Tips for Navigating Liabilities & Subcontractor Responsibilities

The entanglement and overlap of work among multiple contractors is often inevitable due to the complex nature of construction projects and the diverse specialties of the contractors involved. When a property owner files a lawsuit related to alleged construction defects, the initial response typically involves investigating the defect and identifying the parties providing services and material to that part of the project.

Navigating Liabilities & Subcontractor Responsibilities

Recently, plaintiffs have seemingly deviated away from performing their own investigations to identify or exclude specific contractors that may be responsible for the alleged defects. Instead, they often file the lawsuit solely against the general contractor, leaving that party to involve its subcontractors through a third-party complaint. This approach is not necessarily inappropriate; plaintiffs may choose not to name subcontractors due to the lack of privity between parties. However, omitting relevant parties at the outset can lead to delays in the proceedings.

One advantage for plaintiffs in naming a single defendant is the reduced volume of written discovery and dispositive motions that would otherwise be saddled on the plaintiff. This approach lessens the time plaintiffs’ attorneys spend responding to discovery requests and motions. Instead, the general contractor bears this burden while also building its defense and ensuring that necessary subcontractors are included in the proceedings.

Shifting the Burden in Construction Litigation

To mitigate litigation expenses and potential liability, general contractors and even second-tier subcontractors often use a “tender.” The tender process involves one party requesting another to assume responsibility for defending against a lawsuit and covering any resulting liability. This process can occur between a contractor and its subcontractor or between an insured and its insurer, and it is typically outlined in contractual language. It can also be created by statute or case law.

In cases where a plaintiff claims construction defects against a general contractor, the effectiveness of a tender depends on the express language in the subcontract agreement. The desired language for a successful tender includes indemnification provisions and/or requirements for subcontractors to name the general contractor as an additional insured on their general liability policy.

Using Tenders & Insurance to Manage Liability

Indemnification clauses are common in contracts and should be implemented to avoid the general contractor being left with responsibility for its subcontractor’s defective work. A robust indemnification provision allows the general contractor and its insurer to transfer defense costs to the subcontractor. When a defect is alleged, the general contractor can rely on a specific provision in the subcontract agreement, requiring the subcontractor to provide a defense and cover damages related to the subcontractor’s work. A well-drafted indemnification clause can minimize disputes between insurers over the clause’s sufficiency, thus potentially relieving the general contractor of a significant portion of the investigation and litigation burden.

Despite the existence of a contractual indemnification clause, it is not uncommon for the tender to be rejected. Rejections may occur if the alleged defects are deemed outside the scope of the indemnification clause or if further investigation is requested regarding the work performed compared to the plaintiff’s allegations. This will require the contractor to continue with its own defense while it also pursues the validity of the tender.

Beyond express indemnification clauses, another recommended best practice is the requirement that subcontractors add the general contractor as an additional insured on their general liability policy. This arrangement extends protection to the general contractor under the subcontractor’s insurance policy. However, coverage through the additional insured endorsement is often limited to liabilities arising from the subcontractor’s work. Liability created by the general contractor or a third party, which might be covered under the subcontractor’s policy, will not be covered by the subcontractor’s insurance policy, even with the additional insured endorsement.

Combining a clear indemnification provision with an additional insured endorsement provides a general contractor an avenue to avoid defense costs and liability related to its subcontractor’s defective work. In projects with numerous contractors and resulting defect claims, the ability to successfully tender transfers the associated headaches and expenses. Without these contractual requirements, the effectiveness of a tender diminishes, and the general contractor, along with its insurer, must defend against direct claims by the plaintiff and seek contribution from involved subcontractors — a costly undertaking. Properly preparing for and utilizing tenders should be a priority for construction professionals before undertaking projects that involve specialized subcontractor work.