INSURANCE AND BONDS FROM SUB-CONTRACTORS – WHAT YOU NEED TO KNOW
Because contractors often have limited liquid assets, insurance and bonding are often the best resources available to protect yourself against defective work or default. However, you need to be sure that the policies and bonds that are utilized will provide the security that’s needed. Here’s what you need to know:
The work that is self-performed by a contractor to provide cost-savings may not be covered, because virtually all contractor general liability policies contain a “your work” exclusion. A general contractor needs to assess whether the cost savings from self-performed work are worth the risk of its not being included in his insurance coverage.
Construction defects are often discovered years after the work was completed. Post-completion insurance (commonly called “completed operations” coverage) should last until the expiration of the statue of repose – the date when a claim can no longer be brought against the contractor.
General contractors need to be sure that their subcontractors’ policies do not contain exclusions that apply to the project in question. For example, residential or condominium projects might not be covered due to an exclusion. This can often be remedied through negotiation with the subcontractor’s insurer, and there are also alternative methods for insuring a project (such as through a policy that you control). The construction contract should make it clear that inappropriate exclusions are not allowed.
Some contractors ask that the premium for subcontractor default insurance be included as part of the cost of work. However, it’s important to recognize who is the beneficiary of the subcontractor policy, and whether that party is obligated to bring a claim and provide restitution in the case of default. This type of policy may provide an indirect benefit, but it is not a core element of your overall risk protection.
Performance bonds are less common in private projects than in public projects in which they are often statutorily required. A performance bond can be an effective resource for sub-contractor default, and, in comparison to an insurance policy, the bond should have fewer restrictions and exclusions on coverage. Care needs to be taken with its terms, and the best approach for the general contractor is to its own sub-contract bond form or use an AIA or AGC bond format. Otherwise, a careful review of the proposed bond form needs to include the period in which claims can be made and the nature of the claims procedure. Performance and Payment bonds should cover the sub-contractor’s contractual duties not only during the project, but after as well, to include the warranty or indemnity obligations.
Philip E. Vega, President, Contractors & Developers Bonding