A subcontractor warranty endorsement – also known as subcontractor endorsement, Contractor’s Special Conditions, or similarly named – is a non-standard endorsement that can be added to a general liability and/or excess or umbrella policy of a contractor or subcontractor that outlines specific risk transfer requirements that the insured contractor needs to have in place when working with subcontractors. These endorsements can be included on all types of contractor policies, not just a general contractor.

Consequences of not meeting all the conditions in the endorsement can include a denial of coverage, applying a deductible or self-insured retention, applying a higher deductible or higher self-insured retention, and/or charge additional premium at final audit relative to any loss resulting from the work of the subcontractor(s). These endorsements have been litigated and some courts have viewed these as a pre-condition of coverage.

No two endorsements are alike. It is important to take the time to read, understand, and implement the appropriate conditions into all of your contracts.

Know Your Contract Conditions

Conditions imposed can vary by endorsement. Here are some common conditions you may encounter or consider for your own contracts.

A written contract or agreement for the work or operations signed by the person performing operations on the insured’s behalf. This condition requires a written agreement including an indemnification agreement holding the contractor harmless from “all liabilities.” Some endorsements state “all losses” and others include a requirement for expenses and legal fees.

Specifying that the person or organization performing the operations has and will maintain Commercial General Liability insurance coverage for the length of the statute of limitations in the jurisdiction in which the operations or work are performed.

Other requirements you may see include:

• The requirement of the contractor to obtain and sometimes review certificates of insurance (COI) and endorsements.
• The requirement of the subcontractor to have workers’ compensation insurance that may or may not include the requirement that sole proprietors, executives, and other related roles are included.
• The requirement that the subcontractor’s policies do not limit or exclude contractual liability.
• The requirement of the subcontractor to carry coverages and limits similar to that provided by the contractor.

Choose Your Words Wisely

Some of these endorsements are very onerous. Phrasing matters, and the impact of your words could lead to a greater possibility of negative consequences if there isn’t compliance.

For example, requiring the insured to hold harmless the person they have contracted with from “all liabilities” may not be achievable and this immediately puts you in danger of negative outcomes. If the carrier would allow negotiation of the wording on the endorsement, a better phrase might be something like, “for bodily injury, property damage, and personal and advertising injury arising out of those operations or work, including completed operations.”

While it might seem time-consuming to consider specific words or phrases, your diligence will pay off in the long run.

Compliance Can Be Complex

Some conditions in the endorsement may be difficult or impossible for you to comply with and manage, such as the requirement that the subcontractor’s policy not contain any restrictive or exclusionary language for the performance of the operations and work, no exclusion or limitation of contractual liability, and – my personal favorite – for the subcontractor to carry coverages and limits similar to that provided by the insured or contractor.

You’ll want to know and include all of these elements in your subcontract agreement, but to obtain evidence and manage information can cause a burden on both parties, leading to unmet requirements, unnecessary costs, and frustration for everyone involved.

Know Your Certificates of Insurance

Certificates of insurance (COI) and endorsements are only good the day they are issued and given to the contractor to review. A subcontractor’s policy may renew during the length of the construction project and provide different or more limiting coverage that what they had before when they signed the contract. A contractor will need a process in place to obtain this evidence of coverage, review it multiple times, and have a consequence on the subcontractor if they are out of compliance, or they could have a negative consequence of coverage themselves in the event of a loss.

Work With Experts Who Understand Your Needs

Whether you have a choice to partner with a general liability carrier that doesn’t impose strict subcontractor insurance requirements or your options are limited and you need to accept the carrier and endorsements required, it’s important to review your contractual insurance requirements and ensure you align with the conditions.

Navigating the world of subcontractor warranty endorsements can be complicated, but having a partner like Holmes Murphy can help. Reach out today and let’s get started!