Working PIby Isaac Peck, Senior Broker at OREP.org
Private investigators are no strangers to hiring other professionals, including other investigators, so they can better meet their clients’ needs. Whether you are in a larger firm with a dozen full-time employees or a solo-operator, if you’ve been doing this for any reasonable length of time, you’ve probably hired an “independent contractor” to assist you in an investigation.
In many cases, PIs hire other licensed investigators to assist in some part of an investigation—be it surveillance, research, interviewing, geographic proximity, or perhaps they specialize in a particular area that is key to the investigation (asset searches, for example). This is a good idea. It makes your work easier, makes the clients happy, and keeps you in good working relationships with other professionals who can help you when you need them.
Subcontracting is risky, though, and to manage those risks, indemnification is a common and effective legal tool.
Whether you hire an unlicensed “bird-dog,” another licensed investigator, or even another type of specialist or licensee on an independent contractor basis, there are two very important things you need to do with each subcontractor:
1. Get a copy of each subcontractor’s liability insurance
2. Use a written subcontractor agreement with an indemnification clause where the subcontractor agrees to indemnify you.
While some private investigators do take the step of verifying current liability insurance, very few go the extra mile and get a signed agreement with their subcontractors. And even fewer include an indemnification clause in that agreement.
Here is what it means and why it matters.
Why Show Proof of Insurance?
In our work here at OREP, we’ve heard of private investigators balking at the idea of showing another PI proof of liability insurance. “That request is private and over the line!” the argument goes. However, showing proof of insurance is incredibly commonplace across the business landscape—in both professional services circles as well as the trades.
Depending on the venue or the situation, there are plenty of scenarios where you can’t even step onto a property as a vendor without first showing your proof of insurance. As a professional, showing proof of your liability insurance is normal and commonplace, as is requiring that your subcontractors provide you with proof of their insurance.
What is Indemnification?
Let’s start with what it means to “indemnify” someone. The Merriam-Webster Dictionary defines “indemnify” as:
• To secure against hurt, loss, or damage;
• To make compensation for incurred hurt, loss, or damage.
In other words, with an indemnification clause, the subcontractor is agreeing to defend the PI and make them “whole” in the event the PI is sued or held liable for mistakes that the subcontractor makes.
These types of clauses are now incredibly common amongst the construction trades, professional service providers, financial services, and more. For example, if you are a general contractor hired by a wealthy patron to build a house—you are likely to hire a framing company to frame the house, an electrical company to run the electrical, and so on.
In each case, a smart risk management practice would be to have these subcontractors sign indemnification clauses where they agree to take responsibility for any property damage, mistakes, or errors that they make. After all, even though you are the general contractor, if your subcontractors make mistakes, you want them to take responsibility and pay for it, not you. It’s just good risk management. (OREP provides its Members with an attorney-prepared subcontractor agreement they can use with their subcontractors—free of charge.)
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Example
Let’s talk through an example of how an indemnification clause works. Imagine that your firm hires an investigator to conduct surveillance, and that investigator trespasses on the target’s property (trespassing) and kicks over the target’s expensive motorcycle in the process, putting a huge dent in the gas tank (property damage). The target figures out that it was your firm that hired the investigator, and so the target files a lawsuit against the firm, even though it was a third-party, the subcontractor, who committed the tort.
Let’s further posit that you know the subcontractor carries insurance (or at least that’s what he told you!), but you never asked for a copy of his liability insurance, and you never signed an agreement with him. You learn that he did not, in fact, have a current liability insurance policy. And now your firm is the one facing a lawsuit because of his actions!
What about the subcontractor? He’s the one who did the trespassing and damaged the target’s motorcycle. Do you think that he, his company, or better yet, his insurance carrier is going to voluntarily step up and take responsibility for this claim? It would be highly unlikely. The subcontractor and his insurance carrier are breathing a sigh of relief that they were not named in the lawsuit and that they are, so far, completely unencumbered by the entire ordeal. Whew!
Now you are left to defend this claim all by yourself. The only recourse a company has against a subcontractor like this would be to file a claim against the subcontractor and potentially sue them. In other words, you would need to sue the subcontractor yourself, while defending a lawsuit against the target. Many insurance companies and professionals are very uncomfortable with this approach (unless the dollar amounts are very high), and in many cases, the subcontractor will get off scot-free if there is no written agreement between the two parties outlining responsibilities and liabilities.
