Contractual risk transfer means writing your subcontracts so that when a subcontractor causes injury or damage, the subcontractor and its insurer pay, not you and your insurer. It rests on four pieces: an indemnity clause, clear insurance requirements, additional insured status on the sub's liability policy (with a waiver of subrogation and primary wording where needed), and proof collected before work starts. This guide is for new owners of contractors and other businesses that use subs. It explains how the pieces generally work; have your attorney draft or review the actual contract language.
The short answer
- Indemnity is the sub's promise to pay for losses its work causes. It is only as good as the sub's finances, its insurance and your state's law.
- Additional insured status can give you direct rights under the sub's liability policy for covered claims tied to its work, within the endorsement's terms. It is usually the stronger protection.
- Your customer contracts often require you to pass the same terms down to your subs. If you do not, you may carry the gap yourself.
- A certificate of insurance is not the policy. Ask for the endorsements and check them before the first payment.
- Claims the sub's insurer accepts often show nothing on your loss runs, or only a small or notice-only entry, which can help your renewal pricing.
Who pays when a sub causes a loss, and why does it matter after you buy?
Contractual risk transfer decides, in writing and before the job starts, who pays when someone gets hurt or property gets damaged. When a subcontractor's crew causes a loss, a good subcontract points the claim at the sub's insurance. A weak one, or no written subcontract at all, can leave the claim with your general liability policy. One of the most common examples is a sub's own employee who is hurt on your job and then sues your business. Additional insured status on the sub's general liability policy and an indemnity clause backed by that policy are meant to address exactly that claim, depending on the policy wording and your state's law. A waiver of subrogation on the sub's workers' comp only stops its comp insurer from suing you to recover the benefits it paid.
New owners often inherit the weak version. Owner-run businesses often use long-time subs on a handshake, a one-page purchase order or an old template, while their own customer contracts may require them to make subs carry certain coverage. If you are not sure what your customers require, start with checking your customer contracts against your policies.
Your own policy may also depend on it. Some contractor general liability policies include an endorsement that limits or removes coverage for work done by subs unless you got written indemnity, additional insured status and minimum limits from them. Check the forms schedule on your policy; see insurance exclusions that quietly kill coverage.
Because you inherit many subs at once, re-paper them in this order:
- High-hazard work: roofing, electrical, structural, work at height.
- Jobs for customers whose contracts require flow-down.
- The largest subs by annual spend.
- Anyone with no certificate on file.
Lower-risk, low-spend vendors can follow at their next job.
Uninsured subs also raise a workers' comp audit issue, covered with certificate collection in do your subcontractors carry the coverage your contracts require. This article focuses on the contract terms and what happens when a claim comes in.
What are the pieces of a good subcontract?
Think of risk transfer as layers. Each covers a weakness in the others.
| Piece | What it does | Where it lives | What to check |
|---|---|---|---|
| Indemnity (hold harmless) clause | The sub promises to defend you and pay losses arising from its work | The subcontract | Scope, whether it includes defense costs, and whether your state limits it |
| Insurance requirements | Lists the coverage, limits and terms the sub must carry | The subcontract or an insurance exhibit | Lines, per occurrence and aggregate limits (including the completed operations aggregate), umbrella, how long completed work must stay covered |
| Additional insured status | Makes you an insured under the sub's liability policy for covered claims tied to its work, within the endorsement's terms | An endorsement on the sub's policy | Covers both ongoing work and completed work, not ongoing work only |
| Primary and noncontributory wording | For covered claims, the sub's policy pays first, without asking yours to share, as the endorsement describes | An endorsement on the sub's policy | Required in the contract and actually endorsed |
| Waiver of subrogation | Stops the sub's insurer from suing you to recover what it paid | Endorsements on the sub's liability, auto and workers' comp policies | Each policy the contract names has its own endorsement; some states restrict workers' comp waivers, so ask your broker what is allowed where the work is done |
| Proof of coverage | Shows the terms exist before money changes hands | Certificate plus copies of endorsements | Named insured matches the sub, dates current, endorsements attached |
A contract clause is a promise; the endorsement is the proof. Before a sub's first day and first payment, get a current certificate plus copies of the endorsements the subcontract requires, and compare them line by line. The full collection checklist is in do your subcontractors carry the coverage your contracts require, and tracking is covered in certificate tracking in your first month.
