Careful Contracting

Matt Gartner

Waste firms engage outside contractors for activities ranging from one-day installations and repairs to long-term construction or remediation projects. While choosing a well-qualified and ethical contractor is the first step, assuring that your business will not be held responsible for a contractor's actions should always be the second.

One hazardous waste landfill learned this the hard way when it contracted with a specialty environmental contractor to construct a new treatment building. During the project, they discovered that they also had to excavate an underground tank. It would only take five days to complete but, because it was different in scope, required a change order to the existing contract. Instead, however, the tank excavation was authorized through a purchase order on a turnkey basis, requiring the same contractor to be responsible for direct oversight and supervision. The waste company hired the necessary unskilled labor to perform the work from a local temporary agency.

During the tank excavation, a temporary employee alleged that the contractor dumped cement on him while he was in the excavation pit. He filed a workers' compensation claim, alleging back injuries and sued both the waste company and contractor for negligence.

During the claims hearing, staff of the waste firm's insurer initially sought to identify the contractor as the responsible party under the construction contract agreement, but discovered that the tank excavation project in question was instead governed by a separate purchase order which had neither indemnification/hold harmless provisions nor certificates of insurance with additional insured provisions.

Since the owner hired the temporary employee from an agency, the insurer's claims staff sought similar indemnification provisions and certificates from the temporary service company, but no such provisions existed. The contract between the landfill owner and the temporary service company lacked an indemnification clause and the certificate of insurance provided did not list the landfill owner as an additional insured. Had it contained this clause, it would have served as a second line of defense, despite the shortcomings of the purchase order.

The waste firm's insurance claims staff initially sought coverage from the contractor under the construction agreement; however, the contractor's insurer issued a denial letter even before realizing that the project was not part of the construction agreement because the contractor's policy included two exclusions - one for temporary employee and another for work on landfills. This suggests that, even when appropriate risk transfer provisions are included in a contract, an insurer may still deny coverage based on policy exclusions. For example, in this case, to counteract a landfill exclusion, it is necessary not only to include the corporate name as an additional insured, but also the specific landfill name and physical address. A temporary employee exclusion on a contractor's policy should compel the owner to negotiate with the temporary agency, rather than directly hiring temporary employees.

In this particular instance, local landfill managers authorized a short duration project to be managed by a known, reliable and trusted construction specialist. In expediting the project without contractual provisions from the contractor and temporary agency, they assumed a disproportionate share of the risk and in the process, learned some very valuable risk management lessons, such as:

Purchase orders for subcontracted work should have indemnification clauses and additional insured requirements from all parties involved in the project and work on the project should not begin until you are sure all provisions are properly documented and signed.

Agreements with temporary or labor leasing agencies should include indemnification/hold harmless clauses and certificates of insurance with additional insured designation and necessary endorsements, whether hired directly or through contractors.

A certificate of insurance is for information purposes only. It verifies coverage. Without specific language naming a party as an additional insured with an attached contractual and additional insured endorsement, it may not protect owners and contractors from acts of negligence on the part of subcontractors.

Parties who develop subcontracted projects should request, receive and review a subcontractor's general liability policy to identify exclusions that could negate indemnification agreements and additional insured designations.

Matt Gartner
XL Specialty Insurance Company
www.xlinsurance.com

Related Stories