The risk of subcontractor insurance

Does your subcontractor’s insurance cover meet your client’s demands? Solicitor Christopher Coveney reports. Christopher Coveney is a solicitor in the construction team at Thomas Eggar LLP

It is common for the employer under building contracts to require that, if the contractor enters into subcontracts, the subcontractor will hold professional indemnity cover of a specified level. Obviously, the requirement is usually made where the subcontractor is to provide design. The level may depend on the element of the work for which the subcontractor is engaged. The cover preferred by employers is, generally, of the ‘each and every claim’ sort.

In their desire to conclude contracts, it appears that main contractors may be looking to subcontractors’ ability to offer works packages competitively whilst overlooking the employer’s requirements for insurance. On a recent project, our client, the employer, was presented for a second time with a request by the contractor to waive the contractual requirement for each and every claim insurance, at a prescribed level, in favour of lesser insurance. Not unreasonably, it asked the question as to why the contractor was looking to deal with subcontractors whose insurance did not meet the requirements.

On this particular project, our employer accepted the insurance that was available, but what if an employer does not? Can the employer refuse to allow the subcontractor to undertake its works?

It seems, as a matter of simple contractual principle, that the answer is ‘yes’. The risk of resulting delay would lie with the contractor.

Where a subcontractor is providing design for the contractor, the likelihood is that the employer’s first avenue of recourse, in the event of a claim for defective design, would be against the contractor, in any event. Provided that the contractor is sufficiently covered to meet the claim, the employer may have no interest in pursuing the subcontractor. However, contractors may have misfortunes and it is not by chance that employers require those providing design to provide collateral warranties and to have sufficient insurance to cover the risk of their negligence.

To avoid the situation of the contractor engaging with subcontractors for the provision of works packages, then finding that the subcontractors’ insurance does not meet the requirements of the contract, we would suggest that:

  • The requirements for subcontractor insurance are highlighted in the invitation to tender documents;
  • The contractor discusses with the employer at pre-tender stage any concern that the level of insurance required is too high or outside industry norms;
  • That the contractor enquires at the outset of any pre-contract engagement with the subcontractor whether the subcontractor has the required level of cover;
  • That tenderers are required to confirm by their tender that they accept the incidents of insurance required of subcontractors.

Let it not be assumed that employers will necessarily accept less than the insurance that the contract prescribes.

In the recent project, the absence of insurance for the proposed provider of an internal structure calls into question whether that provider should be allowed to be a subcontractor at all. The other discrepancy concerned a proposed subcontractor with ‘aggregate’ rather than ‘each and every claim’ sort of insurance, which was easier to deal with but required enquiries of the claims record of the subcontractor.

Project managers and contractors are advised, therefore, to make enquiries at the outset whether proposed subcontractor’s cover meets the requirement of the proposed contract.