With annual revenues in the trillions and rapid expansion expected over the next several years, the construction industry continues to be a bright spot in the U.S. economy. Nevertheless, construction contractors face a multitude of risks in their everyday operations, from liability and worker injury to property damage and project delays. In addition to carrying an above-average risk profile, construction jobs are often extremely complex, requiring dozens or even hundreds of subcontractors, all of whom must work together despite different processes and procedures.
For both insurance brokers and businesses specializing in construction services, understanding subcontractor liability risks is critical for helping capitalize on the industry’s growth opportunities. That’s why every broker should know some of the most common risks of hiring subcontractors on construction sites, as well as risk mitigation strategies to promote a safer, more successful subcontractor relationship.
5 Common Subcontractor Liability Exposures
Contractor liability exposure is a serious concern for general contractors (GCs) and subcontractors alike. In some cases, coverage gaps with subcontractors can create new, costly liabilities for both the general contractor and the sub. These liability risks include, but aren’t limited to:
Faulty workmanship
General liability for subcontractors and GCs won’t typically cover faulty workmanship and damages caused as a result of it. This exclusion can create a significant coverage gap for GCs. To protect themselves against faulty workmanship, contractors can purchase an errors and omissions (E&O) endorsement or a separate policy.
Third-party injury
Third-party injury suits might name both the general contractor and the subcontractor, which is why it’s important for each contractor to have its own commercial general liability policy. Typically, the policy that covers the incident comes down to the party that’s found at fault, though vicarious liability and negligence could mean both parties are at fault.
Damage to property
As with third-party injuries, a subcontractor might find themselves facing a lawsuit for damage to third-party property. Even if the subcontractor’s liability policy takes effect, if the limits aren’t enough to cover the damage, or if the GC is charged with negligence, the GC might face a significant liability.
Project delays and other breaches of contract
Project delays and other breaches of contract can leave GCs on the hook for problems created by subcontractors. Without an appropriate risk transfer strategy, these liabilities can create a potentially sizable coverage gap for the general contractor.
Pollution liability
Grading and excavation is a key part of construction work but comes with increased pollution liability risks and other environmental challenges. Operating heavy machinery, moving and exposing earth, and working around utility lines and underground storage tanks can introduce a slew of jobsite pollution liabilities that may not be covered with a standard commercial general liability policy.
5 Ways Businesses Can Manage Subcontractor Liability Risks
Subcontractor liability risks can leave large coverage gaps for GCs. To manage these liabilities, GCs can focus on prevention, risk transfer, and clear communication.
1) Thoroughly vet all subcontractors
Before bringing subs on to a project, GCs should prequalify each subcontractor. These checks should include verification that the contractor has all necessary trade licenses and a robust subcontractor liability insurance policy, and that the company is financially stable and has an Experience Modification Rating of 1.0 or less.
2) Ensure contracts are airtight
An airtight written contract between the GC and each of its subs is critical not only for transferring risk and limiting liability but also for setting clear expectations of each party’s responsibilities. Besides listing any subcontractor insurance requirements (and listing the GC as an additional insured), contracts should include a detailed scope of work, payment terms and timelines, and any hold harmless or flow-down clauses.
3) Monitor subcontractors closely and regularly inspect their work
General contractors should closely monitor subcontractors throughout the project to ensure quality and facilitate clear communication. Each GC’s oversight process can vary and may include regular inspections, audits, quality controls, and progress reporting.
4) Address potential issues immediately and document everything
In managing subs, GCs should always address any potential issues immediately, maintaining a written record and communicating clearly throughout the project. Both the GC and the sub should adhere to the contract and to their respective duties outlined in the agreement. If breach of contract occurs, the GC should issue a written notice, attempt to resolve the issue, and, if necessary, take legal action and terminate the sub.
5) Consider subcontractor bonding when appropriate
Though subcontractor default is rare, bonding can help protect the GC’s interest if one of the subs on a project runs into financial trouble. Some GCs require bondable subcontractors, particularly on larger projects, with new subs, if the sub’s work is critical to the project, or if the GC is concerned with the sub’s risk profile.
Conclusion
With the construction industry’s continued growth and reliance on subcontractors, brokers and construction services companies can benefit from understanding and mitigating subcontractor risk. By addressing these liabilities, sticking to an airtight contract, carrying specialized grading and excavation insurance, and implementing robust subcontractor coverage requirements, construction companies can protect themselves through effective risk transfer strategies and focus on safely scaling their businesses.
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