Ensuring Adequate Insurance Coverage for Downstream Contractors and Suppliers

By Brendan Bush, M3 Insurance

As the construction industry continues to evolve, it becomes increasingly important for construction companies to safeguard themselves against potential risks and liabilities. One crucial aspect of risk management is ensuring that downstream contractors and suppliers have adequate insurance coverage.

This article outlines steps construction companies should take to ensure proper insurance coverage for their downstream partners and discusses the significance of certificates of insurance, the limitations they pose, and the importance of various policy endorsements.

About certificates of insurance

Certificates of insurance are documents that provide evidence of insurance coverage. In the construction industry, certificates of insurance play a vital role in verifying insurance coverage for downstream subcontractors and suppliers. They are typically issued by an insurance company or broker on behalf of an insured party, such as a subcontractor or supplier, to demonstrate that they have active insurance policies, and adequate coverages and limits in place. These certificates contain important information, including the type of coverage, policy limits, policy effective dates, and the name of the insurance carrier.

It is important to require certificates of insurance. Requiring certificates of insurance from all downstream subcontractors and suppliers is a crucial step for construction companies. Certificates of insurance serve as a verification tool that a subcontractor or supplier has insurance coverage at a given point in time. They provide assurance to clients, contractors, and other parties involved in construction projects that the subcontractor or supplier has taken steps to manage potential risks and liabilities and comply with the insurance requirements of the construction contract.

By requiring certificates of insurance, construction companies can mitigate potential risks associated with working with uninsured or underinsured subcontractors and suppliers. Insurance coverage helps protect against financial losses resulting from accidents, property damage, or other liability claims that may arise during the course of a construction project.

Limitations of certificates of insurance

Despite their importance, it is essential to recognize the limitations of certificates of insurance.

Their information is limited — Certificates of insurance provide a snapshot of coverage at the time of issuance. They may not include all pertinent details, such as policy exclusions or specific endorsements that could impact coverage for certain types of claims. Consequently, as outlined below, it is crucial to request and review various policy endorsements to fully understand the scope and limitations of your downstream partners’ coverage.

Brendan Bush

Brendan Bush

"By requiring certificates of insurance, construction companies can mitigate potential risks associated with working with uninsured or underinsured subcontractors and suppliers."

They need verification — In some cases, certificates of insurance can be subject to fraud or misrepresentation. It is essential for construction companies to verify the authenticity and accuracy of the certificates, ensuring that the coverage is still in force and aligns with the project requirements.

Policies can be canceled, modified, or non-renewed without immediate notification to the certificate holder — Certificates of insurance do not guarantee continuous coverage throughout the duration of a project. It is essential to establish mechanisms for ongoing monitoring and verification of insurance coverage to address any policy changes or lapses.

Many construction companies are beginning to leverage AI-powered platforms for automating certificate of insurance compliance. These platforms can help businesses of all sizes manage certificate of insurance compliance more efficiently and effectively, reducing the risk of underinsurance and compliance violations.

Request and review crucial policy endorsements

Given the inherent limitations of certificates of insurance, construction companies should request and review crucial policy endorsements to fully understand the scope and limitations of their downstream partners’ insurance coverage – including the additional insured, waiver of subrogation, and primary and non-contributory endorsements.

Request additional insured endorsements — Requesting additional insured endorsements is a critical step to extend coverage from the subcontractor’s or supplier’s policy to the upstream construction company and owner. This endorsement ensures that the construction company is protected against claims arising from the actions or negligence of the downstream party. It provides an extra layer of security and helps allocate responsibility appropriately.

Include a waiver of subrogation — A waiver of subrogation endorsement is essential for construction companies – it prevents the downstream subcontractor or supplier’s insurance company from seeking reimbursement from the construction company in case of a covered loss. It helps streamline the claims process and avoids potential disputes between insurance carriers.

Request primary and non-contributory endorsements — Requesting primary and non-contributory endorsements is vital to protect the construction company’s insurance coverage. This endorsement ensures that the subcontractor’s or supplier’s insurance policy is primary and will respond first in the event of a claim. It also guarantees that the subcontractor’s or supplier’s policy will not seek contribution from the construction company’s policy, thereby safeguarding the construction company’s coverage.

Conclusion: Minimize financial risk

In the construction industry, ensuring that downstream subcontractors and suppliers have adequate insurance coverage is crucial for risk management. While certificates of insurance provide initial information, they have limitations that can leave construction companies exposed to potential liabilities. By requesting additional insured, waiver of subrogation, and primary and non-contributory endorsements, construction companies can bolster their protection and minimize financial risks.

Brendan Bush is an account executive with M3 Insurance. He specializes in counseling construction companies, real estate companies, design professionals, and environmental firms on property and casualty insurance and overall commercial risk management needs.

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