What you don’t know can hurt you!

Identifying Risky Exclusions in Subcontractor Insurance

In recent months, I’ve written articles and released videos aimed at general contractors, highlighting how exclusions within general liability policies can significantly impact business protection. I have also emphasized the importance of compliance, especially when hiring subcontractors—to ensure proper coverage and avoid costly, unexpected audits.

My latest discussions focused on action-over and third-party action-over exclusions, which sparked insightful questions from clients and prospects in the general contractor space. Many were concerned and wanted to understand better how they could determine whether a subcontractor’s policy contained exclusions that might leave them exposed. The short answer? A GC wouldn’t necessarily know.

Identifying these exclusions requires extensive knowledge of insurance policies, a deep understanding of the marketplace, and knowing what specific information to request. This is where working with a dedicated risk management partner like 4C Advising becomes invaluable—helping GCs navigate insurance complexities and ensuring they have the protection they need.

My Search for a Better Solution

My commitment to helping general contractors better protect themselves began in 2018 when a valued client was nearing completion of a custom home build on the California coast. This highly diligent general contractor client had always prioritized compliance and took every necessary step to protect his firm. He ensured that all subcontractors provided Certificates of Insurance (COIs) with additional insured endorsements in his firm’s favor. The general liability policies included primary and non-contributory wording, and he had executed a subcontractor agreement with solid indemnification and hold-harmless clauses.

As part of the final preparations, the contractor hired a cleaning company to ensure the home was pristine before the final walk-through. Unfortunately, the company caused irreparable damage during the window-cleaning process, leading to nearly $500,000 in losses.

When the homeowner demanded the windows be replaced, my client followed all proper channels and tendered the loss to the subcontractor responsible for the damage. Due to his diligent documentation and compliance efforts, he expected a smooth claims process.

However, he was shocked when the subcontractor’s Commercial General Liability (CGL) carrier denied the claim. The reason? A hidden exclusion in the policy that barred coverage for work on homes exceeding 5,000 square feet.

This eye-opening experience marked the beginning of my mission to find better solutions for my clients, ensuring they truly understand their risks and have the proper protection in place before an issue arises.

The Hidden Dangers of Policy Exclusions

A general liability policy covers property damage and bodily injury caused by a subcontractor’s work. However, insurance carriers often include exclusions that limit or eliminate coverage for specific claims. Here are a few key exclusions that can significantly impact general contractors:

• Subsidence Exclusion: This excludes coverage for claims related to earth movement, such as soil settling, shifting, or sinking. This can be a significant issue in excavation or foundation work.
• Action Over Exclusion: Prevents coverage for employee injuries that lead to lawsuits against the general contractor. If a subcontractor’s worker gets injured on-site and sues you, you could be left without coverage.
• Residential or Multi-Family Exclusions: Some policies exclude coverage for work on residential or multi-family projects, a significant issue for GCs working in those sectors.
• Designated Work Exclusions: These exclusions specify certain types of work that are not covered, meaning a subcontractor could be uninsured for the task they are hired to perform.
• Independent Contractor Exclusions: If a subcontractor hires additional independent contractors, some policies exclude coverage for claims related to their work.

These exclusions are often buried deep within the policy language, making them easy to overlook unless you know where to look.

We remain vigilant and stay informed about the evolving exclusions circulating in the marketplace.

How to Identify Risky Exclusions

Understanding what exclusions are in your subcontractors’ policies requires more than just glancing at a COI. A COI provides only a summary of coverage and does not detail policy exclusions. To get the whole picture, you need to:

1. Request the Full Policy or Endorsement Pages: Always ask subcontractors for their policy’s declarations and endorsements to verify exclusions.
2. Look for Key Red Flags: If the policy includes any of the abovementioned exclusions, it could leave you vulnerable.
3. Engage an Expert for Review: Insurance policies can be complex. Work with a risk management professional or compliance service to ensure you are not missing any critical gaps in coverage.

The Role of Subcontractor Compliance & COI Tracking

Ensuring subcontractors have adequate insurance isn’t just about compliance but protecting your business from financial risk. This is where subcontractor compliance programs and COI tracking come into play.

At 4C, we provide general contractors with a streamlined solution for tracking COIs, verifying coverage, and identifying risky exclusions before they become problematic. Our system ensures that all subcontractors maintain proper coverage and flags gaps before they impact your bottom line.

Incorporating technology-driven compliance solutions, such as automated document tracking, verification, and expiration reminders, can make this process significantly more efficient. With instant document data extraction and endorsement analysis, general contractors can gain real-time insights into potential gaps in coverage. These solutions also streamline vendor communication through in-app messaging and automated follow-ups, ensuring compliance efforts remain seamless and proactive.

By leveraging compliance assistance and analytics, contractors can maintain a comprehensive risk management strategy that prevents costly surprises and strengthens overall project security.

Final Thoughts & Call to Action

Insurance exclusions can be a hidden threat that risks your business. Being proactive about subcontractor compliance and insurance tracking can prevent costly surprises. Don’t wait until it’s too late—take control of your risk management strategy today.

If you’re unsure whether your subcontractors’ insurance policies protect you, contact our team at 4C. We can help you establish a robust compliance program that keeps your projects and business secure.

Do you have any questions? Contact us today to discuss how you can safeguard your projects against hidden insurance risks.