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Why Builders Should Understand the Need for Subcontractor Indemnification Agreements


Alison Short

By: Alison Short
Senior Vice President of New Home Division, 2-10 Home Buyers Warranty®

Dealing with faulty work or accidental damage caused by a subcontractor can be a tough situation when a builder has not used the correct contract provisions. A builder’s goal is to build homes without defects and make a profit. However, even the best builders have claims due to inadequate or defective work performed by their subcontractors. In order to protect the builder’s business, it is essential that the builder include an indemnification provisions (contract clauses providing reimbursement for a loss) in the standard subcontractor agreement when hiring others to perform work on their behalf.

As a general rule, the builder is liable to the homeowner for all work on a home, even if they hire subcontractors to perform the work. To protect their business, the builder must have a contract with the subcontractor, which includes an indemnification provision. An indemnification provision gives the builder the power to demand that the subcontractor protect themselves from any claims or liability resulting from the subcontractor’s work. A properly written indemnification provision allows the builder to demand that the subcontractor assume defense of a claim. Appropriately allocating the risk of loss to the responsible party is a key part of a builder’s risk management program.

In addition to the indemnification provision, the subcontractor agreement should contain certain key provisions regarding the subcontractor’s insurance policy. These key provisions include sufficient general liability policy limits and naming the builder as an additional insured.

The subcontractor should demonstrate evidence of this insurance protection by providing a Certificate of Insurance as part of the contract documents. This Certificate of Insurance will identify the insurance carrier who provides the general liability coverage for the subcontractor, the dates of coverage and the insurance broker who provides notice of a claim.

The indemnification provision along with the subcontractor’s insurance will allow the builder to legally allocate any loss caused by the “at fault” subcontractor, and to seek protection from the subcontractor’s insurance carrier. If the subcontractor does not have their own general liability insurance policy, then the builder will have to look to the subcontractor’s assets to pay the loss. Additionally, the builder will most likely have to pay the homeowner and chase the subcontractor for reimbursement. It is important that builders understand this concept and protect themselves from paying claims caused by another party.

In situations where there is no contract in place, the parties must resort to remedies provided under “common law” and a judge or jury will make decisions about which party is responsible based on the facts, various relationships, oral agreement and witness testimony. A claim or lawsuit is much easier to handle when the builder has transferred the loss to the subcontractor based on a contract. Obtaining proper indemnification to the minimize losses also protects the builder’s insurance loss ratio in a positive way because the loss does not become a part of their claim history.

 

For an example, a builder starts a new project and hires subcontractors to perform the work. Midway through the project, a fire is started by the painter who is a subcontractor on the job. The investigation reveals that the painter left dirty, oily paint rags in a closed room along with paint cans and other combustible materials. Spontaneous combustion is noted as the cause of the fire and the loss is traced back to the painter’s negligence. If there is a proper indemnification provision in the subcontractor agreement between the builder and the painter, the claim will be transferred to the subcontractor. The Certificate of Insurance will tell the builder who else, aside from the subcontractor, should be sent a notice of the claim. Once the subcontractor’s carrier accepts the claim, the builder will have achieved their goal of successfully transferring liability and protecting their loss history.

In summary, if a builder retains subcontractors to perform work, it is appropriate that the subcontractor bears the risk of loss associated with their work, and protect the builder in this process. The best way to accomplish the transfer of this risk is through a well written subcontractor agreement that includes an indemnity provision and requires the subcontractor to carry insurance while working on the job.

NOTE: This article provides general information related to the law does not provide legal advice. Although 2-10 Home Buyers Warranty® goes to great lengths to ensure the information we provide is accurate and useful, but we recommend consulting a lawyer for legal advice.