Importance of a contract with subcontractors who come to the site

Feb 28, 2019

By Itzik Simon

The following situation is familiar to every contractor or developer in Israel. In the course of routine construction work, there is consistent movement of subcontractors to the site, bringing with them equipment and tools on the one hand, and various workers on the other. Often, a “subcontractor agreement” between the main contractor and the subcontractor (covering their employees and equipment) is not signed in writing, and sometimes it is even concluded in a “gentleman’s handshake.”

This situation can create significant liability for the main contractor or developer. In the absence of a formal agreement with the subcontractor—let alone one including an insurance appendix with essential waiver clauses—the main contractor bears substantial responsibility for bodily injury that may (God forbid) occur to the subcontractor’s employees, or for property damage to equipment.

This phenomenon is particularly common when working with subcontractors who are on-site for only a few hours or days, especially if there is a prior acquaintance between the parties.

The lack of a written subcontractor agreement can give rise to real risks. First, regarding property damage caused to the subcontractor’s tools or heavy machinery—including damage resulting from the main contractor’s negligence—if the tools are uninsured and there is no waiver clause in the insurance appendix or in a formal contract, the liability falls squarely on the main contractor (read more about this in detail here).

In short, the property section of a contractor’s insurance policy typically covers only light equipment and installations valued up to 40,000 NIS per individual item, and usually only up to about 10% of the total cost of the works (a pre-specified maximum amount). Anything that falls outside these definitions is excluded from the policy.

Article by Itzick Simon

The following situation is familiar to every contractor or entrepreneur in Israel. As part of ongoing construction work, there is a consistent movement of subcontractors to the site, bringing with them equipment and tools on the one hand, and various workers on the other. More than once, a "subcontractor agreement" between the performing contractor and the subcontractor (for his workers and tools) was not signed in writing, and sometimes it was even closed in a "gentlemanly" manner with a clapping of hands.

This situation may be to the disadvantage of the executing contractor or developer. In the absence of a regulated agreement with the subcontractor, let alone an agreement that includes an insurance appendix with substantial exemption clauses, he bears significant responsibility for bodily injury caused (God forbid) to the subcontractor's employees or property damage to equipment.
This phenomenon is common when working with subcontractors who come to the site for several hours or days, especially if there is prior acquaintance between the parties.

This situation of the absence of a written subcontractor agreement may give rise to real risks. First, with regard to property damage that may be caused to the subcontractor's work tools or equipment, including due to the negligence of the main contractor, in the absence of insurance on these tools, and in the absence of an exemption clause in an insurance appendix and a well-arranged contract, the responsibility lies with the main contractor ( read more about this here ).
In a nutshell, we note that the property section of a contractor's insurance policy includes insurance only on light equipment and facilities worth up to NIS 40,000 per single item and usually up to about 10% of the cost of the work (a maximum amount specified in advance). Anything that does not fall under these definitions is excluded from the policy.

Serious or fatal accident on site? Who is the employer of the subcontractor employee?

The date of filing the lawsuit – February 2018.

Form 648 - Report to the National Insurance Institute

Unfortunately, experience in the insurance field shows that many contractors and job seekers are unaware of the importance of reporting to the National Insurance Institute about employing workers through subcontractors.

In this regard, we recall that according to Regulation 1 of the National Insurance Regulations (Laws and Accounts of Contractors), 1957, "A contractor who performs construction work through a subcontractor shall furnish the institution with all the details." Regulation 3 of the regulations adds that if the contractor has not notified the subcontractor as required of his employment, as he is required to do under Regulation 1, then "he shall be deemed, for the purpose of payment of insurance premiums ... as if he were the employer of the subcontractor's employees."

In other words, if the main contractor does not provide the details to the National Insurance Institute, using Form 648 ( which you can read more about here ), then the National Insurance Institute will view him as the employer of the subcontractor's employees.

Form 648 - Report to the National Insurance Institute

Purchasing a contractor policy with extensions for subcontractors – When purchasing a policy for insurance for contractor work, it is important to seek professional advice. You should purchase a comprehensive and broad policy that includes an extension for contractors and subcontractors in the definition of the insured's name (note that this is not a default).
Written contract with each subcontractor – The main contractor or the client must enter into a written subcontract with the subcontractor, even if it is only for a few hours or days.
Including a general liability clause in the contract - Already in the contract itself, the main contractor must ensure that there is a clause imposing full liability on the subcontractor for any event.
Insurance addendum to the contract including exemption clauses – The main contractor must attach to the subcontractor contract a professional insurance addendum with exemption clauses, which on the one hand obligate the subcontractor to insure his employees and property, and on the other hand exempt the main contractor from any damage to the body or property that may be caused.
Reporting to the National Insurance Institute on Form 648 – In every engagement with a subcontractor, the main contractor must report to the National Insurance Institute about the specific engagement using Form 648.
Maintaining an orderly record of workers on site – During the work and when subcontractors are on site, the main contractor must maintain an orderly and consistent record of all workers on site.
Conducting safety training and documenting it – the main contractor must ensure that all employees are given safety training and the employees (including their documents) must sign that they have completed the safety training.