so the requirements could change based on the type of work or product. We also prequal subs even though we don't have a project for them to work on just yet. It's always great to have up-to-date, prequal-ed subs on the bid list.

    In the bid process we send them a copy of our standard subcontract agreement that includes the insurance requirements that they would need to price in for a specific job. I can't tell you how many times a sub has complained about adding coverage that costs more when it was not only in the bid documents but also in the executed subcontract agreement.

    For our type of work we also see that a number of subcontractors don't know who their lower tier subs and suppliers are yet so it would be jumping the gun to try to do this in prequal and yes, we do review the lower tier subs and suppliers' certs. The lower tiers' compliance requirements flow-through from the subcontract.

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    Michael Grant CPA
    Chief Financial Officer
    Cahill Contractors
    San Francisco CA
    (415) 986-0600
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  • 10.  RE: Confirming sub-contractor insurance is adequate, when a COI is not enough?

    Posted 06-09-2020 18:56
    No surprise that a sub didn't read the contract. I cannot begin to count the number of times I have had to negotiate (enforce) insurance specifications with a sub and their broker.  Most insurance buyers believe that all policies are alike. (Those are the ones who have never had a serious claim.) But we both know that coverage is anything but uniform. An insurance buyer has to be a coverage expert or rely on and trust their broker to know and tell the truth. If they are lucky, a sub will find out that what they were sold wasn't what they thought they had bought when their Cert gets rejected by a GC. Getting a Cert up front prevents everyone from wasting time negotiating a subcontract that is never going to happen without the right insurance, and allows the sub to correct the deficiency if they so choose. A sample Certificate of Insurance is an easy ask because it's easy for the sub to provide. A Cert can tell you a lot about a sub, far beyond what insurance they bought.

    When we help our clients prequalify subs, we provide services that are as basic as ordering a credit report and collecting a sample certificate of insurance with endorsements attached, ranging all the way up to a full underwriting as if we were going to write a surety bond for the sub. This includes drilling down on accounts receivable and underbillings on a quarterly basis.. Obviously, that type of analysis is done only for a sub that presents a substantial exposure on a specific project to our client's balance sheet.. Most of what we do is somewhere in the middle and on a blanket basis for subs wishing to prequalify for all work bidding within a year. We developed our program to help GCs comply with their SDI prequal requirements. But we found that our clients, armed with this additional knowledge, were making better decisions hiring subs  in the first place. Ultimately, reducing costs by avoiding underperforming subs adds to the bottom line. By asking for the insurance cert up front, they avoid answering  RFIs, evaluating bids, and negotiating with subs with which they will never sign a contract. But every GC needs to develop a process that works for their unique set of risks.

    I got a little off topic. But I'll add that although best practices would include a review of every sub's policies, in the real world where we operate with budgets, it isn't necessary to ask every sub for a copy of every policy. You will find that the standard carriers will be fairly consistent from sub to sub within the same trade. Surplus Lines carriers need greater attention because of their flexibility on coverage terms. But even they tend to consistently apply the same restrictions to their policies. Red flags include certain trades that are more likely to have coverage restrictions and subs based in another state. Some coverage restrictions could be uncovered by asking the right questions in the Prequalification Questionnaire. Or conceivably, you can implement a CCIP or Rolling Wrap and leave all of these worries behind!

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    David Harris, CPCU, ARM, CRIS
    Senior Vice President
    Marsh
    San Francisco, CA
    (415) 290-1308
    david.harris@marsh.com
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