When a general contractor is hired to complete a project, they oversee the entire project and may hire subcontractors to complete a portion of the work. Although the project owner retains some liability, the work performed, either by the general contractor or its subcontractors, is the responsibility of the general contractor, including adverse environmental incidents.
General contractors can be held liable for the property damage or bodily injury of others due to their contracting operations. This is typically manifested in a couple of different ways. For example, if a contractor creates an unsafe environment and the public has access to that environment, they can be found liable for any injury that occurs. Far more common though is damage or injury to third parties that are the result of the contractor failing to do their work in a proper manner. These contracting errors could include something as simple as failing to secure a railing, or as elaborate as the concrete mixture and proper curing of a hydroelectric dam. In cases where the contractor fails to do their work properly, and the failure results in property damage or bodily injury to others, they can be found liable.
Contractors are exposed to environmentally related property damage and bodily injury in the same fashion. For example, a contractor who, through their work, releases toxic chemicals that harm neighbors adjacent to a job site would be held liable. Contractors could also be responsible for failing to prevent moisture intrusion in a building that results in mold contamination later on and bodily injury issues for tenants.
In addition to potential claims for bodily injury or property damage, environmental issues also carry with them the responsibility for cleanup. Pollution cleanup in the United States falls under the doctrine of Strict Liability, and there is no negligence standard required. Generally speaking, the contractor does not have to be negligent in order to be found liable for an environmental cleanup. If they are found to be a Potentially Responsible Party (PRP), for contributing to the situation in any way (e.g. they supplied the pollutants, even though they didn’t spill them), they can also be found liable. Therefore, general contractors must address and mitigate environmental risks through the procurement process by vetting subcontractors that are properly trained and insured. In addition, project owners should require this of their general contractors.
Pollution Liability for Subcontractors/Trade Contractors
Trade contractors or other subcontractors who perform work on behalf of others face similar liability issues that general contractors face. When an environmental issue occurs, trade contractors or subcontractors may be found liable for the pollution condition. Therefore, they are often required by owners or general contractors to have indemnity agreements in place that hold themselves accountable for their own work.
Contractual Risk Transfer & Indemnification
Project owners and contractors can protect themselves from subcontractor errors by requiring them to obtain their own liability insurance. In addition, they can protect themselves from liability issues caused by their subcontractors through contractual risk transfer (CRT). CRT can indemnify and hold the project owner harmless for specific actions, inactions, injuries or damages caused by the general contractor and/or the subcontractor, and places the financial risk on the party responsible for the activity that results in a liability issue. CRT usually involves a written contract, insurance requirements, requirements to name the project owner as an additional insured, a copy of the certificate of insurance and an indemnity clause. A general contractor will have a similar agreement in their contract with any subcontractors.
An essential component of any construction contract, and part of CRT, is the indemnification clause, which is basically an agreement to transfer risk from one party to another. When you indemnify someone, you agree to hold them harmless from damages caused by your actions or the actions of those under your control. For construction projects, indemnification clauses are written such that the indemnification starts at the bottom (trade contractor) and flows back towards the top (project owner). Essentially, the project owner will hire a general contractor, who will indemnify the project owner against any losses or claims occurred during the project. Any subcontractors that are hired by the general contractor will then indemnify the general contractor and the project owner. These provisions require one party to assume responsibility for third-party claims made against the other party.
When a properly worded indemnification clause is agreed upon between project owners, general contractors and their subcontractors, the project owner is protected against losses incurred by contractors during the project, including those due to an environmental incident. Therefore, in addition to standard insurance (e.g. general liability, auto and workers compensation) it is critical for contractors to have adequate pollution liability insurance to respond to an environmental incident.
Pollution Liability Insurance
Insurance needs for the construction industry are evolving and more often include the need for pollution and/or professional liability to meet contractual requirements, address exposures and protect assets. Contractors Pollution Liability (CPL) provides third-party coverage for bodily injury, property damage, defense expenses and cleanup costs for pollution conditions arising from covered contracting operations performed by or on behalf of the insured.
Prior to the 1970s, pollution liability was covered under the standard commercial general liability (CGL) policy. However, this began to change during the 1970s as the public started becoming more aware of the impacts of pollution on human health and the environment. During this time, the federal government created the Environmental Protection Agency (EPA) and enacted the Comprehensive Environmental Response Compensation Liability Act (CERCLA), better known as Superfund. As insurance companies became more concerned with the liability associated with pollution incidents, they began excluding pollution liability under the CGL policy. Due to litigation, the pollution exclusion language has been updated over the years in an attempt to clarify that no pollution coverage is available on a CGL policy. This has created the need to purchase separate coverage for pollution liability. Contractors looking to cover pollution risks must now purchase CPL coverage to ensure protection. Project owners and general contractors must ensure that subcontractors have the appropriate CPL coverage that will respond in the event of an environmental incident.
Source: Managing Environmental Risk in the Construction Industry.pdf, http://www.ucpm.com website. Accessed August 16, 2021. https://ext.ucpm.com/Portal/Brochure
© Copyright 2021. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.
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