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Insuring the Independent Contractor Exposure

Author: VU Faculty

Many businesses use independent contractors. While the "principal" (owner) is usually not liable for the actions of an independent contractor, third parties can make claim or sue the owner on the basis that the work was inherently dangerous, the owner supplied defective tools or equipment, negligently hired or supervised the contractor, etc. Owners have at least four ways of protecting themselves for claims against them which arise out of an independent contractor's actions.

 

Many businesses use independent contractors. While the "principal" (owner) is usually not liable for the actions of an independent contractor, third parties can make claim or sue on the basis that the work was inherently dangerous, the owner supplied defective tools or equipment, negligently hired or supervised the contractor, etc. Whether such claim or suit has merit, that doesn't keep the owner from being sued, so in many cases, defense coverage is as important as indemnity provisions.

The CGL policy protects the principal/owner from suits based on direct or vicarious liability for the contractor's actions. The CGL insuring agreement says that coverage applies to the insured if he/she is "legally obligated" for a loss without regard to the cause of the loss. So, while an independent contractor may not be an "insured" under the owner's CGL, the owner is covered for the contractor's negligence. However, many businesses will still insist that contractors bear the responsibility of claims or suits for which they are responsible.

So, owners have at least four ways of protecting themselves for claims against them which arise out of an independent contractor's actions:

1. Require a hold harmless agreement, and/or
2. Rely on their own CG 00 01 12 07, and/or
3. Be named as an additional insured under the contractor's CGL, and/or
4. Require the contractor to furnish an OCP (CG 00 09 12 07) policy.

Let's take a quick look at each of these options, focusing on the most viable one...the OCP.

Hold Harmless Agreements. While a hold harmless agreement is a good idea, it isn't sufficient by itself unless it is certain that the contractor has the financial resources to pay any and all claims against the owner for which the contractor is liable. Not only that, but the owner may have to file suit to enforce the agreement and the third-party claimant isn't interested in that...they just want their money.

Owner's CGL. Sole reliance on the owner's own CGL, if the owner is using a significant number of contractors, may quickly result in a depletion of the aggregate limits, although it does give the owner greater control over his/her defense. A fundamental tenet of our legal system, though, is that tortfeasors should be responsible for their own actions. If you throw in the element of making business decisions, reliance on one's own CGL for the negligence of others probably doesn't make good business sense, nor does the inclusion of loss experience from an outside party into one's own CGL make sense.

Additional Insured Status. Complete reliance on coverage as an additional insured under someone else's policy is rarely a good risk management decision. While being an additional insured is generally better than NOT being one, it should not be the primary means of risk transfer. You are at the mercy of the other party to maintain the insurance in force and at adequate limits, and their aggregate limit could be depleted without the owner's knowledge. As an additional insured (and possibly one of MANY AI's), the owner must share limits with a potentially large group of insureds...so, there might not be much insurance from the standpoint of limits to share. The owner will also want to make sure that the policy under which he/she is named as an additional insured will be primary coverage, with the owner's CGL being excess.

For a look at additional insured issues, check out this article in our research library: CGL Additional Insureds...A Risky Business.

OCP Coverage. The Owners and Contractors Protective (OCP) policy is an alternative to just naming the owner as an additional insured, though each method has its advantages and disadvantages. The OCP policy is usually purchased by the contractor, with the owner being the named insured. The OCP does not have as widespread a use in the construction industry as it did when originally introduced.

The main financial downside of the OCP (from the contractor's standpoint) is that there is obviously an additional premium that he/she has to pay to benefit the owner as named insured. However, the premium is usually quite affordable and the named insured has a whole new set of limits to draw on...and those limits are PRIMARY over any other coverage the owner has. The OCP clearly states that it is primary to any other coverage available to the named insured...that's not necessarily true if they only have additional insured status using non-ISO forms.

The coverage itself is similar to being an additional insured, though coverage under the OCP is not quite as broad as the CGL, and OCP coverage only applies if the named insured is held vicariously liable for loss arising out of the acts of the designated contractor.

The OCP does not include products/completed operations coverage...once the work ends, the insurance ends under an OCP. However, the most recent version of the most often used additional insured endorsement (CG 20 10 07 04) doesn't either, so that lack of coverage is a wash (though the coverage can be provided by the CG 20 37 07 04). Also, the OCP doesn't include personal injury coverage, if that's an issue.

As an additional insured, the client would not be entitled to notice of cancellation; as the named insured on an OCP, they would. That could be of critical importance.

Here is an excellent IRMI article from VU faculty member Craig Stanovich:

Keep in mind that the above discussion assumes "ISO standard" coverage forms...many insurance companies may use their own versions of these forms and/or may manuscript them, particularly additional insured endorsements. Beware of some of these proprietary AI forms, particularly if they include defense within limits.

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