At MECON Insurance, we’ve observed a recent trend. Some subcontractors within high-risk classes like sheet piling, waterproofing, plumbing and other high-risk occupations, are passing-off some, if not all, of the risk of defects or failures in their products up the line to the contractor that employs them via their engagement documents.
Why is this happening?
Traditionally, subcontractors would stand behind their work (operationally, ethically or via subcontract agreement). However, the cost of insurance (if they can get it at all!) has resulted in some subcontractors looking for ways to off-load their risk.
They can do this as a simple condition in their engagement documents, or it can be more complex included in their subcontracts. The reason some are doing this is because insurance has become very expensive, for the ones that can get it. Some are struggling to get insurance at all.
As a result, they’re effectively making the person who employs them their surrogate insurer. Those builders that take on such a risk, they themselves face incurring high premiums, high excesses (or both) or may become uninsurable commensurate with the risk they have assumed.
What should builders do?
The key point here is to be vigilant. Understand what’s happening, and how and why it’s happening. You do not have to accept Draconian terms in your engagement documents (a.k.a. job sheets or subcontracts).
We would recommend instead that you search for subcontractors who don’t apply those sorts of terms. Chances are, those that assume their own risk are also delivering better outcomes – they’re backing themselves and the quality of their work and in turn, their insurers are backing them. Your subcontractors should be the masters of their trade and have a good understanding of the risks and risk management associated with their trade.
Instead, there have been many examples lately of head contractors looking at the job sheets and perhaps not understanding the risk assumption, so they sign it and ascribe to this additional exposure.
One example of this unintended consequence that we’ve seen is with a letter of engagement given to the head contractor by a sheet piler. Sheet piling is unique and is often very risky as it’s generally the cheapest form of engineered retention system.
Historically, even just five years ago, you could reasonably easily insure a sheet piling contractor’s risk. It may have still been high risk, with high premiums and deductibles, but you could insure it. Now, there are far fewer underwriters that will insure sheet piling contractors.
In this case, the head contractor employed a subcontractor who avoided the risk of the sheet piling it was installing and passed it onto the head contractor. Unfortunately, the sheet piling collapsed, and both parties have ended up in a dispute with loss, damage and liability running into the $ millions.
The lesson (learned the very hard way in this example) is that this was a manageable risk. Secant or contiguous piling, although more expensive than sheet piling, presented far less risk than sheet piling. Alternatively, a sheet piling contractor prepared to back its work and use its own insurance and “clear” terms of engagement, would have vastly reduced the risk to the contractor.
One rule of thumb that we suggest is that if you’re finding subcontractors that would seek to contract out of any risk in their work (which they’re intimately familiar with), then it usually involves too much risk.
If you are going to go forward, do it with eyes wide open, but we would strongly suggest choosing a subcontractor that, while they may cost more upfront, have no reservations backing their own work.
If you have any questions around this risk, please don’t hesitate to contact us – we’re happy to help.