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Case Study: Contractor Endorsements

Case Study: Contractor Endorsements

It all happened very quickly, but the consequences continue to affect a subcontractor. This company found out the hard way that those primary and noncontributory and waiver of subrogation endorsements aren’t as harmless as they seem.

A subcontractor was working on a large remodel job with a large general contractor (GC) about five years ago doing demo work. The GC’s foreman was onsite while the sub was working on grinding down rebar and offered to help. As the foreman was finishing up the piece he was grinding, the rebar got caught on the grinder. The rebar shot out like a bullet and hit someone standing in the parking lot and cracked his skull.  Thankfully, it didn’t penetrate.

In this case, the foreman who was working the grinder was not an employee of the subcontractor, he was employed by the GC.  However, the subcontractor, prior to work being performed, had provided a certificate of insurance to the GC. This certificate included primary & noncontributory and waiver of subrogation in favor of the GC as required by contract.

What Happened Next

The claim was settled for $150,000. Since the foreman was an employee of the GC, the injuries caused should have been the responsibility of the GC. Guess who paid? The insurance company for the subcontractor.  Why?

The certificate provided included primary & noncontributory wording in favor of the GC. This puts the responsibility for the claim directly at the doorstep of the subcontractor. The sub’s insurance is primary and does not allow for the contribution of any other insurance policy, regardless of any other party’s responsibility for the accident.

In addition, the waiver of subrogation provided in favor of the GC ties the hands of the sub’s insurance company. The insurer cannot go back to the GC’s insurance company and recoup any losses paid on behalf of the subcontractor, despite the accident being the fault of the GC’s foreman.

Three Ways This Can Affect Insurance

The sub’s insurance company paid $150,000 to settle the claim. Settlements like these where primary & noncontributory wording and waiver of subrogation are given can have far-reaching and long-lasting consequences for a subcontractor.

  1. Premiums can increase.  The claim settlement lands on the loss history for the subcontractor for up to 5 years. If the claim or claims are smaller in nature the insurance company will require an increase in premium for the 5 years until the claim falls off the loss run.  The severity of the loss is an indicator of just how high the premium might go.
  2. The policy could be cancelled or non renewed.  Depending on the severity of the claim, the insurance company might cancel or nonrenew the policy. Large claims on small premiums will get a policy non renewed in a hurry.
  3. It can be difficult to get replacement insurance at a reasonable cost.  A contractor with a large loss and/or a policy non renewed due to losses will have a tough time finding affordable insurance for at least 5 years after the claim, until it drops off of their loss history.

Contracts can be negotiated, but it needs to be done before they are signed. To avoid being on the hook for losses that aren’t your responsibility, talk to an insurance broker and a contract attorney about your scope of work and the insurance requirements before signing on the dotted line.

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