Subcontractor Insurance - Is It Enough?
When a contractor enters into subcontracts, the subcontractor will hold professional indemnity cover of a specified level. The level may be dependent upon the portion of the work for which the subcontractor is responsible for. However, the cover preferred by employers is usually of the “each and every claim” type. In a bid to deliver it seems that the main contractors look for subcontractors who are able to offer work packages at a competitive rate whiles overlooking the employer’s requirement for insurance. This can result in an employer being asked to waive the contractual requirement for each and every claim insurance in favour of a lesser insurance and some employers are wondering if they can refuse to allow the subcontractor to undertake the works.
When a subcontractor is providing design for the contractor, it’s very often the case that in the event of a claim for defective design, the employer’s first avenue would be against the contractor rather than against the subcontractor. If the contractor has sufficient cover to meet the claim, then the employer is highly unlikely to be interested in persuing the subcontractor. This results in employers requiring those providing design to provide collateral warranties and have enough insurance to cover the risk of negligence.
In order to avoid a situation where a contractor engaging with a subcontractor for the provision of work packages and then discovering that the subcontractor’s insurance does not meet the requirements of the contract, the following measures can be taken:
- Make sure that the requirements for the subcontractor insurance are highlighted in the invitation to tender documents.
- At the pre-tender stage, the contractor should make the employer aware of any concerns that the level of insurance required is outside industry norms or too high.
- The contractor should discuss the level of cover required with the subcontractor at the pre-contract engagement stage.
- The tenderers should confirm by their tender that they accept the incidents of insurance required of the subcontractors.
Not all employers will accept less than the insurance that the contract prescribes and an absence of insurance for the proposed provider on an internal structure means that the employer should questions whether the provider should be allowed to be a subcontractor. Any proposed subcontractor with “aggregate” rather than “each and every claim” insurance should be questioned on this so that an informed decision can be made by the employer.
Project managers and contractors should make inquiries at the outset on whether a proposed subcontractor’s cover meets the requirements of the proposed contract. Performing due diligence in this way may seem tedious and time consuming, but it can make all the difference to the success of any project and could save the employer both time and money in the long run.