When you form a business relationship with another person, you are more legally entangled than you might think. In the construction industry, those entanglements can be complex. General contractors face liabilities if a subcontractor's actions on the jobsite cause some sort of harm to a client or third party. This is in addition to the legal liability a subcontractor bears if their team makes a mistake on a project.
In short, general contractors are responsible subcontractors in both a professional and legal sense—and that working relationship will often link their fates in the case of a lawsuit. If you’re worried about the risks that implies, there are ways to protect yourself, whether you are the general contractor or subcontractor.
What is a general contractor?
A general contractor (also called a prime contractor), is the person who has a relationship with the property owner and signs an agreement with them to complete a project. The general contractor reviews what the property owner needs, helps determine the specifications of the project, and subcontracts work to various specialty tradespeople. Very little of the labor is actually performed by the general contractor. Usually, they take on more of a supervisory role in the project.
For this article, the term "general contractor" is broad and can refer to those working in small residential remodeling businesses or large-scale commercial corporations. The only commonality we will focus on is a general contractor’s use of subcontractors to perform work on projects.
What is a subcontractor?
A subcontractor is a person who specializes in a specific aspect or trade within a construction project. Subcontractors are hired and managed by the general contractor. For example, the general contractor will hire both a framer and an electrician for a residential housing build, and direct them each accordingly on the project. It is rare for a subcontractor to do more than one task on a project, so in the previous example, the framer and electrician will usually be different people. Regardless of who does what, the contractor is responsible for the subcontractor’s work.
The work does not have to be a licensed trade to be considered for subcontract. We have seen subcontractors specialize in areas such as installing LED light bulbs.
Can a general contractor be held liable for a subcontractor's actions?
The short answer is yes, but the circumstances under which a general contractor can be held liable for a subcontractor’s actions differs by state.
Regardless of state legal systems, if property damage or an injury occurs on a construction jobsite, the general contractor will always be named in the lawsuit. In a best-case scenario, the general contractor fights their way out and proves they have no legal liability. In a worst-case scenario, they could be liable for all the damages since they are the prime contractor on the project.
Top 3 Consequences When General Contractors Are Held Liable for Subcontractors’ Actions
If you’re found liable for your subcontractor's work, the fallout can be severe. Here are a few of the most common consequences we have seen general contractors face with these claims:
1) Reputational Damage
The old adage that “reputation is everything” couldn’t be truer. In certain states, the details of civil lawsuits are publicly accessible and can be easily viewed by customers or prospects. Being named in a lawsuit—much less losing the suit—is bad for business.
2) Expensive Settlements
Being held liable for an incident caused by your subcontractors means that you are responsible for paying at least a portion of the judgment or settlement, which cost you thousands, hundreds of thousands, or even millions of dollars.
3) Time Waste
Regardless of your legal liability in the matter, getting listed in a lawsuit is a frustrating obstacle to overcome and fighting your way out can take years. The process will shift your time away from doing revenue-producing work to dealing with attorneys and legal proceedings.
What does insurance cover for general contractors regarding subcontractor liability?
Depending on how your general liability policy is structured, insurance can cover liability arising from subcontractors. If you’re shopping for a liability policy or renewing your current one, ensure you have the coverage you need by watching out for these items:
Subcontractor Exclusions – It’s fairly common for insurance companies to add a policy exclusion that says that they will not pay for any claim arising out of a subcontractors actions. Although some insurance carriers will let you remove this exclusion for an additional cost, most will not. You need to find an insurance carrier that is comfortable covering subcontracted liability risks.
Subcontractor Warranties - Many insurance companies add an endorsement requiring your subcontractors to carry specific policies at a specific limit. You are also obligated to collect certificates of insurance from your subcontractors each year to meet the requirements of the policy. If the requirements are not met, the insurance company can charge you an additional premium, limit coverage provided, or exclude coverage entirely.
Special Subcontractor Deductibles – In some cases, general liability policies add special deductibles for subcontractors and uninsured subcontractors. This means that if a claim arises from a subcontractor's actions, the deductible will be much higher than the deductible for the policy itself. Usually, this increased deductible is $50,000.
If you want to make sure you are fully protected against liability arising from subcontractors, consider purchasing a contractor's indemnity policy to fill in some of the coverage gaps left by general liability insurance.
How can general contractors avoid subcontractor liability?
Worried about the worst-case scenario?
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Have a good contract in place.
A good contract clearly lays out roles and responsibilities between a general contractor and subcontractor, thereby lowering a general contractor's liability in the event of a claim. When each party understands how an accident could affect them personally, it can preserve the relationship between the general contractor and subcontractor. It could also mean that the general contractor and subcontractor get to work these details out themselves instead of involving a judge.
Carry general liability (with no subcontractor exclusions) and workers compensation insurance.
Having general liability and workers compensation insurance will cover the vast majority of situations you can be sued for as a general contractor. Whether an incident on the job site or defective work results in a claim, these two policies are your greatest assets when faced with a lawsuit.
For more information on the essential policies all construction companies need, check out our article, “A Guide To Contractors Insurance."
Hire insured subcontractors only and require they add you as an additional insured on their policy.
If your subcontractors carry their own general liability and workers compensation insurance, which you verify every year, most of these questions about legal liability become non-issues. Additionally, if you require that your subcontractors add you as an additional insured, their insurance policy will pay for your legal defense and any costs that you might accrue when dealing with a claim.
As a general contractor, you could be responsible for some of the liabilities that arise from your subcontractor's actions and completed work. There are ways to mitigate the risk and lower your costs if you are ever held liable, namely through the use of great contracts and quality insurance policies.
If you need help finding an insurance policy for your construction business, let us know! One of our experts will guide you through the process of finding coverage that does not exclude subcontractors.