Careful when signing contracts

Contracts and wood destroying organisms (WDO) inspections are a regular part of pest control operator's business. Without contracts for service, operators would have a difficult time getting business. Contracts can tell the customer how much is charged, types of service to be provided and what results the customer can expect from the service. Of course, the contract also serves to explain to customers that if certain conditions are not maintained, they will not get the results desired. Over the years contracts have become more complicated in their promises and limitations, often confusing customers. WDO inspections are also performed regularly by pest control operators as they provide operators with opportunities to secure extermination contracts, fill in work between treatment business, and provide a valuable service to the real estate industry. An argument can be made that without contracts and inspections, pest control operators would have little opportunity for work.

Most pest control operators spend time and money on developing contracts that spell out the service to be provided to the customers. One area where contract management needs improvement is on the contracts that spell out their relationship between operators and their subcontractors. 

This document will attempt to explain some of the often overlooked, and complicated, pitfalls to avoid in contractual agreements, additional insureds issues, and contractual indemnification. Of course, since states vary widely in certain allowances under contract law, you should check with your corporate counsel regarding the laws in your state and how best to create favorable contracts between you and your subcontractors and clients.

Competition for business over the years has caused a change in both contracts and inspections. It is common to see repair bonds and re-treatment warranties contained in contract language. To complicate these issues, some PCO companies either work for other operators or hire subcontractors themselves. The main contractor's promises to customer and the subcontractor's understanding of the promises sometimes do not match. When a claim results from ANY imputed liability, the already complicated contract of insurance is considered along with the contract between an operator and a subcontractor. To protect their interest in the work and avoid potential liability for events that are of no fault of the contractor, certain basic requirements in the contractual relationship are necessary.

Let's look at the PCO that is hiring a small operator to perform work on their behalf. At the simplest level companies that hire others to do work for them need to assure that the company doing the work has insurance. This is fairly common knowledge but should be reiterated to point out issues that complicate the relationship and can leave a general contractor unprotected or with less protection than he or she desires. It has been a common industry practice for the general contractor in this situation to request a certificate of insurance verifying the subcontractor has liability insurance and limits. This is not enough, however, to protect the interests of the general contractor.

Liability insurance policy language requires that in order for insurance coverage of a subcontractor to protect and defend another company, there needs to be a written and signed contract agreeing to the specific responsibilities of each party. This is referred to as "an insured contract" and is necessary to provide coverage under a "blanket endorsement" for additional insured status. (The definition of an insured contract is contained in CGL policy language in the section describing "who is an insured" under the policy.)

Additional Insured status can also be provided by a written endorsement of the policy. A written endorsement is required when the policy language of the subcontractor DOES NOT provide for a "blanket endorsement." It should be pointed out that there are many cases in industry where two parties agree in principle but insurance contracts do not clearly identify the agreement usually do not end well for wither party. Business relationships are ruined, and both parties often spend time and money arguing in court over who is responsible for coverage.

If you are using a written endorsement to secure additional insureds status, the endorsement page should include the name of the additional insured on the endorsement certificate. It will not be sufficient for an endorsement page to provide general coverage to 'business partners' or some other vague language referring to general contractors.

To quickly summarize what is required to create additional insured status; at least one of the two conditions must be met:
  1. Blanket Endorsements are supported by written contracts agreeing to provide liability insurance.
  2. A specific written endorsement with the name of the entity that the subcontractor is intending to provide coverage to is in place

After the contract is properly executed and additional insured status is secured, the general contractor hiring the subcontractor should verify that the limits of insurance available are at least equal to the limits under their commercial general liability policy. When a written endorsement is used as opposed to a blanket endorsement, it should state in writing that the subcontractor's policy "will be primary to all others valid and collectible insurance available to the additional insured." This will help avoid a dispute between the carriers about which insurance is primary and which is secondary coverage.

Another contractual issue that deserves more attention from pest control operators is in the area of indemnity agreements. Many contracts between general and subcontractors contain language that is often found to be "against public policy" by the courts and is therefore unenforceable. A typical example is the clause in an additional insured endorsement or is contract language that reads, "...liability arising out of your ongoing operations." Courts have found this language too broad and would prefer that clause to read, "...liability arising out of your work." Similarly, in other areas of contractual language and endorsements the preferred phrase is also, "liability arising out of" as opposed to, "liability resulting from" or "liability caused by." Many states do not enforce indemnification agreements particularly if the additional insured, in this case the general contractor, is found to be solely negligent. (The intent here is to hold a company accountable for its sole negligence even it has a contract with another company agreeing to indemnify and hold harmless.)

There are a number of other important issues to consider regarding contractual relationships, insurance contracts, additional insured clauses and indemnification agreements. The subject matter is complicated and often creates confusion when a claim occurs it is important for operators to begin considering some of the issues BEFORE a claim occurs so it will be easier for all parties involved to address the issue of the claim rather than the contractual issues. Since most claims in the pest control business relate to WDO inspections and many operators who perform inspections use subcontractors to provide fumigation service, these contractual issues are important to resolve on the front end to avoid the pitfalls and assure proper coverage is in place.

The information provided in this article is intended for general informational purposes only and should not be considered as all encompassing, or suitable for all situations, conditions, and environments. Please contact us or your attorney if you have any questions.

For safety or risk management questions or suggestions, please contact Markel.

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