Insuring Your Firm Against Contractor Negligence

Contractor Looking At Blue Prints In A New Hom
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As a general rule, a business that hires an independent contractor isn't responsible for injuries to third parties that result from the contractor's negligence. However, this rule has some exceptions, and businesses that employ contractors should be aware of them. Businesses can protect themselves against claims resulting from contractors' negligence by purchasing liability insurance.

Hiring Company Liability

When an independent contractor is hired by a business to perform a job, and the contractor performs the work negligently, injuring third parties, the business isn't normally liable for the injuries. The responsibility lies instead with the contractor as long as they, not the hiring company, direct how the work is carried out.

Consider the following scenario:

Fancy Foods, a high-end supermarket, hires a contractor called Peerless Painting to paint the exterior of the store. The contract between Fancy Foods and Peerless Painting describes the work that will be done, but doesn't specify how it will be performed. One day, a Peerless employee is on a ladder painting trim on Fancy Foods' building when he accidentally drops a half-full can of paint. The can falls onto Bill, a store customer, injuring his shoulder. Is Fancy Foods responsible for Bill's injury?

The answer is likely no. Bill's injury resulted from negligence committed by an employee of the painting contractor. Peerless Painting, not Fancy Foods, was in charge of the painting work so Peerless is liable for Bill's 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 property owner has a duty to maintain their premises in a safe condition. If the workplace is unsafe and someone is injured, the owner may be liable for the injury. For example, let's say Realty Inc., a property owner, hires Pipes-R-Us to repair a boiler located in a building Realty Inc. owns. Pipes-R-Us does a shoddy repair job, and the boiler subsequently leaks onto the floor nearby. A tenant is injured when they slip and fall on the wet floor. If the tenant sues Realty Inc. for bodily injury, alleging it failed to maintain a safe premises, Realty Inc. may be liable for the tenant's injury.

Hired a Contractor to Perform Work With Peculiar Risks

Work may have "peculiar risks" if it is inherently dangerous and may cause harm unless precautions are taken. For example, suppose that Realty Inc. hires a landscaping contractor to create a garden on its grounds. The building owner knows that old hand grenades are buried on the lot but fails to inform the landscaper of the danger. If a landscaping employee is injured by an exploding grenade while working on the property, the property owner may be liable for the worker's injuries.

Hired a Negligent Contractor

A business that hired a negligent contractor may be liable for injuries caused by the contractor's inferior 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 hired a negligent contractor. 

Failed to Adequately Supervise the Contractor

A business may be liable for negligence committed by an independent contractor if the business assumes control over the contractor's work or authorizes the latter's unsafe practices. For example, Realty Inc. hires Easy Electric to upgrade electrical wiring at an apartment complex Realty Inc. owns. A Realty Inc. executive supervises Easy Electric's employees while they are working on the wiring. The exec directs their work by giving them instructions on how to perform their jobs. Because Realty Inc. has voluntarily assumed responsibility for supervising the electrical contractor, it may be held liable for Easy Electric's negligent acts.

A property owner's duty to maintain a safe premises is non-delegable, meaning the owner can't delegate it to a contractor or anyone else.

Liability Coverage for Contractor Negligence

A business that's insured under a standard general liability policy is automatically covered for its vicarious liability for negligent acts committed by the independent contractors it hires. Such acts are covered because the policy doesn't exclude injuries caused by the negligence of independent contractors. The policy covers claims against the business arising from negligent acts committed by employees, independent contractors, and others acting on the business's behalf.

Additional Insured Coverage

When a business hires an independent contractor, it typically requires the contractor to cover the business as an additional insured under the contractor's general liability policy. This arrangement ensures that the contractor's liability policy (not the hiring company's policy) will provide first-line coverage for claims against the hiring company that arise from the contractor's negligence. The additional insured's (hiring company's) liability policy usually affords excess coverage.

However, one disadvantage of additional insured coverage is that the additional insured must share the contractor's policy limits with the contractor. Another pitfall is that the contractor could reduce, alter, or cancel the policy without the additional insured's knowledge.

Owners and Contractors Protective Liability Policy

An alternative to additional insured coverage is an Owners and Contractors Protective (OCP) liability policy. An OCP policy is typically purchased by a contractor or subcontractor on behalf of a project owner or a general contractor. The owner or general contractor (GC) is the named insured, but the party that buys the policy isn't covered. An OCP policy covers claims against the owner or GC that arise out of their vicarious liability for negligent acts committed by the contractor. The OCP also covers claims against the named insured for failure to properly supervise the contractor's work.

One advantage of an OCP policy over additional insured coverage is that the named insured need not share the policy limits with any other business. Also, the policy can't be canceled by anyone other than the named insured and it always applies as primary insurance. Additional insured coverage is usually, but not always, primary.