What's a hammer clause?

What’s a Hammer Clause in NY Construction Insurance?

This article describes the meaning of a hammer clause in a NY contractor general liability policy.1 

A hammer clause in NY construction insurance refers to an exclusion in a general contractor’s general liability policy. The exclusion can have bad implications in the event of a claim caused by a sub-contractor or independent contractor, or in the event of an action over.  

This clause requires you, the GC, to verify, and be responsible for, the insurance and risk management program of any of your sub-contractors. The implications to you are that if a claim occurs that is caused by one of your sub-contractors, and your sub-contractor’s insurance does not comply with the terms of the hammer clause, your general liability policy insurance carrier may deny the claim. 

This situation essentially puts conditions of your own business insurance coverage into the hands of your sub-contractors. 

This is very dangerous… After all, how can you know 100% what your sub-contractor is doing with their insurance coverage?

How To Identify A Hammer Clause

As mentioned above, a hammer clause is an endorsement or exclusionary language that may be added to your general contractor’s (GC) general liability policy. 

The clause restricts or eliminates coverage for you because of shortcomings in the insurance of your independent contractors and/or sub-contractors. 

A hammer clause may appear in many forms, it may also be referred to as a “Sub-Warranty“, an “Independent Contractor Conditions Precedent” and/or “Subcontractor Conditions Precedent“. 

The clause puts the onus on you, the GC, to make sure your sub-contractors have coverage that is equal to, or greater than, the limits required by your CGL policy. 

Below is some example language that would be a tip off of a hammer clause in your CGL:

Independent contractors and/or subcontractors (including material suppliers) that perform operations for you must maintain Commercial General Liability insurance in force with limits of insurance for their operations that are equal to or greater than the limits of insurance shown in the Declarations of this policy, including operations performed for them by others, and that policies of such independent contractors and/or subcontractors do not exclude liability arising from the work being performed, or products being provided, for you. If your independent contractors and/or subcontractors have a policy that does not cover them for liability arising from the work they are doing for you, or products that they provide to you or on your behalf, then this policy does not cover you for any such liability.

Don't get caught with a hammer clause in your NY contractor's CGL policy! #insurance #nyc

- Rob Freeman | Insuring The Built Environment Tweet

Note the last sentence states that in the event that your sub-contractors’ insurance excludes the work they do for you, the hammer clause means your policy may not cover you for any related liability.

The hammer clause may have other requirements including that you to have proper indemnification in place through legally enforceable written agreements holding you harmless, that you be expressly named as an “additional insured” on your sub-contractors’ policy and that their policy be primary and non-contributory

As described above, some hammer clauses go so far as to require the same of all materials suppliers as well as sub-contractors and/or independent contractors.

Do You Use Sub-Contractors?

If you use sub-contractors and find a hammer clause in your GL policy, even if you’ve decided to get rid of it at renewal time, you should take the following steps to protect your business today: 

  • Verify the limits of your sub-contractors insurance policy are equal to, or greater than, your own policy.
  • Require your sub-contractors to include you (the GC) as an additional insured on their CGL policy.
  • Get a copy of their policy with the endorsements evidencing coverage as proof (remember that a certificate of insurance (COI) is not proof of coverage.
  • Have a sub-contractor and/or independent contractor agreement in place that explicitly states the obligations of the sub-contractor and/or independent contractor.  
  • Make sure the agreement you use has a hold harmless/indemnification agreement in place protecting your business from the actions of your sub-contractor and/or independent contractor. 

Most importantly, read your policy. Not taking precautions can leave you dangerously exposed in the event of a claim. 

Summary

If you work in New York City, because of the high costs of insurance stemming from New York Labor Law 240 and 241, having a hammer clause may save you money, but it is not ideal. 

Also, smart clients, building owners and risk managers know that a hammer clause can leave them exposed. So they are choosing not to do business with contractors without the proper coverage in place.

If you felt lucky to find a “cheap” general liability policy doing construction or contracting in NYC, check your policy for “the hammer”. 

Footnotes

  1. Note that a hammer clause has a separate meaning in liability insurance. It can also imply that, in the event of a covered claim, the insurance carrier has the right to settle if the opportunity presents itself to do so. The insurer would be required to seek consent from the insured, but if the insured does not consent, the insured will be responsible for the costs associated with defense (legal fees) and any incremental costs from a judgement against the insured.
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