General contractors often hire subcontractors to perform some of their work for them. However, general contractors may be held liable for any injury or property damage caused by their subcontractor’s work. In most states, an injured employee of a subcontractor may sue the general contractor. In order to protect themselves, general contractors need to transfer their risk.
Risk transfer involves shifting the risk of loss for injury or property damage among the parties of a contract. This is done through an indemnification and hold harmless agreement as well as additional insured requirements in the general contractor’s construction contracts.
When it comes to transferring risk, contractors and other parties in a contract are referred to as either higher tier or lower tier. The higher tier owner or contractor hires the lower tier contractor to perform work and transfers their risk of loss to the lower tier contractor.
Common examples of higher and lower tier relationships would be an Owner to a General Contractor or a General Contractor to a Subcontractor but could also include a Subcontractor to a Sub Tier Subcontractor.
Understanding construction contracts and knowing what contractual agreements need to be in place are key to protecting the financial security of the contractor.
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