This Special Report was written by Daniel P. Hale, J.D., CPCU, ARM, CRM, LIC, AIC, AIS, API of Marsh & McLennan Agency LLC.

A frequent and major source of claims against business owners is that of employees of independent contractors who become injured while working at the business owner’s building. This could involve employees of painting, carpentry, sprinkler, roofing contractors, or other trades people working at the business premises during construction or renovation activities. It could also include employees of independent contractors who are involved in repairing machines, as well as mechanical and electrical contractors performing repair or maintenance or janitorial work. Other exposures to property owners from the use of such independent contractors involve property damage caused by the contractor, defective work of the contractor, or liens resulting from the contractor’s failure to pay sub-contractors or material suppliers. Marsh and McLennan attorneys have represented clients in such cases and the purpose of this Special Report is to outline some risk management techniques that can be used to limit your exposures to such risks.


  1. Injuries to employees of contractors can subject you to a lawsuit. When an individual working for any of these contractors is injured, they will undoubtedly make a workers’ compensation claim against their employer and will then sue the property owner or business owner for damages in excess of the workers’ compensation benefits that are available to them. In addition to this, the workers’ compensation insurance company can sue, or subrogate, to recover amounts that it pays by way of those claims. Claims by the independent contractor’s employees are generally covered by the business owners’ commercial liability insurance policy but because these claims are likely to be sizeable, your premium will be impacted and, of course, the damages could be in excess of the policy limits, exposing your assets to risk.

  3. Property damage from acts of contractors. Another exposure presented is property damage caused by a contractor that creates liability for the property owner that contracted for the work. While the general rule is that you are not liable for acts of independent contractors, there are exceptions to this general rule and suits can result for negligent hiring of a contractor or utilizing a contractor that is involved in an inherently dangerous activity.

  5. Liens filed on your property. Yet another exposure comes from liens filed by subcontractors or material suppliers who have not been paid. These liens are routinely filed but may be difficult to have removed where the contractor you retained goes out of business or becomes insolvent. The Michigan Construction Lien Act provides that an owner can be liable for satisfaction of a lien where the owner contracted for the improvement or required and benefited from the improvement. This Act also provides for foreclosure of your property as a possible remedy in the event a lien goes unsatisfied. Moreover, such liens affect the market-ability of your property.

  7. Exposure for shoddy workmanship of contractors. Independent con-tractors that do not provide the best service or product are often the same ones that are difficult to recover from after-the-fact due to the absence of insurance coverage or assets. Commercial general liability insurance coverage of a contractor will exclude coverage for shoddy workmanship. Even where collection efforts are not at issue, litigation or arbitration can be costly and time consuming.

Independent Contractor: Managing the Risk of Independent Contrac-tors.doc (07-17-13) /np (Rev. 04-04-14) 2


Many of the above mentioned exposures can be avoided or limited by managing the risk of independent contractors. This is accomplished by:

  1. Using experienced, well-managed, and well-supervised independent contractors. You should take steps to investigate the background and years of experience of the contractor and its financial size to assure that your job will go smoothly. 

  3.  Establishing lock-out tag-out procedures. Use such procedures in the manufacturing facility, whereby machines cannot operate while independent contractors are in the area or while they are working directly on the machines.

  5.  Requiring proof of insurance. Certificates of insurance should indicate that the property owner or business owner are additional insured’s under the independent contractor’s commercial general liability insurance and should confirm the existence of contractual liability coverage.

  7. Obtaining performance / payment bonds. These forms of insurance can protect you financially in the event the work is not completed or the contractor does not pay subcontractors or material suppliers. Part of the construction contract should include a requirement for such bonds based on the circumstances of each job.

  9. Requiring an indemnity agreement where-by the independent contractor will assume the responsibility for injury or property damage. This is almost always permitted by their insurance carrier and will not result in an additional premium to them. With this agreement, if a business owner is sued by one of its employees, the independent contractor will have to assume the responsibility for that lawsuit and hold Independent Contractor: Managing the Risk of Independent Contractors.doc (07-17-13) /np (Rev. 04-04-14) 3 the business owner harmless from any damages or legal fees. Included in this Special Report is a sample indemnification and insurance requirements provision.

  11. Being certain that insurance required of the contractor is clearly spelled out. Insurance provisions found in construction agreements are often unclear and lacking specificity. This is a complicated area that involves more than requiring a certificate of insurance. Included in this Special Report is sample language to consider.

  13. Paying close attention to Notices of Furnishings / Commencement Forms. For commercial construction liens to be valid, notice has to be given to the owner that work is being commenced and furnished. Further, if a lien is filed, you should immediately require that the general contractor who has not paid for the work purchase a bond to replace the lien.

  15. Obtaining certificates of insurance confirming the existence of commercial general liability and workers’ compensation coverage. If you do not do this, your insurance carrier could pick-up the payroll of the independent contractor at the time of an audit and charge you additional premiums.

  17. The following language is an example of language that can be used with independent contractors as part of a contract covering all aspects of the agreement between the parties, or this can be used as a standalone agreement. This is general in nature and may not be appropriate in all situations.

**Mr. Dan Hale can be contacted at 734-525-2429 or More Special Reports are available at