Insuring Your Firm Against Contractor Negligence

Construction worker laying bricks

If your company hires an independent contractor, can your firm be held liable for injuries caused by the contractor's negligence? The answer is usually no but there are some exceptions. You can protect your business against claims resulting from a contractor's negligence by purchasing liability insurance.

Hiring Company Usually Not Liable

As a general rule, a business that hires an independent contractor to perform some type of work isn't responsible for injuries to third parties caused by accidents resulting from the contractor's negligence. The contractor is in charge of the work he is doing and has a duty to control the risks associated with it. Thus, the contractor is generally liable for injuries or damage he causes to third parties while performing his work. Consider the following scenario.

Example

Ready Realty owns an office building that is undergoing renovation. Ready's tenants will remain in the building during the renovation process. Ready has hired Precise Paving to repave the office parking lot.

It is noon on a weekday and Precise Paving has repaved about half of Ready Realty's parking lot. The paving workers decide to break for lunch. They secure their equipment, rope off their work area, and leave the job site. Ten minutes later Steve arrives for a meeting with his accountant. He parks his car and heads toward the building. He is walking across the parking lot when he trips and falls over a rake inadvertently left on the ground by a Precise Paving employee. If Steve is injured in the fall, will Ready Realty be liable for his injury?

The answer is likely no. Steve's injury resulted from negligence committed by an employee of the paving contractor. Thus, Precise Paving, not Ready Realty, is responsible for his injury.

Exceptions

A business can be held liable for negligence committed by an independent contractor under certain circumstances. The hiring company might be responsible if it did any of the following:

  • Failed to maintain a safe premises. A business owner is obligated to ensure its premises is safe for employees, customers, and other visitors (including employees of subcontractors). If the workplace is unsafe and someone is injured, the owner may be liable for the injury. For example, Steve has just finished a meeting with his accountant. It is evening and the parking lot is dark. He is walking to his car when he stumbles over a traffic cone used by the paving workers to mark off their work area. Steve sues Ready Realty for his injury, contending that it is responsible for his injury because it failed to make the parking lot safe by providing adequate lighting.
  • Hired a contractor to perform work that had peculiar risks. Work may have "peculiar risks" if it is inherently dangerous and likely to cause harm even if precautions are taken. An example of a peculiar risk is blasting. Work may also have peculiar risks if the hiring company is aware of a hazard but fails to take adequate precautions. For example, Ready Realty knows that landmines are buried under the parking lot but fails to inform Precise Paving of the danger. If a paving worker inadvertently triggers a landmine that injures him or a building visitor, Ready Realty will likely be liable for their injuries.
  • Hired an incompetent contractor. If a company hires a contractor that isn't fit to perform the work properly, it may be liable for injuries caused by the shoddy work. For example, Ready Realty hires Pronto Painting, a painting firm owned by a relative of a Ready Realty executive. A visitor to the building (Jim) is injured when a Pronto Painting employee mixes bleach with ammonia. Jim learns that when Ready Realty hired the painting contractor, it knew that Pronto had several previous OSHA citations. Jim sues Ready Realty, alleging that the property owner is liable for his injury because it negligently hired an incompetent contractor. 
  • Failed to adequately supervise the contractor. For example, a Ready Realty executive supervises Precise Paving's employees while they are working on the parking lot. He directs their work by giving them instructions on how to perform their jobs. Because Ready Realty has voluntarily assumed responsibility for supervising the repaving contractor, it may be held liable for Precise Paving's negligent acts.

Liability Coverage for Contractor Negligence

If a business has purchased a commercial general liability policy, it is automatically covered for its vicarious liability for negligent acts committed by an independent contractor. Such acts are covered because the policy doesn't exclude injuries caused by the negligence of independent contractors. The policy covers damages the insured business is legally obligated to pay for bodily injury or property damage caused by an occurrence. Injury or damage caused by an independent contractor is covered if it arises out of work the contractor is performing work on the insured company's behalf.

Additional Insured Coverage

When Ready Realty hires Precise Paving to repave the parking lot, Ready knows that its business might be sued if the paving contractor acts negligently and injures a third party. Ready doesn't don't want its liability policy used as first-line coverage for claims attributable to the contractor. Rather, it wants the contractor's policy to serve as primary coverage for those claims.

Thus, Ready Realty requires Precise Paving to cover Ready as an additional insured under the contractor's liability policy. As an additional insured under the paving contractor's liability policy, Ready should be covered for claims resulting from negligence attributable to Precise Paving or jointly to Ready Realty and Precise Paving. Ready's own liability policy will afford backup coverage, insuring those claims on an excess basis.

One disadvantage of additional insured coverage is that the additional insured is sharing the contractor's policy limits with the contractor. A large claim against the contractor could reduce or exhaust its policy limits, leaving little or no coverage for the additional insured. Another pitfall is that the additional insured is relying on the contractor's policy for coverage. The contractor could reduce, alter or cancel the policy without the additional insured's knowledge.

OCP Coverage

An alternative to additional insured coverage is a separate Owners and Contractors Protective Liability (OCP) policy. An OCP policy is typically purchased by a contractor or subcontractor on behalf of a project owner or a general contractor. The policy lists the owner or GC as the named insured. It covers two types of claims. First, it covers claims against the owner or GC that arise out of its vicarious liability for negligent acts committed by the contractor. Secondly, it covers the named company for claims alleging it failed to properly supervise the contractor's work.

An OCP policy offers some advantages over an additional insured coverage. First, the policy covers the named insured only. No other entities are covered so the named insured need not share the policy limits with any other business (e.g., a contractor or subcontractor). Secondly, an OCP policy always applies as primary insurance. Additional insured coverage is usually primary but sometimes applies as excess coverage. Thirdly, the named insured has control over the policy. No one can cancel the policy without its knowledge.