Best Practices for Mitigating Profit Loss with Subcontractors

Scenario*

ABC Movers had a client with nationwide locations that accounted for a significant portion of their annual revenue.  In some instances, this client had needs best fulfilled by a local mover (subcontractor).  As holders of the master service agreement, ABC Movers would call upon XYZ Movers to perform the job.

One day, ABC Movers received a call from their client reporting a problem.  An entire shipment worth $60,000, subcontracted to XYZ Movers, was damaged.  XYZ Movers ran the job under their Bill of Lading at $0.60 per pound / per article.  The claim settlement from XYZ was paid, amounting to approximately $2,000.  XYZ refused to make up the difference as did their insurance carrier because the Bill of Lading read $0.60 per pound / per article.  The client went to ABC Movers to supplement their loss.  ABC was on the hook for the remaining $58,000. 

ABC Movers should have communicated job requirements and had contracts in place with the subcontractor.  If they had the proper measures in place they would have saved a significant amount of time, money and reputation damage. Most importantly, ABC Movers would have protected their client and not jeopardized that important relationship.
*Real world example with names and details removed and slightly modified.

Issue

Most diversified moving and storage operations come across instances where subcontractors are needed in order to perform part of an office move or logistics job, to satisfy a client. If so, provide a proactive review of the subcontractor’s insurance program and require coverage designed to protect you and your client from their negligent acts.
Best practices dictate, and most contracts will require, that your subcontractors carry the same coverage (forms & limits) that you as the general or prime contractor are required to provide. Often movers believe they are not contractors.  This is not accurate.

While contracts will vary in size and scope, here is a good basis for review:
Summary – Best Practice for Hiring a Subcontractor:

• Signed Contract
  
  • Hold Harmless and Indemnification Agreement Included
• Certificate of Insurance
  
  • Minimum Insurance Limits and Coverage
  • Additional Insured Status
  • Waiver of Subrogation

Signed Contract – Hold Harmless and Indemnification Clause

Include a hold harmless and indemnification clause in your service agreement. In such a clause, your business is not responsible for any losses, costs, damages, expenses, or liability – including Workers’ Compensation – sustained due to negligent or intentional acts. This clause requires the vendor to indemnify you for any negligent claim pursued against you.  Contact the authors for sample wording to be used in your contracts.

Certificate of Insurance

When hiring, proof of insurance in the form of a certificate of insurance should always be obtained. The certificate should show the line(s) of coverage, coverage limits, insurance carrier and special endorsements. Your company’s name and address must be clearly listed on the certificate. Copies of certificates should be obtained and verified compliant by your company prior to the start of any job.

Insurance Requirements

While your customer will address the required amount and type of insurance required in the contract, you will need to pass these same requirements on to the subcontractor. Typical requirements are as follows:

• Carrier Legal Liability: Subject to Contract*
• Warehouse Legal Liability: Subject to Contract*
• General Liability: $1M per occurrence $2M aggregate
• Auto Liability: $1M
• Workers’ Compensation: Statutory
• Umbrella or Excess Liability: $5M
• A.M. Best Rating: A- or Better
• Insurance Carrier Policyholder Surplus: Level V ($10M to $25M) or better

*Clearly indicate which valuation option (or insurance) is selected for your shipper’s coverage.  $0.60 per pound / per article vs. Replacement Cost is a big difference.

Additional Insured Status

Your company should be named as an additional insured on the General Liability, Auto Liability and Umbrella policies. Gaining additional insured status on the policy will give your company access to the policy for defense and settlement payments. Most policies require a written contract spelling out this requirement in order to activate the additional insured status.

Waiver of Subrogation

As the general contractor, your sub should also provide you with a Waiver of Subrogation on the General Liability, Auto Liability and Workers’ Compensation policies. A Waiver of Subrogation removes the right of recovery against another party. The insurance company is then prohibited from countersuing your company after an unfavorable settlement. For example, a subcontractor’s employee is injured while moving a heavy piece of hospital equipment during the course of a move. With a Waiver of Subrogation, the subcontractor’s insurance carrier is prohibited from seeking recovery against your policy.

Conclusion

It’s important to have a process in place when you’re either sending out jobs to others or receiving them yourself.  Proper paperwork and agreements on the  front-end can save a lot of headaches and dollars in legal fees on the back-end.