Avoiding Business on a Handshake

Minimize liability with a good contract

Good Contract

A successful relationship with a painting subcontractor begins with an enforceable contract and appropriate insurance coverage. But some small operations, or one-man shops, may mistakenly believe it’s okay to hire a sub with just a handshake. Not so fast, some legal Pros say.

To minimize risk, it’s important that a binding contract spell out the terms of every hiring contractor-subcontractor arrangement, says Nashville attorney Andy Rowlett, who specializes in insurance law and litigation at the law firm Howell & Fisher PLLC.

“Make sure the contract specifies that all subcontractors agree to make you, the hiring contractor, an additional insured under the sub’s commercial general liability insurance policy,” Rowlett adds. “The contract may matter more than even the insurance. It is the responsibility of the subcontractor to carry adequate insurance, and that must be specified in the contract.”

A hiring contractor should obtain a standard-form contract that can be reused with different subs, Rowlett says. Such contracts are available through an attorney or many trade associations, including the American Institute of Architects. [Click here]

A standard-form contract gives the hiring contractor “an inexpensive and easy tool he or she can use day in and day out,” Rowlett adds. The attorney says that though nothing is ironclad, not having a contract increases exposure to risk.

More on insurance

It’s essential for a hiring contractor to also secure a certificate of insurance from the subcontractor. This is a single piece of paper issued by an insurance agent’s office that includes the name of the insurance company issuing the policy; the policy number; the names of all those insured (including the hiring contractor); the date when coverage became effective; the limits of liability; and the different coverages included in the policy, says Daryl Johnson, CPCU, an insurance agent and president of Brown-McNerney-Johnson Insurance Agency in West Des Moines, IA.

But it’s important to remember that the certificate is “just a snapshot of what’s going on at that time. It doesn’t necessarily mean that a premium will be paid a month from then. That’s one of the reasons the contract is so critical,” Johnson adds. “If a subcontractor’s premium payments lapse, the policy would not be in force. … But the contract would legally protect the hiring contractor, because it dictates the obligations of the subcontractor with regard to carrying insurance.”

Johnson recommends a subcontractor’s insurance coverage be at least $1 million or at least equal to the hiring contractor’s level of insurance coverage. Coverages typically include bodily injury, property damage, products used and the completed operation, he explains.