For plain-English definitions of the endorsement terms, see additional insured, waiver of subrogation and primary noncontributory, explained.
What does a sub's promise to pay (indemnity) really get you?
In a subcontract's indemnity clause, the sub usually agrees to defend and pay for claims arising out of its work. Three limits matter:
- State law. Many states have anti-indemnity laws that limit how far one party can make another pay for losses the first party caused, especially in construction. Some void clauses that cover your sole negligence; others go further. The rules differ by state and by type of project, so have your attorney write the clause for the states where you work.
- The sub's ability to pay. A promise from a small sub with no assets is worth little unless insurance backs it.
- The sub's insurance. The standard Insurance Services Office (ISO) general liability form excludes most liability a business takes on by contract, but it gives coverage back for an "insured contract". That includes a promise to cover someone else's liability for injury or damage the law would hold them responsible for anyway. So a sub's policy can often back up its indemnity promise. Some policies narrow this by endorsement, which is one more reason to see the actual policy.
See the glossary entries for hold harmless agreements and indemnity.
Why is being on the sub's policy usually worth more than its promise to pay?
Indemnity is a contract promise: you have to ask the sub to pay, and if it refuses, you may have to sue. Additional insured status makes you an insured under the sub's own policy for covered claims tied to its work, so you can send the claim straight to the sub's insurer and ask it to defend you. That is why most contractors treat additional insured status as the core of risk transfer and indemnity as the backup.
Three details catch new owners:
- Completed work. Many claims arrive after a job is finished. An endorsement that covers only ongoing operations may not respond to a claim about work completed last year. Ask for completed operations coverage too, and set in the contract how long the sub must keep it.
- The contract sets the limits of the coverage. Many current additional insured endorsements limit coverage to what the written contract requires and to what the law allows. Vague requirements can produce vague coverage, so write them precisely.
- Shared limits. You share the sub's limits with the sub and its other additional insureds. Asking for a per-project aggregate and an umbrella that also covers additional insureds helps keep the limits available for your job.
Policy forms and endorsements vary by carrier, so check the actual wording. Blanket endorsements, which cover anyone the sub is required by written contract to add, are common and easier to track; see blanket vs scheduled additional insured.
What should flow down from your customer contracts to your subs?
A customer that requires certain terms from you usually expects the work you hand to subs to carry them too. A practical flow-down rule: whatever your customer asks of you, ask of your sub.
The flow-down points that most often break in practice:
- Additional insured status for your customer and, where its contract requires it, the property owner, as well as for you, for ongoing and completed work.
- An umbrella or excess policy that extends additional insured status and primary wording to you, if your customer counts umbrella limits toward its requirement.
- The same terms passed down to any sub-subcontractor your sub hires.
- Professional liability if the sub designs anything, and pollution coverage if its work can release pollutants, since general liability usually excludes both.
- Notice to you if the sub's coverage is canceled. The standard certificate only says notice will follow the policy's own terms, and most policies do not require notice to certificate holders. If you need notice, ask for a notice of cancellation endorsement on the sub's policy. Either way, track expiration dates yourself.
Some large projects use a wrap-up, where one policy covers everyone on site. Wrap-ups change who insures what; read what a wrap-up is before you sign onto one.
How do you tender a claim to a subcontractor's insurer?
To tender a claim is to formally hand it to the sub and its insurer and ask them to take it over. Do it quickly and in writing:
- Report the loss to your own insurer as your policy requires, without waiting for the sub's insurer.
- Find the sub's insurer and policy number on the certificate in your file.
- Send a written tender to the sub and its insurer asking them to defend and pay under the subcontract's indemnity clause and the additional insured endorsement.
- Attach the signed subcontract, the certificate, the endorsements and the incident facts.
- Ask your own insurer whether it will tender on your behalf or pursue recovery.
- Track the response: an acceptance, a denial or a reservation of rights (an insurer agreeing to defend while keeping the right to deny coverage later). Get each answer in writing.
