A Commercial General Liability (CGL) Policy provides coverage for, among other things, bodily injury and property damage for which the Named Insured is legally liable. This legal liability can result from the Named Insured’s operations. It can also result from the operations of subcontractors hired by the Named Insured.
Some policies include an endorsement that makes coverage for claims resulting from operations of a subcontractor contingent upon the Named Insured’s having certain controls in place. These endorsements are commonly referred to as subcontractor warranties, and can cause problems if the Named Insured is not aware of or doesn’t follow the rules.
Subcontractor Warranty Endorsement Requirements
The following are examples of requirements that might be included in a subcontractor warranty endorsement:
- Subcontractor must carry specified limits of Commercial General Liability coverage, such as $1,000,000 per occurrence/$2,000,000 general aggregate.
- Subcontractor must carry a CGL policy at least as broad as the Named Insured’s.
- There must be a written contract wherein the subcontractor agrees to indemnify, hold harmless and defend the Named Insured.
- The Named Insured must obtain a Certificate of Insurance from the subcontractor before work begins, and must keep it for five years following the policy term.
What happens if the Named Insured doesn’t do what the subcontractor warranty endorsement requires him to do? Again, the endorsements vary, but common consequences are:
- There is no coverage for the Named Insured for liability arising from the operations of subcontractors. This is the most extreme form of endorsement.
- There is coverage for the Named Insured, but a sublimit of liability will apply. Often this sublimit is as low as $50,000, which may include defense costs.
- There is coverage for the Named Insured, but a significantly higher deductible or self-insured retention will apply to the claim.
It’s always a good idea to make sure you have a strong contract with subcontractors you hire. The contract should include insurance requirements as well as an indemnification or hold harmless agreement. It’s also important to obtain Certificates of Insurance, to review them carefully, and to keep copies on file. Sometimes, though, having such controls in place is more than just a good idea; sometimes it is key to preserving coverage under your own policy.