Risks Associated With Contracted Sole Proprietors

March 26, 2019

person in front of cluttered desk holding notebook with sole proprietorship

image credit: designer491/shutterstock.com

Owners, General Contractors, Developers, and even Trade Contractors take on a certain amount of risk when hiring any contractor, regardless of the business type. These risks typically include Liability Risk, Work Quality or Completion, Contractor Default, Bankruptcy, Insolvency and even the ceasing of operations. These are only a few that must be considered when hiring a contractor.

 

When hiring a Sole Proprietor, many of those risks are the same. The biggest additional risk with a Sole Proprietor is that they may not have the assets to withstand large losses. Large losses could be the loss of time, money, resources, or large liability claims. If the Sole Proprietor is unable to absorb any of these losses, then those losses may be the responsibility of the hiring contractor. It is important for Owners/General Contractors to be aware that hiring Sole Proprietors poses a greater risk for them. 

There are some strategies to mitigate this risk. Contract stipulations can go far in reducing the possible burden of a Sole Proprietor. Here are four contract stipulations:

  1. Requiring surety bonds. This will guarantee that the Sole Proprietor will perform the work contract documents. This also protects the Owner from financial loss up to the penal sum of the bond, in the event the contractor fails to fulfill its contractual obligations. 
  1. Contractually obligate the Sole Proprietor to hold harmless and indemnify the Owner, General Contractor, Developer and any upstream Trade Contractors. However, it is important to keep in mind that hold harmless and indemnification clauses are only as good as good as the Sole Proprietor’s financial ability to mitigate losses.  
  1. Requiring liability limits both primary and excess liability that are sufficient to address the work to be performed. In addition, requiring the policy to name the Owner, General Contractor, Developer and upstream Trade Contractors as additional insureds.
  1. Require Worker’s Compensation and Employer’s Liability coverage.

Overall, there is an increased risk when hiring a Sole Proprietor that any Owner/General Contractor/Trade Contractor should be aware of. If you have any questions or want to learn more information about how to handle Sole Proprietors on your next construction project, give us a call at 201-267-7500.

Understanding Contractual Risk Transfer

Topics: Construction Risk Management

Written by The TSIB Team