Independent Contractors Limits of Liability

Historically, MCIT has recommended members require independent contractors to carry insurance with limits of liability that at a minimum match Minnesota’s statutory tort caps.

The reality is that:

• • Independent contractors may find it difficult to obtain liability insurance that matches the tort cap limits.

• • In certain circumstances, the cost to obtain this coverage can limit an independent contractor’s ability to bid on a project.

Minnesota Statutes Section 466.04 Maximum Liability

Minnesota Statutes Chapter 466 currently caps the limit for tort claims against municipalities at $500,000 per claimant and $1.5 million per occurrence. Members have expressed concern that contractors may find it difficult to purchase insurance that reflects these limits.

Typically, contractor’s liability insurance is purchased in $1 million increments. As a result, meeting the minimum recommendation often means buying at least $2 million of insurance.

Many contractors have umbrella policies that provide this greater financial protection. For others, additional coverage may be unavailable or prohibitively priced given the amount of the contract (e.g., lawn mowing, painting or cleaning).

MCIT recognizes the dilemma this poses for members but continues to recommend (not to be confused with requires or mandates) members use the tort caps as a benchmark when determining adequate limits of liability for its independent contractors.

Reasons Independent Contractors’ Insurance Limits Should Match Tort Caps

An independent contractor’s exposure is not limited by the tort caps; however, there are good reasons to use these limits as a starting point when deciding what limits to require of contractors. Having a contractor’s occurrence limit mirror the statutory cap more likely ensures:

• • The contractor’s coverage will be adequate to cover a claim. Absent having sufficient insurance limits, an aggrieved party may seek additional compensation from the member. MCIT does not cover liability arising from a contractor’s negligence and such compensation would be the member’s responsibility.

• • MCIT can pursue recovery against the contractor’s insurance company in cases where the member is named as the sole defendant even though the contractor has the majority of the negligence. Therefore, it is important that the amount of insurance available at least matches the member’s potential exposure.

General Aggregate Limit

A contractor’s insurance policy has both a per occurrence limit and a general aggregate limit. The per occurrence limit applies to one event. This is the most the insurance company will pay for that one incident.

The general aggregate limit is an annual aggregate limit meaning the most the insurance company will pay in claims for the policy year. Once the general aggregate limit is met, the insurance coverage is exhausted. MCIT recommends that members require a general aggregate limit that is at least twice the required per occurrence limit.

The required per occurrence limit cannot be met by the general aggregate limit. They are distinct limits, serving different purposes and are not interchangeable.

MCIT members have no general aggregate limit. MCIT does not limit the number of liability claims or the total claim dollars paid annually on a member’s behalf. This provides members better coverage than if they had a general aggregate.

Individual Projects

Members have a variety of projects that involve independent contractors. No two projects are exactly alike. MCIT recommends that projects be reviewed on an individual basis to determine the limits of liability required of the independent contractor that will best protect the member in the event of a loss.

Factors to consider include:

• • Size and scope of the project

• • Risks posed by the project

• • Lines of coverage needed ( e.g., general liability, auto liability, professional liability)

Each member must weigh the pros and cons of requiring a contractor to secure at least $1.5 million in coverage. Large projects, such as the construction of a new road or building or when the likelihood exists that a single incident may result in multiple claims, would suggest that the limits of liability coverage from the independent contractor should meet the tort cap limits at a minimum.

Small projects, for example, touch up painting work for one day on a building or general clean-up work, may suggest that liability coverage could be less than the tort cap given the relatively small exposure to the member.

Generally, the higher the coverage limits a contractor has in place, the more a member’s exposure is reduced, which benefits the member and MCIT as a whole.

Additional Insured Status

Additional insured status is intended to provide extra protection to members in the event of a claim. Additional insured refers to an entity that is covered by the insurance policy of another organization. This status is provided by an endorsement or written amendment to the contractor’s policy.

Like primary coverage, additional insured coverage typically provides both defense and indemnity to the additional insured. This protection is owed to the additional insured for a short time even when the contractor has failed to pay the premium. When an insurance company cancels the contractor’s insurance for not paying the premium, the additional insured likely has coverage for up to 10 days after cancellation. Rules may differ from policy to policy, but most insurance companies offer an additional insured endorsement.

Regardless of whether the member is eventually found to be responsible or even partially responsible for a third-party liability claim resulting from the contract or project, the member likely will be involved in a costly and time-consuming claim process. Therefore, MCIT recommends that members require additional insured status with respect to the contractor’s general liability, auto and excess/umbrella policies.

Member agreements should require the contractor to name the member as an additional insured on the contractor’s liability policies. Members should obtain a copy of the additional insured endorsement from the contractor’s policy. This is the only way to ensure that the organization is an additional insured. Additional insured status is typically not granted under workers’ compensation or professional liability policies.

Start Right with a Contractor

Ensuring that the independent contractor has adequate coverage for the work to be performed starts well before the work does. When using a request for proposal (RFP), it should always include the insurance requirements for the project. This makes the contractor aware and allows him or her to include the cost of insurance in the response.

The contractor should always be required to include certificates of insurance to allow the member an opportunity to review the insurance the contractor has in place before accepting the bid.

Upon selection of the contractor, it is a simple task to transfer the language regarding insurance requirements used in the RFP into the contract to ensure consistency. Absent this language, there is no guarantee that the contractor has the financial means to meet the obligations that he or she has assumed in the contract.

Some insurance companies charge the contractor a nominal fee for issuing an additional insured endorsement. Therefore, it is important that the contractor knows of this requirement to build the expense into his or her estimate or bid.

It is also advisable that the RFP include the hold harmless and indemnification language that will be required in the contract. The hold harmless language should require the contractor to protect and defend the member from claims and other actions for which the contractor may be legally liable. Indemnification language should require the contractor to pay for losses or damages incurred by the member as a result of the contractor’s actions.

The intent of this language is to make the contractor responsible for his or her own actions. This puts the contractor and his or her insurer on notice. Again, the language in the RFP can be included in the final contract.

Risk Management Recommendations

• • Use the tort cap limits as a benchmark for liability insurance limits required of independent contractors.

• • Review the scope of each project and determine the appropriate limit of insurance required for each line of coverage, both per occurrence and in the aggregate.

• • Require the contractor provide certificate(s) of insurance and verify that the required coverage is in place.

    • • Require the contractor to name the member as an additional insured on his or her policy for the contractor’s activities, including completed operations.
    • • Obtain a copy of the additional insured endorsement naming the member as an additional insured.

• • Understand the limitations and exclusions of the contractor’s policies, including the impact of aggregate limits.

• • Include insurance, hold harmless and indemnification requirements in the RFP and the final contract.

• • Understand the coverage, limits, exclusions and conditions of the MCIT Coverage Document.

• • Update, maintain and follow  current policies and procedures for reviewing all contractual agreements.

• • Monitor the contractor’s insurance status and require proof of premium payment.

For an in-depth discussion of insurance coverages and recommended minimum limits, see Coverage(s) and Liability Limits for Independent Contractors.

It is important to recognize that MCIT’s recommendations with regard to limits of liability should always be looked at on a case-by-case basis. Members can contact their MCIT risk management consultant at 1.866.547.6516 if they have questions as they review the limits of liability coverage they request from independent contractors.

Although MCIT cannot recommend limits for specific projects, risk management consultants can discuss potential liability issues that exist with individual projects. The amount of insurance to require from an independent contractor is ultimately the member’s decision.