A Subcontractor’s Self-Insured Retention Can Negate A General Contractor’s Additional Insured Status

In the commercial contractor setting, it is common for the contract between the general contractor or premises owner and the subcontractor to contain both an indemnification clause and an insurance clause. The indemnification clause requires the subcontractor to protect the general contractor to defend and indemnify the general contractor should it be sued. The insurance clause inserted by the general contractor will usually require the subcontractor to carry commercial general liability limits in an amount of at least $1 million dollars per occurrence. In addition, the contract will require the subcontractor to ensure that the general contractor is named on the subcontractor’s commercial general liability policy as an additional insured.

The requirement to purchase liability insurance for the contractor seems like a simple endeavor. However, problems arise when the subcontractor, in an effort to lower its premiums, procures a liability insurance policy (with its full regiment of bells and whistles) but agrees to a large self-insured retention (SIR) that I have seen as high as $500,000. A self-insured retention is an amount the subcontractor agreed to pay out-of-pocket before the insurance company is on the hook for its first dollar, and the insurance policy will detail the expenses that encompass the self-insured retention.

If an accident happens at the work site and the general contractor is sued, the contractor, as a named additional insured, will certainly look to the subcontractor’s insurance carrier for coverage. However, even if the tender is accepted by the insurance carrier, the general contractor will still be subject to the same self-insured retention amount as the subcontractor. Certainly, the contractor did not receive the benefit of what it had bargained for in its contract with the subcontractor, and although the subcontractor can be sued for breach of contract for failure to comply with the terms of the contract, that just means another lawsuit against a company that may very well be judgment proof.

In the context discussed above, when contracting with subcontractors and requiring the subcontractor to have the prime contractor named as an additional insured, the general contractor needs to take that one extra, but extremely simple step to ensure that it is protected. The general contractor needs to review the declaration page of the subcontractor’s commercial general liability policy to confirm that it is (1) named as an additional insured and not just a certificate holder, and (2) that it does not contain a self-insured retention (at least concerning the additional insured).