Third-Party Injuries: Contractor Liabilities Imposed upon HNW

05 Mar Third-Party Injuries: Contractor Liabilities Imposed upon HNW

This month’s HNW RiskTip is, in part, a follow-up to January’s titled: “Vicarious Liability, Nuclear Verdicts & Impact to HNW Families”.  Readers responded to January’s RiskTip with two common questions: “Why would a homeowner be liable and/or sued by an injured contractor’s employee (landscaper, roofer, remodeler, etc.)?  And why, if the contractor is licensed, bonded and insured?”  Unpacking these questions is a bit complex and lengthy – one reason why we did not include in January’s RiskTip – but we will attempt to now educate.

As “Licensed, Bonded and Insured” is displayed on contractor vans –– most states require contractors to obtain and maintain those three elements.  Yet, what do these three components really mean for HNW homeowners?

Licensed Contractor
This component is meaningless to our subject.  Simply because a contractor has been registered with a state’s construction trade is has no bearing as respects to liability issues.  The licensing authority has merely given the contractor the right to conduct business.

Bonded Contractor
This factor takes a bit more explanation, yet additionally meaningless to the subject of liability impositions.  Most states require contractors to obtain and maintain a surety license bond.  Firstly, understand that the bond amount required is normally under $25,000.  Second, what is the purpose of the bond?  The bond is simply an assurance given to the public, backed by a financial institution (surety), that the contractor in question has the wherewithal to conduct business.  Yet even though the bond limit is minimal, it does not respond to third-party bodily injury liability acts of the contractor.  Instead, the bond exists as a form of credit indemnification to make whole some third-party, such as a vendor for whom the contractor is unable to fulfill a debt obligation (typical cases being a building material provider’s invoice for project supplies).

Insured Contractor
Now we come to the chief subject of consideration and the element on which most of us ignorantly rely.  Unfortunately as well, the public reliance on a contractor’s insurance is useless as respects to our topic of concern – the injured contractor’s employee and their attempt to impose liabilities upon the homeowner.  State contractor boards require contractors to carry “Commercial General Liability” (CGL) insurance.  CGL provides legal protection for the contractor (or any of its employees) – not the homeowner – against actual or alleged third-party bodily injury or property damage negligence.  I.e., should your contractor injure you physically, you, being that third-party, can bring a claim against the contractor and their CGL will respond.  Additionally, should the contractor damage your property, you can file against the contractor for such damages and their CGL will respond.  However, if the contractor’s own employee is injured while working on your property – there is no coverage under the CGL for such an event.  As a matter of fact, the CGL excludes such affirmingly.  Moving that scenario forward, wouldn’t the contractor’s Workers Compensation protect me, the property owner, from a lawsuit brought by the contractor’s employee?

Workers Compensation
Most states require contractors (all employers for that matter) to carry Workers Compensation if they have any employees.  As briefly mentioned in the January RiskTip, there is a statutory “trade-off” established by most legislators to discourage legal action, referred to as a “no fault” law.  Instead of an employee having to establish fault, they are simply given work comp benefits (medical expenses and time loss wages).  However – and this is the heart of the issue that generates legal claims against HNW homeowners – by accepting “no fault” work comp benefits, an employee, in turn, waives their rights to bring a lawsuit against their employer; even in cases where the employer may be negligent.  Most state work comp laws typically specify that the work comp benefits are the employee’s “sole remedy” for their injury.  Therefore, they cannot sue their employer.  Enter our problem.  Guess who they can sue?  With the dramatic and rising trend of “social class warfare” (see WSJ article “Nuclear Verdicts by Juries Get More Common”), work comp laws do not preclude the injured worker from bringing a lawsuit against the respective homeowner.  This is why HNW families are finding themselves targets of these incidents that occur on their real estate locations regardless of fault under the doctrine of “Vicarious Liability”.

The Solution
Unbeknownst to many, insurance is, actually, not the starting point for managing this HNW exposure.  Contractual Risk-Transfer, one component of a strategically smart HNW Risk Control Plan, is where effective protection begins.  Establishing a proper written agreement (even if brief and simple) is the foundation upon which we control risk and govern third-party relationships.  A good agreement will create an “affirmative wall-of-defense” and spell out specific insurance requirements for visiting contractors to secure.  Contractors who visit your home typically need to have their standard business insurance modified to accommodate the agreement’s requirements.

As the WSJ article affirmed, we are now living in a different world with enhanced liability exposures.  Add to that, insurance can be complex.  Policies are legal “contracts of adhesion” constructed with various terms, conditions, exclusions, and definitions which can generate problems for us all – especially HNW families with more to lose.  Simply allowing a contractor onto one’s location because their truck displays “Licensed, Bonded, and Insured” by no means shields the homeowner.  Yet, by incorporating proper “enterprise risk management” principles to protect HNW families, such can be accomplished.