From Boring to Full Panic Mode in 60 Seconds— Avoiding Problems When Hiring Contractors

By Patrick Prendiville, CIRMS

THE ABC’S OF ADDITIONAL INSUREDS

Community managers and board members are tasked with overseeing many things at once. While some of these tasks seem to be pressing at the moment, like what plants to choose in the entry, any resulting problem may be short lived--thankfully. Then, there are the more mundane details that need to be navigated, like taxes. If everything goes well, no one notices. But, when things go poorly, it’s a different story. Or, perhaps you are hiring a contractor to work on the association grounds--what could go wrong? Well, with a proper (and boring) Additional Insured Endorsement, you may be able to avoid problems that would otherwise cause financial loss and aggravation.

In its most simple terms, the concept of receiving additional insured (A/I) status means that the HOA is going to rely on the insurance policy of another party (contractor) to protect the HOA from lawsuits related to the contractor’s work. The following are some important details and concepts to keep in mind.

Additional Insured Endorsement: This is a document, received for an upcoming construction project, or even the renewal of an annual contract from a service provider and is not the same as a Certificate of Insurance. The A/I Endorsement provides the HOA and management company with extra protection. So, while a contractor’s Certificate of Insurance does a great job of proving coverage by listing the insurance company, policy number, etc., it doesn’t provide any further value beyond providing information.

LET’S TAKE A LOOK AT TWO POSSIBLE SCENARIOS, WITH AND WITHOUT A PROPER A/I ENDORSEMENT:

1) Scenario One: Randy the Roofer slips on the tile roof he’s working on and one of the tiles hits Mrs. S., causing a head injury. Mrs. S sues the HOA and Randy the Roofer. Both entities put their respective insurance carriers on notice. Because there is a proper A/I Endorsement in place, Randy the Roofer’s insurance company picks up the entire cost of defense and eventual payout for the injuries sustained to Mrs. S. The Association’s carrier closes the claim without payment and takes an attitude of “no harm, no foul.” I’m sure you would agree--a safe and sublimely boring scenario.

2) Scenario Two: Same details as above, but because there was either no A/I or an invalid one, Randy the Roofer’s insurance carrier tells the HOA that while they are defending their contractor client, they will not be providing a defense for the HOA.

As the HOA is named in the lawsuit, their insurance company mounts a defense. Besides the wasted time of the manager and board, the HOA’s carrier would have spent potentially thousands of dollars just in the defense of the claim and the result would be to potentially increase the insurance rates of the HOA due to the claim payment. Nobody is happy.

When to ask for an Additional Insured Endorsement: Any time you have a vendor working on the premises, you should secure an A/I Endorsement. This includes not only special one-off jobs, but vendors who work on an ongoing basis, like landscapers and pool service providers.

Check your contract: Many types of A/I Endorsements are only triggered when the contractor has agreed, in writing, to provide A/I status. So, make sure this is a requirement in your contract.

Who to name on the A/I Endorsement: Without question, the association and the management company need to be named as additional insured.

Policy exclusions: As powerful as an A/I Endorsement is, it will not speak to any policy exclusions, and those can be very important as well as surprising. Rely upon your insurance agent and/or attorney to review the contractor’s insurance coverage. Exclusions from work on condo associations, subcontracting, certain types of activities, can bite you, even after receiving an A/I Endorsement. But, a quick read by a knowledgeable person can dodge some big problems.

Limits of insurance: The limits of insurance should always start out at $1,000,000 per occurrence and $2,000,000 aggregate. This means that the contractor is covered for $1,000,0000 in a single event, but no more than $2,000,000 will be paid out in a year if there were more than one claim. Depending on the job and the advice you get from legal counsel, it may be more appropriate to ask for higher limits.

Auto and workers’ compensation: Make sure your contractor has provided auto liability including owned, non-owned and hired auto coverage with the same limits as above. Also, it is imperative that the contractor carry workers’ compensation.

You may have noticed, I have mentioned seeking guidance from your attorney and insurance agent multiple times. This point cannot be overstated. Your association is paying for professional advice, so you don’t have to keep these tasks strictly at the manager and board level.

Protecting the association from a negative financial impact is perhaps the most important objective of the manager and the board. Keeping these details in mind will go a long way in meeting this objective.

Patrick Prendiville is a Community Insurance and Risk Management Specialist and founded Prendiville Insurance Agency in 1988. Based in Rancho Mirage, Prendiville Insurance Agency services hundreds of HOA’s in the Coachella Valley. Patrick can be reached at 877-532-7238 or by email at Patrick@ PrendivilleAgency.com.