Niche Stories

Subcontractor Compliance: What Every GC Should Do Today

October 29, 2020
Niche Stories | 5 minute read

For General Contractors, it’s always been important to properly vet their subcontractors’ General Liability (GL) policies to make sure they have the right insurance coverages. But during economic slowdowns, like the one we’re in today, it’s even more important. Why? Let’s take a look at what I’ve seen in recent history to understand:

During 2008-2012, the financial crisis and resulting economic downturn created havoc in the construction industry as projects across cities and suburbs stalled. Subcontractors found themselves out of work, leading many of them to let their insurance policies lapse. That all changed in 2012 when Superstorm Sandy hit, ravaging homes and businesses along the Eastern U.S coastline. Suddenly, there was a need for contractors to clean up and rebuild, and trade contractors were unexpectedly in high demand. While this led to a welcome rebound in construction, I’ve seen how it also set up a subcontractor tendering situation that was unfavorable to GCs.

Since trade contractors had to get their insurance up and running quickly but didn’t have much cash flow due to being unemployed, many of them bought inexpensive policies with restrictive coverages and exclusions. If a GC tried to tender a claim to their subcontractor’s insurance carrier due to improper work the sub performed and the subcontractor had inadequate coverage which prevented that claim from being tendered, the GC got stuck paying it. And the worst part? I’ve seen it take years for that claim to come off a GC’s GL loss run, so future insurance costs were increased—all this because the GC had to pay a claim they couldn’t properly tender to their subcontractor.

Fast forward to 2020, and I’m noticing a similar situation taking shape across the construction industry. (See chart below.) As COVID unexpectedly gripped the country in the first part of the year, rolling economic shutdowns brought construction to a crawl, if not a halt in some places. What the industry thought might be a lull of a few weeks stretched into months, with subcontractors losing work and letting their insurance policies lapse in a déjà vu Sandy scenario. Now, as the economy has reopened and construction has picked up, trade contractors are back in demand—with a quick need for insurance. But just what kind of policies are they getting? And do they have the right coverages should GCs need to tender a claim?

Source: FRED ECONOMIC RESEARCH


Here’s the good news:
History does NOT have to repeat itself. I’m confident that GCs can learn from the tendering missteps of the post-Sandy years by being extra vigilant in monitoring the performance and stability of their subcontractors. Consider more established subs who didn’t allow their policies to lapse, have better cash flow, and won’t necessarily need the cheapest insurance policy to get back on the job. But whomever you choose, my advice is to make sure you take this ONE proactive step with regard to your subs:

Thoroughly review each subcontractor insurance policy.

That’s it. That’s the secret sauce in this sub tendering recipe. By completely reviewing each policy—and not just the COI, but the entire policy—you can find restrictive language or exclusions that need to be addressed with your subs. Trust me, you don’t want to find out about these exclusions after you’ve attempted to tender a claim and find the coverage isn’t there.

At ProSight, we know the impact a bad sub can have on the health of your company, but we also know how much time and energy it takes to manage all your subs’ insurance—time you don’t necessarily have. That’s why we offer all our construction customers Subcontractor Policy Management through Docutrax1.

A leading verification and document management company, Docutrax can collect, review, and track all your subcontractor policies—and alert you to subs that aren’t in compliance. All the data is updated in real time and available 24/7 in an online portal, so you’ll always know where your subcontractors stand.

As a General Contractor in today’s COVID world, you don’t need any sub surprises that could come back to haunt you. If we’ve learned anything from the tendering issues the construction industry saw after Superstorm Sandy, it’s that these surprises could come in the form of costly claims and rising premiums. Remember, the decisions you make today can affect you tomorrow. An insurance partner like ProSight provides the right tools to help you make the best possible decisions for your business.

Jake Morin
Value Creation Executive

1Subcontractor Policy Management services provided by Docutrax. Docutrax’s services are not insurance products. Engaging Docutrax to provide these services does not guarantee insurance coverage. ProSight Specialty Insurance Group, Inc., its parent, affiliates, and subsidiaries (“ProSight”) are not a party to the contract between insureds and Docutrax, and ProSight does not review nor comment on insurance policy documents or forms provided by subcontractors. ProSight is not responsible for Docutrax’s advice or analysis regarding insurance coverage.