Daniel Sunley at Clear Insurance Management discusses insurance best practices when engaging subcontractors, and addresses common misconceptions around liability to help developers ensure that their agreements protect their interests.

It’s no secret that UK housebuilders are battling a shortage of skilled workers, and that the use of subcontractors is mitigating this to some extent, as main contractors turn to this flexible labour pool to boost their resources on construction projects. However, while this approach has gone some way to bridging the workforce deficit, it has also given rise to some confusion about insurance liabilities and with whom they ultimately rest. 

The primary liabilities that insurance covers in this context are: 

• Employer’s liability for employees and for any persons for whom the subcontractor may act as ‘labour master’
• Public and product liability for injury or damage to third parties or their property
• Professional indemnity insurance to cover financial loss to third parties because of an error or omission in executing the subcontractor’s professional activities.

Legally, the main contractor is responsible to their client for completing the housebuilding project. To guarantee that this happens, all subcontractors must ensure that they have suitable liability insurance to undertake work on the latter’s behalf. Additionally, the main contractor must ensure they have cover in place for any work done by the subcontractor. Both parties’ policies must provide adequate cover for any work that is carried out, in all respects of a particular project.

THE GOLDEN RULE

On the face of it, this may seem like a duplication of costs and effort, but it makes sense. Should a relevant event occur concerning the subcontracted works, the claim will likely be brought against the main contractor in the first instance since they have a legal agreement with the client to carry out the work.

This point is critical, because if the main contractor fails to take out cover for the subcontracted activities, there is, effectively, no insurance cover. And without adequate cover, there can be no provision for legal defence costs or for the costs of passing on the claim (subrogating) to the subcontractor and their insurer. So, the main contractor’s and the subcontractor’s insurance policies must be checked to ensure parity of insurance coverage before any work begins.

Too often, the main contractor only checks the subcontractor’s insurance to confirm that it provides a public liability limit that corresponds with the main contractor’s requirements. However, the subcontractor’s policy must also cover all types of work and activity they carry out on behalf of the main contractor. The cover must also be in place for the duration of the work, and the insurance premium must be paid in full. Implementing a robust vetting process for subcontractor insurance is, therefore, of the utmost importance. Failure to do so could invalidate the main contractor’s insurance policy and result in the non-payment of a claim. 

In principle, the contractual terms under which the main contractor engages with their client should be replicated in the legal agreement with any subcontractors. Observing this golden rule can flush out detrimental clauses and waivers. To give an example, this preparatory due diligence could determine whether an agreement contains a waiver of subrogation. In practice, such a waiver would prevent the main contractor from passing on a claim to a subcontractor presumed solely or partly responsible for a loss. Worse still, unwittingly agreeing to such a waiver could breach the main contractor’s policy conditions.

A COMMON MISCONCEPTION

There is also a common misconception that liability ultimately lies with the subcontractor responsible for any work they undertake and not with the main contractor. However, If the subcontractor is not liable under the terms of an agreement, then the main contractor may have to shoulder the full cost of any claim. Bear in mind, too, that at the start of a housebuilding project, the main contractor will set parameters and provide direction to subcontractors regarding the allocation of work. They will communicate specifications, provide input and feedback to the client, and, in some circumstances, be charged with overall site safety and other responsibilities. 

In these circumstances, it is unlikely that total liability for a given incident can be passed on to the subcontractor when it comes to the settlement of a claim – even if, at first sight, they should bear sole responsibility. In short, subcontracting work does not absolve the main contractor of liability should a relevant event occur.

CONSTRUCTION INSURANCE SPECIALISTS CAN OFFER ADVICE

Given the complexities, misunderstandings and potential pitfalls involved in insuring subcontractors, the main contractor should seek guidance from a construction insurance specialist from the outset. The main contractor’s insurance requirements will, after all, depend on the specific circumstances of a housebuilding project and the workforce mix that it entails.

Daniel Sunley is account executive at Clear Insurance Management