It is the nature of the business for utility contractors to face high risk and the potential for sizeable losses. Learning to assess relative risk is crucial to protect and grow a utility contracting business. While most small utility contractors understand many things can go awry and lead to financial loss, they also need to thoroughly understand uninsurable risks and exposures, as well as the potential of any incident that could exceed their insurance coverage.Utility contractors can be held liable for many things that may occur regardless of a careful and thorough effort; some risks are simply unavoidable. Additionally, legal requirements in some contracts require a contractor to cover losses that are not necessarily their fault. When considering potential projects, utility contractors of all sizes should be familiar with the following risks before entering into a contract.
Certain Jobs Cannot Be Insured
When it comes to prospective risk, jobs with an indemnity obligation are partially uninsurable, yet this stipulation is included in many contracts. With contractual transfer, or Type 1 Indemnity, anything that goes wrong on the project becomes the responsibility of the utility contractor, even if it did not cuase the problem or if problems occur after the project has been completed.
For example, consider a project where a company secures a contract to upgrade the sewer system in a city’s downtown area. In order to complete the job, it is necessary to close down the street for six months. While this is clearly a necessity, downtown businesses likely will experience slow sales due to the temporary road closure. As the indemnified party, the businesses are able to pursue the contractor for their loss of revenue.
In this situation, negligence is not the issue. The fact is someone is losing money, and unless they have been convinced of the project’s overall value to their business, they may understandably seek compensation. Anticipating which store owners may choose to pursue damages during the course of the six months, or after, is essentially impossible. For a contractor, the only way to manage the risk is to network with the affected businesses and try to work toward building strong communication that may help ward off damage claims.
Contractors should carefully consider high liability locations before committing to a job. When reviewing an opportunity, study who will be affected if something goes wrong and how much financial risk is involved. Most high liability location projects require agency indemnity, which means losses will be paid by the contractor if something goes wrong, regardless of who the responsible party is.
For example, a million-dollar job requires de-watering next to a high-rise building. If de-watering causes the neighboring high-rise to settle, the indemnified party can be held liable even if it did everything properly. In most cases, it is impossible to purchase enough coverage for an incident of this magnitude.
If damage or loss of revenue occurs, a lawsuit can be filed by any business or individual that is adversely affected by the project. The costs of the lawsuit are regularly passed onto the contractor and the indemnified party, and often the contractor will be held liable for compensation.
Agency indemnity also means a contractor may face lawsuits that have nothing to do with its work, but occurred on the premises where they worked. It is very loosely defined and can open a contractor to lawsuits during the job or years after the work has been completed.
While it is possible to purchase commercial coverage that covers some estimated losses in a high liability location, it is not feasible for most contractors. If a company makes $35 million annually, it would take a policy with $100 million in coverage to cover a small contractor in the case of damage to a high-rise building, which is not a practical expenditure. Most companies that can afford this kind of coverage choose to self-insure and deal with losses as they occur rather than purchasing this expensive insurance. The stakes get similarly higher with higher risk projects, so everything is relative.
When considering a contract that includes indemnity obligation, the practical question is: “How large is my balance sheet?” For large contractors, indemnity obligation is a cost of doing business, as it is associated with most sizable contracts. In many cases, the potential loss exceeds the available insurance proceeds. The risks are assumed and often are a contingency component of a bid.
Unfortunately, many contractors are regularly taking these uninsured or underinsured risks without being aware of the potential ramifications of an incident in a high-risk location. When researching an opportunity with indemnity obligation or agency indemnity attached, a contractor should look beyond the potential profit. The main concern is whether a contractor has the resources to pay the necessary costs should any problems arise, or to spend hundreds of thousands of dollars fighting the lawsuit in court.
Large and small utility contractors alike would be wise to carefully assess these contracts and the potential liabilities associated with them before making a bid or commitment. A contract that appears to be a growth opportunity could potentially close down a company if it is not financially prepared to handle an extensive litigation process or substantial, unforeseeable costs.