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Insurance IQ: Working With Subcontractors

by Isaac Peck, Senior Broker at OREP.org

As you grow your home inspection business, sooner or later, you may end up hiring subcontractors. For example, you might hire another professional home inspector to pick up some overflow inspections that you can’t fit into your schedule. You might hire a plumber (or another inspector) to perform a sewer scope or perhaps sub-out pest inspections to certified pest control operators.

There are even some instances in which home inspectors hire an environmental specialist to test for mold, asbestos or lead. In some areas, real estate agents and/or buyers look to home inspectors to provide certain services, and inspectors feel like they are at a disadvantage if they don’t offer those services to their clients.

Here’s some practical advice on how to handle subcontractors from an insurance and risk management perspective.

Have a Contract
The most important step you can take is to have a contract in place with any subcontractor you work with.

At OREP Insurance Services, we work with several thousand home inspectors every year, providing risk management, insurance and liability advice to help inspectors stay out of trouble and, unavoidably, defending them when trouble arises.

One of the most common mistakes we see is not having a signed contract with subcontractors. In some cases, the professional you’re working with might be a friend. They might assure you that they carry their own business insurance, and that they will stand behind their work in the event of a claim.

All too often, what actually happens is the subcontractor is nowhere to be found when a claim gets filed.

More importantly, and less obvious, is that even if your subcontractor has insurance and shows you proof of their coverage, without a contract in place that indemnifies you and your company in the face of a claim that stems from the subcontractor’s work, their insurance is not going to stand up and do the right thing, i.e., their insurance is not going to defend or indemnify you.

Real World Example
Imagine there is a home inspector who is subcontracting out pest inspections to a pest control operator. The home inspector collects the pest inspection fee and subs out the work to a licensed pest control individual. The home inspector is pleased because he is able to serve as a one-stop shop for his clients and pocket a $30-$40 fee for every pest inspection.

The pest control operator is a good friend and assures the home inspector that he carries his own business insurance. All is well.

Then one summer day, one of the home inspector’s clients moves into their new home and ambitiously sets out to fully remodel the house—gutting it down to the studs. The new homeowners discover substantial termite damage and send a demand letter to the home inspector.

The home inspector contacts the pest control operator and asks for a copy of his insurance. Crickets ensue.

Thankfully, the home inspector has comprehensive errors and omissions (E&O) and general liability insurance, and it’s his liability insurance that ends up defending him against the claim that involved the other professional’s work.

Here’s the crux of the issue: Even if the home inspector possessed a copy of the pest control operator’s insurance, the pest professional’s insurance would not have voluntarily stepped up to defend the home inspector. Barring a contract, the home inspector is left defending this claim on his own.

Could the home inspector sue the pest professional for the alleged mistaken reporting? Maybe. But will the home inspector’s insurance carrier want to go through that subrogation process? Unlikely—unless the ultimate court judgment is substantial. Regardless, the losses will remain on the home inspector’s record and affect their ability to get insurance going forward.

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 Key Points
We’ve established that if you are going to hire subcontractors, you need signed agreements with the vendors. However, having a contract is just the first step. Here are some key clauses that you should have in that agreement:

• Requirement to Carry Insurance: You’ll want to not only require, but verify, that your subcontractor is carrying insurance that will respond to any claims relating to their work.
• Indemnification Clause: Just requiring your subcontractor to carry insurance will not protect you if you do not have an agreement that expressly requires the subcontractor to indemnify you for their work. The indemnification clause is 100 percent necessary to make their insurance respond.

Of course, there is more that goes into an effective subcontractor agreement, but these two points are a great start.

Even Referrals Apply
Now, you might be thinking that you don’t use subcontractors, and when you do work with other professionals—even other home inspectors—you simply refer the client to that professional. Those providers collect payment and deal directly with the client. There can’t possibly be liability associated with that, right? Not so.

This same type of referral relationship is rampant between real estate agents and home inspectors. Real estate agents frequently refer home inspectors to their clients. Consequently, real estate agents have astutely concluded that these referrals may create liability on their part, and the smart ones like to see that home inspectors have insurance that extends coverage to the agent for these referrals.

In fact, this is why the majority of leading providers of home inspector liability insurance include a Referral Additional Insured endorsement on home inspector insurance policies. This type of coverage effectively shields the referring party and promises to defend them from a claim that arises from the home inspector’s alleged errors or omissions. Savvy home inspectors often use this coverage as a marketing advantage and a way to make their referring real estate agent feel more comfortable.

Here is an example of how this is worded in OREP’s policy:

Solely with respect to any CLAIM brought and maintained against an INSURED for a WRONGFUL ACT committed or allegedly committed by an INSURED, this POLICY will provide coverage to any REFERRAL ADDITIONAL INSURED solely with respect to the REFERRAL ADDITIONAL INSURED’S vicarious liability for the WRONGFUL ACTS of the INSURED; provided, however, the COMPANY will only pay CLAIM EXPENSES for such CLAIM.

In other words, smart real estate agents are aware of the potential liability that they take on when they refer home inspectors to their clients. And you should be, too.

What this means for you is that even if you are just referring home inspections to another home inspector, or simply referring a client to an environmental specialist or a pest professional, you should have one of two things in place to truly protect yourself: 

1. A written agreement with the professional you are referring in which they agree to indemnify you and your company for any claims that arise from their professional services; and/or
2. Evidence that the professional’s insurance policy provides Referral Additional Insured coverage (similar to what is quoted above) for parties like yourself who are referring clients to the professional. 

I hope these tips are helpful. Stay safe out there!

OREP Members enjoy an attorney-prepared Subcontractor Agreement and Pre-Inspection Agreement template, in addition to attorney pre-claims services led by trial attorney Geoff Binney. Visit OREP.org/inspectors to learn more. 

About the Author
Isaac Peck is the Publisher of Working RE magazine and the Senior Broker and President of OREP.org, a leading provider of E&O insurance for savvy professionals in 49 states and DC. Over 13,000 professionals trust OREP for their E&O. Isaac received his master’s degree in accounting at San Diego State University. Reach Isaac at isaac@orep.org or (888) 347-5273. CA License #4116465.

OREP Insurance Services, LLC. Calif. License #0K99465