Despite our best efforts, accidents can and do happen during the course of construction operations. Sometimes they cause bodily injury and/or property damage. Ideally, the liability for these accidents should be the responsibility of the party with control over the exposures that caused the loss. That is where risk management comes into play. A structured approach to managing uncertainty, risk management involves assessment of the risks involved, strategies to manage the risks identified and mitigation of the risks using managerial resources.

Risk management is a complex topic, so I will zero in on managing the risk of third party lawsuits — a potentially troublesome issue for utility contractors. Here is a common example of such a lawsuit: A subcontractor’s worker claims that he/she was injured on the job due to the omission or negligence of a “third party” — that is, a party other than his/her own employer; the injured person files a lawsuit for monetary damages against that third party.
If you’re the controlling contractor, you could be that third party.

Selecting Safe Subcontractors

While hiring a subcontractor that has a good safety record is no guarantee, in terms of risk management, it is better than hiring one with a poor record. So how do you find out if the subcontractor you are about to hire does or does not have a good safety record?

Experienceing Modiciation Rate (EMR)

As part of the bid process, require all bidders to provide you with their Workers’ Compensation Experience Modification Rates (EMR). The EMR is an insurance rating mechanism that is based on the company’s workers’ compensation claim experience during the past three years (excluding the most recent year). The EMR is determined by dividing the actual losses by the expected losses. An EMR of less than 1.0 is desirable and a rate greater than 1.0 will indicate that the subcontractor’s claim history is greater than what’s expected for the class and therefore should be further scrutinized before hiring.

OSHA Logs/Inspections

Requesting the OSHA logs for the last three years can help the hiring contractor get a better picture of the subcontractor’s employee injury history. The OSHA Log Form 300, which should be provided with the names of the injured employees omitted, identifies recordable injuries and illnesses over the calendar year.
The OSHA 300A Form is a summary of the OSHA log that is used to calculate the incidence rates (total cases, lost workdays cases and lost workdays) to determine if the subcontractor is below or above the industry average. The industry average and the subcontractor’s inspection and OSHA citation history can be obtained from OSHA’s Web site (www.osha.gov).

Mitigation through Insurance, Agreements and Waivers

Certificate of Insurance

Prior to subcontracting any work, you should require that potential subcontractors provide you a Certificate of Insurance, a form issued by the subcontractor’s insurance company or agent. The certificate should list the coverage(s), expiration dates and limits contained in the subcontractor’s insurance policies. Be sure to verify that, at the minimum, the subcontractor has Workers’ Compensation, Commercial General Liability, Umbrella Liability and Automobile Liability Insurance. Don’t feel guilty about calling the sub’s agent to verify the coverage and expiration dates; some people have been known to falsify documentation. Make sure that the coverage does not expire prior to or during the contract period. Note that Certificates of Insurance do not alter the terms or conditions of the policies listed on the certificate. If a certificate misstates a key point or lists a coverage that doesn’t exist, the policies’ actual terms and conditions are the ones that will prevail.

Additional Insured Endorsements

There are many ways that owners and hiring contractors can end up in litigation arising out of work done by subcontractors. Therefore, owners and hiring contractors should require subcontractors to add them as additional insureds on the subcontractor’s general liability and umbrella liability policies. This is usually accomplished with an endorsement to the sub’s insurance policies.

An additional insured (AI) endorsement should be used to complement an existing hold harmless provision (see below) in a job contract and can protect a party from liability arising out of another party’s negligence. In this way, the risk transferor is not solely dependent on the validity and ultimate enforceability of the hold harmless agreement for protection. The AI endorsement can cover the hiring contractor for accidents that are caused by the subcontractor’s work or operations on a job and often only provide coverage for operations and actions that involve the subcontractor in some way.

Hold Harmless Agreement

A Hold Harmless Agreement (indemnity agreement) in construction contracts is another useful tool to transfer the risk of claims and liability from one party to another. Remember, however, that it is a contractual clause that must be backed up by adequate insurance (certificate and additional insured coverage) to cover any possible losses. It is recommended that the insurance coverage required of subcontractors be equal to or greater than that held by the owner or hiring contractor.

Contractors and subcontractors should always consult their legal counsel when drafting a hold harmless agreement in a contract or before signing a contract containing a hold harmless agreement. Courts will generally uphold hold harmless agreements if they clearly reflect an agreement by both parties to transfer liability and if the transfer is not against public policy in the particular state. However, since there is always a chance that a court may strike down a contract’s hold harmless clause, it’s prudent to back up hold harmless provisions in contracts with other risk transfer techniques such as Additional Insured Endorsements and Waivers of Subrogation.

Waivers of Subrogation

Owners and general contractors often include waivers of subrogation in construction contracts. The waiver takes away a subcontractor’s right to sue the owner or general contractor in certain circumstances. If a contractor waives its right to sue, the contractor’s insurer also loses the right to seek recovery from the negligent party for insurance claims paid to or on behalf of the contractor.

To avoid claims and litigation expenses down the road, beneficiaries of waivers (owners and hiring contractors) sometimes require that the waiver-giver (the subcontractor) endorse its policy with a Waiver of Subrogation endorsement. Such endorsements verify that the subcontractor’s insurer is aware of the waiver and won’t initiate subrogation actions against the owner or hiring contractor.

The risks related to construction operations can be managed if you: identify the risks; understand the strategies that can be used to transfer, limit or control them; and know what documents/contracts are available to implement those strategies.

A final word of caution: Prior to signing a contract, hiring a subcontractor or subcontracting work from a contractor, make sure you know and understand the risks that your company is assuming. Always consult with your insurance agent/broker and legal advisor to ensure that you have adequate insurance coverage, including the proper types and limits of coverage and that your company is not assuming any liability that is not insured.

Note: In conjunction with CNA, NUCA is planning to add a searchable Risk Management section to the members-only section of the Web site at www.nuca.com. CNA has produced a series of Insurance Bulletins that will be posted in this new section. Be sure to check the Web site for updates on the launch of this valuable risk management tool.

George Kennedy is NUCA Vice President of Safety.