When Bad Things Happen To Good Contractors
Four take-aways to minimize risk
By Colin Donovan
No contractor is immune from mistakes, and no business is immune from disputes (legitimate or not) with customers. A certain amount of risk is inherent in every job that you perform. Fortunately, there are risk-management techniques you can employ to help minimize the risk of one of these mistakes adversely affecting the financial health of your company.
Purchasing liability insurance is a common method, but it is not a panacea. Even those with liability insurance face the cost of deductibles, premium increases and, perhaps most important, the cost of a sullied reputation should a claim event occur.
The following are four claim events that could have been minimized or avoided entirely had someone simply taken an extra precautionary step.
|
| Working Outside Realm Causes Damage |
The Event: A contractor, during a down-market year, was performing a job that was outside its realm of expertise for a warehousing company. The job involved permanently sealing a storage cage by spot-welding its bolts and screws. While welding, sparks from the torch ignited combustible materials (mostly made of plastic and rubber) in an adjacent cage. The welder reached for his fire extinguisher, but it was empty. The fire quickly spread and destroyed the contents of all nearby cages. The resulting smoke generated by the burning plastic and rubber was transmitted via the HVAC system throughout the rest of the office building. The sprinkler system was triggered and caused severe damage to the rest of the items stored on that floor. The owner of the facility presented a demand to the contractor for all of the destroyed property, as well as the smoke damage to the rest of the building.
Cost: Over $350,000
| Take-Away: You should be selective when performing work outside your comfort zone. Welding sparks outdoors are often not a concern, but indoors is a different matter. Fire-resistant drapes could have been installed to prevent sparks from igniting combustible materials. Of course, make sure that your fire extinguisher is fully charged. |
|
|
| Incomplete Instructions Add Up |
| The Event: A contractor under contract with a POS transaction software company was directed to install software at a c-store. As part of this installation, the contractor downloaded the POS software from the hardware provider, established communications settings and ran a test charge of $1 through the computer system. After confirming that the transaction had cleared, the contractor concluded that the system was functioning properly. The c-store contacted the contractor a few weeks later and complained that the printer was not working properly. The contractor returned to the c-store, reset the system, discovered that the printer was out of paper, reloaded the paper and confirmed that all was indeed well.
Six months later, a claim was made by the c-store that the contractor had installed defective software and that the c-store had “sold” $130,000 worth of product that was never collected. Upon investigation, it was learned that the c-store took the printer out of service and thus the c-store did not perform any credit card transaction reconciliations nor print a daily log of transactions. After further probing, it also appeared that the software provided by the credit card processing company was defective and that the POS system erased historical transactions after 30 days.
Cost: Potentially upwards of $150,000
| Take-Away: Always leave a document with instructions for transaction reconciliation and the need to print all transactions daily and have your customer acknowledge receipt of these instructions. Also, your field technicians should provide detailed notes of all work they perform. |
|
|
| Subcontractor Responsibility in Question |
 The Event: A contractor was hired by a general contractor to install a new tank at a hospital. The contractor subcontracted the excavation to an excavation contractor. The general contractor asked the contractor to lend the excavation contractor his track-hoe to dig a trench to allow an electrical contractor to modify some electrical connections. Under the direction of the general contractor, the track-hoe operator began trenching but hit an active electrical line that provided power to the hospital. No one was injured, and the hospital operated on emergency power.
Emergency, weekend and overtime repairs to the electrical system totaled over $200,000. The hospital brought an action for expense recovery against the first contractor because its subcontractor caused the damage.
Cost: $250,000
| Take-Away: You are generally responsible for your subcontractors and the work they perform under your direction. You can also be liable for work they perform at a worksite when you allow them to perform work for others. Your job foreman should have a form that should be signed by any party that wishes to “borrow” your subcontractor stating that the other party is contracting separately with your subcontractor for work and that you are not responsible for the supplemental work that your subcontractor performs on the party’s behalf. You should also make sure that any subcontractor you hire provides evidence of liability insurance. |
|
|
| Erase Your Tracks |
| The Event: During the fueling of a boat at a marina, an explosion occurred that caused severe burn injuries to a marina employee and property damage to the boat. The injured party sued for $5 million and named the owner of the vessel, the nozzle manufacturer and the contractor in the suit.
The contractor did not have a relationship with the marina and did not directly supply the nozzle. It was believed that the nozzle had been rebuilt and that the contractor’s name was on the protective rubber cover surrounding the nozzle. During discovery, evidence was presented that the employee used a makeshift latch-open device during the fill operation and walked away. An overfill occurred, and there was some source of ignition.
Cost: $80,000 in defense and indemnity
| Take-Away: Although there was no connection between the marina and the contractor, the nozzle cover displayed an advertisement for the contractor that caused them to be named in the suit. No evidence was presented that the nozzle was defective or caused the overfill, but the contractor paid over $40,000 in legal defense costs and $40,000 in settlement costs to be removed from what could have been a very expensive jury verdict. You should be careful how and where you advertise. |
|
|
| Smart Decision Making |
| As evidenced by these accounts, even a somewhat innocuous confluence of events can prove extremely costly. For this reason, it is important that you outline an internal risk management plan and talk to your employees about smart decision-making at a job site. If a mistake does occur, make sure you partner with your insurance company immediately to help resolve the issue as expeditiously as possible. This will help protect your financial health and may save you from losing a customer. |
|
