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Risk Transfer for Contractors 101: How to Help Protect Your Business When Hiring Subcontractors*

By James Albi
AVP, Contractors Strategic Business Unit

The construction industry has boomed for years, and I think the future remains bright for contractors who are vigilant and proactive about protecting their businesses. Here are four reasons why:

  • Municipalities are allocating record funds toward local infrastructure upgrades like sewer line repairs and road building.
  • Though the market for single-family home building and renovation has cooled, there is surging demand for new and affordable multi-family housing like rental properties and apartments.
  • Contractors will likely need to repurpose commercial spaces as companies adapt to remote and hybrid work models.
  • The U.S. Census found that the 15 fastest-growing cities from July 2020 to July 2021 are in the South and West. Contractors in these regions may have more opportunities to help accommodate new people and businesses. Of course, the great migrations across all parts of the U.S. indicate emerging opportunities for all.

Yet challenges remain in the post-pandemic construction industry.

In 2022, Associated Builders and Contractors estimated that the construction industry would need to attract nearly 650,000 additional workers to meet the demand for labor—a trend likely to continue in 2023 and beyond.

Employers who hire inexperienced or unskilled workers also risk fielding more workers compensation claims. According to a Selective study, employees report workplace-related injuries 18% earlier in their tenure than ten years prior.

In addition to construction projects becoming more complex and broader in their demands, the legal and regulatory environment is also constantly evolving.

These conditions pose new challenges for contractors, particularly trade contractors who may not be as familiar with the importance of risk transfer as others in the construction industry. For example, an electrician who rarely hired subcontractors in the past may now regularly hire other electricians or similar tradespeople as subcontractors to help complete a job.

To seize growth opportunities and feel confident delivering on projects, all contractors can benefit from an up-to-date risk transfer contract and a process for hiring qualified subcontractors.

What are the Risks of Hiring Subcontractors?

Generally, when you hire subcontractors to work on your behalf, it is as if you performed the work yourself.

The asphalt paving contractor who hires someone to install concrete sidewalks could be liable if the subcontractor fails to meet the project requirements, makes an error, or causes damage.

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If a contractor fails to recognize gaps between its contractually assumed liabilities and its insurance coverage, it becomes the de facto "insurer" of these liabilities. (The fact that a loss is uninsured does not relieve the contractor of its contractual obligation.)

- Effective Contractual Risk Transfer by the International Risk Management Institute

Subcontractor errors can result in significant financial costs to the hiring contractor and tarnish their reputation in the community. Contractors should always consider transferring their risk for subcontractor errors to the subcontractors before work begins and should verify that they are licensed and carry adequate insurance.

What is Contractual Risk Transfer?

Contractual Risk Transfer is a process where contractors transfer certain risks and liabilities to subcontractors they hire through a legal document called a Risk Transfer Agreement. A Risk Transfer Agreement can help protect hiring contractors by ensuring subcontractors are held responsible for their work, actions, and certain losses they cause on your job site.

Always validate subcontractor insurance beforehand to ensure they can deliver on their promise of indemnification.

How do Risk Transfer Agreements Work?

Risk Transfer Agreements can help hiring contractors clarify insurance requirements, indemnification obligations, and project requirements for their subcontractors. They can also impose quality, safety, and management standards on them.

By ensuring subcontractors have adequate insurance and adhere to the project requirements, Risk Transfer Agreements also help reduce the risk of errors.

Working with your attorney, a carrier like Selective Insurance, and one of our independent agency partners allows you to specify the standards of work you (or your customers) require.

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Fuzzy contractual language is among the biggest causes of claims against prime contractors.

- Construction Executive

Your insurance agent, attorney, and insurance carrier can work together to help you ensure that your contract and risk transfer process is adequate, current –and properly executed by the subcontractors you hire.

Risk Transfer Records Retention

Record retention is a significant piece of the risk transfer puzzle.

Your Risk Transfer Agreement is a signed record that can protect you if a claim arises months or even years after you complete a project.

Imagine you hired a subcontractor to lay the concrete foundation of a house you built. If the owners find a crack in the foundation three, five, or even ten years later (depending on the state or local statute of repose), you must be able to prove that the subcontractor is responsible and they were hired for that specific part of the project. A risk transfer agreement between you and the subcontractor can help demonstrate their liability.

Risk Transfer Advantages for Selective Policyholders

While you should always take proper precautions when hiring subcontractors, working with Selective and one of our independent agent partners offers several unique advantages.

  • Free sample contract templates
    Selective offers four risk transfer agreement templates that contractors can use either off the shelf or with modifications (or to use as guides to risk transfer best practices) when made in consultation with legal counsel. All templates are also available in Spanish.
  • Agent partnerships
    Every contractor business and local construction market faces unique challenges. That’s why our local field underwriters partner with independent agents nationwide to help us deliver account-specific solutions, including risk transfer services, to our business insurance customers.
  • DocuSign options
    Selective’s EContract portal, which features DocuSign e-signature technology, makes managing your risk transfer agreements fast, easy, and safe. You’ll also receive a digitally-signed copy of the contract for your records when the process is complete.
Protect Your Contractor Business with Contractual Risk Transfer

Macroeconomic challenges like inflation and the skilled labor shortage, plus a changing legal environment, make it ever more important for contractors to keep their risk transfer process and agreements up to date.

Proper Risk transfer and insurance coverage for contractors can help you protect your business and feel more confident about taking advantage of emerging opportunities in the construction industry.

Talk to your local independent agent about risk transfer agreements today.

*The information presented in this document is intended for general informational purposes only and is not legal advice.

About the Author

James (Jim) Albi is an Assistant Vice President leading the Contractors Strategic Business Unit for Selective Insurance. The Strategic Business Unit is responsible for portfolio management, provides technical expertise in underwriting of Construction risks, and helps drive strategic initiatives to advance growth and profitability of the Contractors Segment. Prior to joining Selective, Jim worked as an Executive Underwriter in Crum & Forster’s Contractors Segment and before that held various claims and underwriting roles at Liberty Mutual. Jim earned his Master’s Degree in Insurance Management from Boston University and holds industry designations such as Chartered Property Casualty Underwriter, Construction Risk and Insurance Specialist, Associate in Insurance Data Analytics and Associate in Claims.

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