Executive Vice President of Rancho Mesa Insurance, Daniel Frazee and Vice President of the Construction Group, Sam Clayton continue their conversation on General Liability Policies and delve deeper into a key endorsement often seen as they negotiate terms and conditions with underwriters. Sam walks listeners through the Subcontractor Warranty Endorsement and why contractors should pay attention to this endorsement.
Show Notes: Subscribe to Rancho Mesa's Newsletter.
Director: Alyssa Burley
Producer/Editor: Megan Lockhart
Host: Daniel Frazee
Guest: Sam Clayton
Music: "Home" by JHS Pedals, "The DeLong Incident" by Craig MacArthur
© Copyright 2023. Rancho Mesa Insurance Services, Inc. All rights reserved.
Transcript
Daniel Frazee: Welcome, everyone, and thank you for joining us. Back in StudioOne, my name is Daniel Frazee, the Vice President of the construction group with my fellow principal, Sam Clayton. Sam, welcome to StudioOne.
Sam Clayton: Good morning, Dan. Happy to be here and excited to talk about this topic today.
DF: Great. Well, we've, we've talked about some key exclusions. We've talked about residential work. I wanted to continue today with some conversation on the general liability policies, but kind of move deeper into a key endorsement that we often see as we negotiate terms and conditions with underwriters. Walk the listeners through the the subcontractor warranty endorsement and why contractors should pay close attention to this.
SC: The subcontractor warranty endorsement in the Commercial General Liability Policy outlines the minimum requirements. The named insured, or you the contractor, must have in place with the subcontractors that you hire.
DF: Okay. So good point. So these are lower tier trades that our clients are hiring. So it doesn't necessarily need to be a general contractor that we're talking about. It could be a sub contractor Who's.
SC: A sub sub.
DF: A sub sub. Exactly. Okay, great. Appreciate that. So what types of requirements are typically outlined?
SC: Typically, we see three things that are required. First, the name insured has to have a written contract with an indemnity agreement in your favor. The second would be the named insured needs to be added as an additional insured by endorsement for both ongoing and completed operations. And ongoing is during the construction process and completed operations is after the projects put to its intended use for future liability claims. The third would be the the minimum limit requirements equal to or greater than your commercial general liability policy, which typically is 2 million aggregate with a 1 million each occurrence.
DF: Okay. You mentioned a written contract. Some of our clients are signing some agreements for higher tier general contractors. Is there or are there recommended contracts for them to be using? Are they are they available through different resources or are these things that they should be talking with their attorney about?
SC: They should definitely be talking to their attorney about putting together a subcontract agreement, or they could use the AGC short form or long form. But even if they were to use that, they'd still want their attorney to review that before they put it in place.
DF: Okay. And then typically, you mentioned the additional insured by endorsement for ongoing and completed operations. Is that something that their agents should be looking at and at least reviewing in conjunction with their own risk manager?
SC: Absolutely. Absolutely.
DF: Okay. All right. So then kind of the next logical question is, what happens if a contractor does not meet these requirements?
SC: That's a that's a great question. So every carrier is different and some are definitely more restrictive than others. Typically, we will see the insurance carrier charge a higher deductible if these requirements aren't aren't met and the deductible can be as high as 25,000 versus your normal deductible of 2,500 or 5,000, depending on the policy. In worst case scenarios, we've seen some carriers deny coverage altogether if these requirements are met, which obviously could have a negative impact for the insured in the event of a claim.
DF: Okay. So just want to go back to that deductible piece. They would obviously be required to pay a higher deductible. But in that scenario, coverage would still exist with their existing carrier.
SC: Correct.
DF: Okay. So I guess play through an example. We're just kind of talking off the cuff here. But I guess what I'm envisioning is a subcontractor of, let's say, a client of ours is found negligent. Right. But ultimately, how could that end up kind of trickling up to our client and having them be responsible? I guess the scenario is that they have a carrier that denies the coverage and and and we have an issue.
SC: Absolutely. Absolutely. So normally, let's say if you're a plumbing contractor and you're subcontractor subcontracting out the the trenching piece of the, of the, of the project and, you know, during the excavation portion of the work, that contractor hits a utility line. Typically, what would happen is, you know, whoever our insured contractor with would turn and tender that claim back down to us because that was in the scope of our work. And then we would tender that claim back down to the excavation contractor. But if there was not a contract in place, our client's general liability carrier should respond but our insured would have a higher deductible.
DF: Got it. Okay. I appreciate you walking through that. That's that makes a lot more sense as I as I hear that example. So I think what you're saying is it's really important for for our clients and prospective clients that they read and understand this endorsement as it relates to their their current policy.
SC: Absolutely.
DF: So what else can a contractor do to protect themselves in this situation?
SC: I think the first step would be to contact their attorney to draft or review their current subcontract agreement to make sure that the indemnity provisions are current, as well as consult with their broker to outline the insurance coverages and limits to protect themselves. The last thing would be to have a system in place so that they're receiving the certificates of insurance from the subcontractors and all the necessary endorsements.
DF: Okay. Appreciate that. This has been really helpful, Sam. I think it's a good refresher. It's a key endorsement on virtually all the policies that we come across. So as as we kind of wrap up, are there any any last thoughts you'd like to share?
SC: Well, I just you know, I think for our clients and prospective clients, just make sure that you read and understand the subcontractor warranty endorsement in the policy so that you're aware of the the ramifications of what is and isn't given.
DF: Great. Hey, thank you so much. And thank you to our listeners for joining us again back in StudioOne. We will continue this dialog down the line and begin to peel apart more general liability policies. So thanks, Sam.
SC: Thanks, Dan.
Alyssa Burley: This is Alyssa Burley with Rancho Mesa. Thanks for tuning into our latest episode produced by StudioOne. For more information, visit us at ranchomesa.com and subscribe to our weekly newsletter.
