Insuring Your Firm Against Contractor Negligence

Drawing of worker laying floor tiles
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If your company hires an independent contractor, can your firm be held liable for injuries caused by the contractor's negligence? The answer is maybe. This article will explain the circumstances under which a business might be held responsible for negligence committed by an independent contractor. It will also explain how your business can protect itself against such claims.

Independent Contractor Rule

As a general rule, a business isn't responsible for third-party injuries caused by an accident resulting from a contractor's negligence.

The contractor is in charge of the work he or she is performing, and has a duty to control the risks associated with that work. Thus, the contractor is liable for injuries caused by that work. Consider the following scenario.

Example

Harry owns Happy Hardware, a retail hardware store. The store is undergoing renovation, but will remain in operation throughout the construction process. Harry has hired Fantastic Flooring to replace the old flooring with new floor coverings.

Late one afternoon, a Fantastic employee is working at one end of the store. The work area has been roped off. The worker is measuring cleaning fluid when he accidentally knocks over the bottle. He mops up the spill, ​but doesn't notice that some liquid has traveled outside the roped-off area. Bill, a customer, is walking by when he slips and falls on the wet floor. If Bill is injured in the fall, is Happy Hardware liable for his injury?

The answer is likely no. Fantastic Flooring was in charge of the flooring work, so it (not the hardware store) is responsible for the customer's injury.

The independent contractor rule has some exceptions. A business may be held liable for negligence committed by an independent contractor under the circumstances described below.

  • The business failed to maintain a safe premises. A business owner is obligated to ensure that the workplace is safe for employees, customers and other visitors (including employees of subcontractors). If the workplace is unsafe and someone is injured, the owner may be liable for the injury. For example, a Fantastic Flooring employee is working on Happy Hardware's floor when he plugs a vacuum cleaner into a power outlet. The outlet is faulty and an explosion occurs, injuring the Fantastic employee. Happy Hardware failed to maintain its premises properly. Thus, the hardware store may be vicariously liable for the worker's injury.
  • The business hired a contractor to perform work that had peculiar risks. Work may have "peculiar risks" if it is inherently dangerous and likely to cause harm even if precautions are taken. An example is blasting. Work may also have peculiar risks if the hiring company is aware of a hazard but fails to take adequate precautions. For example, Harry knows that black mold has grown under the old floor tiles. Harry fails to mention this fact to Fantastic Flooring. He also fails to take any precautions, such as recommending workers use masks and gloves. If the flooring work releases the mold, which sickens a customer or a Fantastic employee, Happy Hardware may be vicariously liable for the injury.
  • The business has hired an incompetent contractor. That is, a company owner or manager negligently selected a contractor that wasn't fit to perform the work. For example, a Happy Hardware customer is injured by fumes created when a Fantastic employee mixes bleach with ammonia. The customer learns that Harry hired Fantastic Flooring as a favor to his brother-in-law, who owns the company. Harry hired Fantastic Flooring even though he knew Fantastic had a several previous OSHA citations. The customer sues Happy Hardware, alleging that the store is liable for his injury because it negligently hired an incompetent contractor. 
  • The business failed to adequately supervise the contractor. For example, Harry takes control of Fantastic Flooring's employees while they are working on the floor. He directs their work by giving them instructions on how to perform their jobs. Because Harry has voluntarily assumed responsibility for supervising the flooring contractor, he may be held liable for its negligent acts.

    Liability Coverage for Contractor Negligence

    A business is covered for claims like those outlined above under a commercial general liability policy. The policy covers damages the insured business is legally obligated to pay for bodily injury or property damage to a third party caused by an occurrence. The business is covered for its vicarious liability for negligent acts committed by an independent contractor. This coverage is included because the policy doesn't exclude injuries caused by acts of independent contractors. As long as the contractor is performing work on the company's behalf when the injury or damage takes place, the claim against the company should be covered.

    Additional Insured Coverage

    In the scenario outlined above, Happy Hardware has hired Fantastic Flooring to replace an old floor. Harry knows that his business might be sued if the flooring contractor acts negligently, and injures a third party. Harry doesn't don't want to use the store's liability policy as first-line coverage for claims attributable to the contractor. He wants the contractor's policy to serve as primary coverage for those claims.

    Thus, Harry requires Fantastic Flooring to cover the business as an additional insured under the contractor's liability policy. As an additional insured under Fantastic Flooring's liability policy, Happy Hardware should be covered for claims resulting from negligence attributable to Fantastic, or jointly to Fantastic and Happy Hardware. Happy Hardware's own liability policy will afford backup coverage, insuring those claims on an excess basis.

    Additional insured coverage has some disadvantages. One major drawback is that the additional insured is sharing the contractor's policy limits with the contractor. A large claim against Fantastic Flooring could reduce or exhaust Fantastic's policy limits, leaving little or no coverage for Happy Hardware. Another disadvantage is that the additional insured is relying on the contractor's policy for coverage. The contractor could alter or cancel the policy without the additional insured's knowledge. Thirdly, additional insured wording often contains coverage limitations. For instance, it may provide no greater limits than are required by the contract, even if the policy provides higher limits.

    OCP Coverage

    An alternative to additional insured coverage is Owners and Contractors Protective Liability or OCP coverage for short. This coverage may be purchased by a contractor or subcontractor to insure a project owner or a general contractor. It is written as a separate policy.

    An OCP policy covers claims or suits against the insured for bodily injury or property damage caused by an occurrence. Coverage applies only if the injury or damage arises out of either of the following:

    • operations performed by the contractor at the location listed in the declarations
    • the insured's acts or omissions in the general supervision of those operations

    In other words, OCP insurance covers the named insured company for its vicarious liability for negligent acts committed by the contractor. It also covers the named company for claims alleging it failed to properly supervise the contractor's work.

    Advantages

    For the company named in the policy, OCP coverage has three advantages over an additional insured endorsement. First, an OCP policy includes its own aggregate limit and each occurrence limits. The company named on the policy need not share these limits with a contractor or subcontractor. Secondly, an OCP policy applies as primary insurance. If a claim covered by the OCP policy is filed against the insured, the OCP insurer will pay the claim without seeking contribution from the insured's own liability policy. Additional insured coverage usually, but not always, applies as primary coverage. Thirdly, the named insured has control over the policy. No one may cancel the policy without the company's knowledge.

    Disadvantages

    OCP coverage has several disadvantages. First, it covers only the two types of claims described above. An OCP policy may provide narrower coverage than an additional insured endorsement. Moreover, disputes can arise over the meaning of "general supervision," since this term is not defined in the policy. Secondly, OCP coverage applies only to claims arising from operations performed by the contractor listed in the declarations. The operations the contractor is performing, and the location where they are being performed must also be described.

    Not a Substitute for General Liability

    An OCP policy is not a substitute for general liability insurance. The company named in the policy will need its own general liability insurance to protect it from claims not covered by the OCP policy.