- Ask your carrier to show on your loss runs that the claim was tendered or recovered.
Your attorney can advise on deadlines and on pressing the indemnity claim against the sub directly.
How does risk transfer protect your loss history?
Your loss runs (the insurer's record of claims on your policies) follow the business into every renewal and a buyer's diligence. When a sub's insurer handles a claim about the sub's work, the loss is usually paid under the sub's policy. Your carrier may still open a file, and it may set a reserve or pay defense costs until the sub's insurer accepts the tender. Incurred amounts (paid plus reserved) are what move pricing most, so a quick, documented tender can help keep your own numbers at or near zero.
A hypothetical example. A subcontracted plumbing crew leaves a supply line fitting loose and floods a customer's finished lower floor, causing $40,000 of damage.
| Setup | Who likely pays | What your loss runs show |
|---|---|---|
| Handshake deal, no certificate on file | Your general liability policy, if it has no subcontractor conditions that the missing paperwork breaks; then you chase the sub, if you can | A $40,000 paid property damage claim on your policy for as long as underwriters ask for loss runs (often five years) |
| Written subcontract with indemnity only | Possibly your policy first, with a demand on the sub | Possibly a paid claim, reduced later if you recover |
| Subcontract with indemnity, additional insured for ongoing and completed work, primary and noncontributory, endorsements on file | The sub's general liability insurer, after you tender the claim | Often a notice-only entry or a small amount, depending on your carrier |
The amounts are illustrative, and how any real claim is handled depends on the contracts, the policies and the facts. When a loss happens, follow the tender steps above. Morrow can review your subcontract insurance terms against your own policies and your customer contracts if you want a second set of eyes; the indemnity wording itself stays with your attorney.
Keep reading
- Do Your Subcontractors Carry the Coverage Your Contracts Require?
- Additional Insured, Waiver of Subrogation and Primary Noncontributory
- How to Check Your Customer Contracts Against Your Policies
- Set Up Certificate Tracking in Your First Month as Owner
- How to Read Loss Runs After You Buy a Business
- All guides for new business owners
Frequently asked questions
My sub's insurer refused to take over the claim. What now?
Ask for the denial in writing with the reasons, and send it to your own insurer and your broker. Your insurer may defend you and then try to recover from the sub or its insurer. A denial often turns on the endorsement wording, whether the work was ongoing or completed, or whether the subcontract was signed before the work started. Your attorney can tell you whether to press the indemnity claim against the sub directly.
Can I make a sub pay for accidents that were my fault?
It depends on your state. Many states limit indemnity clauses that shift a party's own negligence to someone else, especially in construction, and the rules differ by state and project type. Have your attorney draft the clause for the states where you work.
What if my long-time subs push back on new insurance requirements?
Explain that the requirements usually come from your customer contracts and, often, your own insurer's conditions, and that they protect both of you. Keep them the same for every sub and give a reasonable deadline. A sub that cannot meet them may need to price the coverage into its bid, or the work may need to go elsewhere.
Do I still need my own general liability if my subs carry theirs?
Yes. Your own policy is what responds, subject to its terms and exclusions, to claims about your own operations and to claims your subcontracts do not shift, and most customer contracts require it. Risk transfer can reduce how often your policy has to pay; it does not replace it.
Does a waiver of subrogation on my sub's workers' comp stop its injured employee from suing me?
No. The waiver stops the sub's workers' comp insurer from suing you to get back the benefits it paid. In many states the injured employee can still sue your business directly, and that is the claim additional insured status on the sub's general liability policy and the indemnity clause are meant to handle. How it plays out depends on state law and the policy wording, so check both with your broker and attorney.
References
- ISO Commercial General Liability Coverage Form CG 00 01 (carrier copy)
- IRMI: Insured contract definition
- IRMI: Anti-indemnity statute definition
- IRMI: Contractual risk transfer definition
- IRMI: Additional insured definition
- IRMI: Waiver of subrogation definition
Just bought a business? Get your insurance reviewed.
Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.
Morrow · 25 New Chardon Street, 4th Floor, Boston, MA 02114
This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.