If you, the private investigator, have (1) a copy of the subcontractor’s professional’s insurance, and (2) a written agreement with an indemnification clause, it makes it much easier for you to tender the claim to the subcontractor’s insurance carrier and seek retribution and defense in the lawsuit.
Practical Example: Mortgage Professionals
Here’s another example from a different industry to demonstrate the importance of indemnification agreements. OREP also serves mortgage field professionals with insurance and risk management. These professionals help banks and other large property managers manage their inventory of bank-owned properties (REOs). Their services include boarding up windows, mowing lawns, property maintenance and even property clean-outs—where a firm will go into a home and empty it of all furniture, belongings, and trash.
The relationship between these professionals is structured like this: typically, there are larger vendors that service big contracts with a lender. They then subcontract out the jobs to smaller firms across the country. Just like with appraisals, lenders try to avoid administering their own panel of thousands of vendors across the country.
In one claim OREP has seen, a local mortgage field firm was hired by a larger vendor to perform a “clean out” on a particular property that had been foreclosed on. But the smaller firm made a serious error: they didn’t verify the address and ended up getting it wrong. So, they drove up to the wrong house, kicked in the front door, and cleaned it all out, putting all of the legitimate homeowner’s current belongings out on the front lawn.
As you can imagine, this resulted in a very big claim. But because the larger vendor didn’t have an indemnification clause in their service agreement, they couldn’t transfer the liability onto the smaller firm that had made the mistake! As a result, the larger vendor ended up defending, and finally settling, a serious claim.
You’d hope they could recover from that one disaster, but it’s more complicated than that. This big vendor was doing big business, and their faulty contracts created more problems for them, and eventually the company faced six-figure insurance premiums, with few carriers willing to even quote their business. In fact, the only insurance carrier that was willing to quote their business demanded that they start including—you guessed it—indemnification clauses in all their service agreements as a condition of coverage.
Be Smart When Hiring Subcontractors
I tell these stories to private investigators when they ask me about proof of insurance and indemnification clauses. Common law indemnification theory dictates that the party responsible for the mistake should pay for it. From a practical standpoint (especially when it comes to insurance), indemnification clauses make all the difference.
In other words, from a risk management perspective, any business that is working with subcontractors, or even businesses that allow subcontractors on their properties (like builders or wedding venues, for example), should be asking those subcontractors to (1) show proof of insurance, and (2) sign an agreement with an indemnification clause. This is true for private investigators as well.
When You’re the Subcontractor
If you’re the one doing subcontracting—maybe you’re working for another PI, or a law firm with a small team of PIs—you shouldn’t be surprised to see indemnification provisions in your engagement letters and service agreements. But there’s one important difference you should keep an eye out for.
Specifically, you never want to sign any agreement where you agree to indemnify any third-party for their mistakes or errors. You should only indemnify a third-party for your own errors or omissions. From an insurance standpoint, if you agree to indemnify a third-party for their own mistakes and errors, that is not something your insurance will cover—watch out for that!
How Can I Help?
If you ever have any questions about liability or risk management in your private investigation business, please reach out to me via email at isaac@orep.org or give OREP’s office a call toll-free at (888) 347-5273.
OREP Insurance supports Private Investigators across the United States! (8 a.m. ET – 7:30 p.m. ET.) Did you also know at OREP, we offer our Members an attorney-prepared subcontractor agreement for use in their businesses?
Stay safe out there!
About the Author
Isaac Peck is the Publisher of Working PI magazine and the President and Senior Broker of OREP.org, a leading provider of liability insurance for PI professionals. Working PI is the most widely read print magazine for investigators nationwide, reaching over 25,000 PIs. Investigators who become OREP Members enjoy two CE courses (15 hours of education) at no charge (Visit for details). Isaac brings over 10 years of experience leading teams in Professional Liability insurance underwriting, operations, technology, and marketing—with a focus on E&O and general liability insurance for professionals. He holds a Master’s Degree in Accounting. Reach Isaac by phone at (888) 347-5273 or email at isaac@orep.org. CA License #4116465.
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