Contractual Risk Shifting, Workers’ Compensation and You

During the process of negotiating construction contracts, contractors often use certain clauses to shift the risk of loss onto subcontractors who may have less bargaining power. How do they do this? Most commonly through the use of indemnity and waiver of subrogation clauses. While these clauses apply in a variety of situations, they are particularly concerning with regard to workers’ compensation insurance.

All states have mandatory workers’ compensation statutes. These statutes make employers strictly liable for employee injuries on the job. Strict liability means liability without fault. Therefore, an injured employee of a subcontractor can recover damages from the subcontractor’s workers’ compensation carrier even if a third party is 100 percent at fault for the injury.

What Is Subrogation?

Subrogation arises when an innocent party incurs damages attributable to the fault of another. This most commonly applies when an insurance carrier pays an insured loss and subrogates to the rights—or “stands in the shoes”—of the injured party in recovering against the responsible party. This doctrine is based on equitable principles, primarily to prevent the at-fault party from escaping liability. Makes sense, right? Then how does a subcontractor waive subrogation?

Here’s a sample waiver of subrogation provision:
Subcontractor hereby waives all right of recovery against the Contractor, the Owner and their respective officers, directors, employees, agents and representatives with respect to claims covered by insurance obtained pursuant to insurance requirements under this Subcontract. The Subcontractor agrees to cause its Workers’ Compensation, General Liability and Automobile Insurance carrier to waive their rights of subrogation against the Contractor, Owner and their respective officers, directors, employees, agents and representatives.

Here’s an example:
A subcontractor’s employee is injured by the sole negligence of the contractor. The subcontractor’s workers’ compensation carrier pays out statutory damages to the injured employee. Pursuant to the waiver of subrogation clause, the subcontractor and its carrier have no right to recover the losses from the contractor.

What is the practical effect? The subcontractor suffers the consequences of the contractor’s sole negligence. How? The subcontractor’s experience modification rate (EMR) goes up. What else goes up with the EMR? Premiums!

What Is Indemnification?

Indemnification requires one party to pay damages to another, sometimes without regard to who was actually at fault. These types of clauses often include language requiring the subcontractor to “defend and hold harmless” the contractor, which puts the additional burden on the subcontractor of incurring fees and expenses for the contractor’s legal defense. There are generally three types of indemnity clauses: broad, intermediate and limited.

A broad indemnity clause requires the subcontractor to pay loss or damage regardless of who is at fault, even if the damage is caused by the sole negligence of the contractor. This is the most onerous type of indemnity clause because it shifts the entire risk to the subcontractor.

Here’s a sample broad indemnity provision:
Subcontractor shall indemnify, defend and hold harmless the Contractor, Architect and Owner against all liability claims, judgment or demands for damages and expenses, including, but not limited to, reasonable attorneys’ fees, arising from accidents to persons or property arising out of or resulting from the performance of the work.

An intermediate indemnity clause requires the subcontractor to pay loss or damage for its own sole or partial negligence. Some intermediate indemnity provisions require the subcontractor to pay the entire loss or damage while others only require the subcontractor to pay its pro rata share of the loss or damage.

Finally, a limited indemnity clause only requires the subcontractor to pay loss or damage that is the sole responsibility of the subcontractor.

How do indemnity and subrogation interplay? When the subcontract has abroad indemnity clause and a waiver of subrogation clause.

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Sims Crane Earns Insurance-premium Reduction

Because of its superior on-the-job safety score, Sims Crane & Equipment Co. has again earned a significant reduction in its insurance premium. The firm’s Experience Modification Rate (EMR) is 0.68, meaning its insurance premiums will be 68 percent of the premiums required from less safe companies.

“The EMR is a rigorous standard set by insurance companies and the state, so having those outside third parties attest to our superior workplace safety practices and our culture of safety at Sims is a credit to everyone who works here,” declared Dean Sims II, vice president of Marketing at Sims Crane & Equipment.

The EMR is a gauge of past cost of injuries and future probability of injuries. An EMR of 1.0 is considered industry average. The lower the EMR, the lower the firm’s worker compensation insurance premiums will be. The EMR is designed to measure whether a company’s workers’ compensation losses are better or worse than expected. If the experience is worse than expected, a company is punished with a high EMR greater than 1.0. If the experience is better than expected, a company is rewarded with a low EMR below 1.0, paying less for workers compensation premium than a company with a high EMR.

“In Florida, Workers Compensation rates are ultimately determined by the Florida State Department of Insurance. The only real mechanism to apply either good or bad loss experience to the premium calculation is through the experience modifier,” adds Randy Proos, with USI Insurance Services in Coral Gables.

The EMR is calculated by a rating bureau, the National Council on Compensation Insurance, using three years of past loss history, excluding the immediate past year. The 2014 EMR is calculated using the 2012, 2011, 2010 loss experience.

With 325 employees and 381 cranes, lifting devices and associated support equipment operating out of 11 regional offices in Florida, Tampa-based Sims Crane & Equipment Co. is ranked No. 1 in Florida and No. 14 in the nation by American Crane and Transport magazine. Since its founding in Tampa 54 years ago, Sims has been known for its safe, cost-effective, creative and on-time customer service, offering the latest in 3-D lift planning, total transport capabilities, a fully trained service department, and a team of onsite consultants and application specialists.