Beyond the Smoking Hole Scenario

This is the mid-range risk profile that quietly drives a substantial portion of facility management loss portfolios. No fire, no flood, no act of nature. Just ordinary contracted work that matures into a claim because someone overlooked the documentation needed to transfer the risk.

The gap between what gets planned for & what gets paid for

FM programs allocate considerable attention to catastrophic scenarios. Business continuity exercises model utility loss, severe weather, civil disruption and what some practitioners call the “smoking hole” total site destruction to mitigate the risk of asset, financial and human life losses. These scenarios may be few and far between, but planning for them is essential.

The mid-range incident, however, is where financial loss is most consistent. The U.S. Bureau of Labor Statistics reported 2.5 million nonfatal workplace injuries and illnesses in private industry in 2024, alongside 5,070 fatal work injuries. Construction and extraction workers, those most often performing contracted work in commercial buildings, accounted for 1,032 of those deaths. Globally, the International Labour Organization estimates that construction work alone produces approximately 60,000 fatalities per year. In the European Union, slips, stumbles and falls represented 18 percent of all fatal and nonfatal work accidents in 2022.

Slip-and-fall incidents, the workhorse mid-range exposure, generate consistent claim activity in commercial settings. The U.S. National Council on Compensation Insurance reports an average workers’ compensation claim of approximately US$54,000 for fall injuries; and the U.S. National Institute for Occupational Safety and Health puts annual workplace slip-and-fall costs at roughly US$70 billion. These figures describe contained incidents, not catastrophic ones.

The financial picture has shifted in the past five years. Social inflation, or the phenomenon in which insurance claims costs rise due to changing societal attitudes, has affected the cost of claims. Swiss Re reports that liability claim severity in the U.S. has risen 57 percent over the past decade, with social inflation reaching 7 percent annually in 2023, a rate that exceeds general economic inflation. The trend is most pronounced in U.S. courts, which produced 135 verdicts of US$10 million or more in 2024, an increase of 52 percent year over year, with median “nuclear verdict” awards rising to US$51 million. Spillover effects appear in other markets. Swiss Re estimates that social inflation contributed more than 10 percent of liability claims in the United Kingdom in 2023, and broker reports cite parallel pressure in Australian and Canadian markets. A standard commercial general liability policy in any major market can be exhausted by a single mid-tier verdict in this environment.

Three implications follow for FM: Contained incidents now produce uncontained claims; contracts drafted prior to the shift in the litigation environment should be reviewed and updated; and the value of well-executed risk transfer has risen accordingly.

Three FM service configurations, three risk pictures

Liability does not flow uniformly. Three common service configurations distribute exposure differently, and each requires a different contracting discipline.

1. Integrated FM & MSP arrangements

In an integrated FM or managed service provider (MSP) arrangement, a single contractor coordinates multiple service lines under one master agreement. The MSP becomes a contractual buffer between the client and the underlying trades. When the model functions correctly, the MSP carries primary liability for the work it coordinates, holds appropriate insurance and flows down its obligations to subcontractors.

Function does not always follow form. The buffer is strong only if the MSP’s contract with each subcontractor mirrors the protections in the client’s contract with the MSP. Where flow-down language is generic or indemnification is capped below the master agreement, the buffer leaks. Even where the contractual position is protected, client-side FM still carries reputational and operational consequences when an incident occurs on a managed site.

The audit posture for this model is upstream. Diligence is primarily on the MSP itself: confirming that subcontractor agreements meet the same standard the client imposes on the MSP, that the MSP’s insurance program is current, and that flow-down is verified rather than assumed.

2. Direct vendor relationships

Where FM in an organization retains direct contracts with multiple vendors, a common model in mid-sized portfolios and certain hard-services categories, the client-side FM function carries the highest documentation exposure. There is no MSP buffer. Each vendor’s certificate of insurance (COI), additional insured status and contractual indemnification flow directly to the facility owner or operator.

Two specific exposures require attention. The first is coverage continuation. The mechanism that names a client as a covered party on the vendor’s policy varies by market, but the underlying question is the same: does coverage continue after the work is complete? In the U.S., Insurance Services Office (ISO) Form CG 20 10 provides additional insured status during ongoing operations only; Form CG 20 37 extends it to completed operations. Many vendor agreements specify the first without the second, leaving the period after completion unprotected. A leak that causes injury 18 months after the work was finished is a CG 20 37 problem in U.S. markets, and an analogous coverage-continuation problem in every other market.

The second is endorsement completion. A risk management firm’s audit of hundreds of certificates and underlying policies found that more than 90 percent contained at least one material misrepresentation between the certificate and the actual policy. A common defect: the additional insured endorsement is attached to the policy, but the schedule listing the named additional insureds is left blank. The endorsement does not function until the schedule is completed.

3. Landlord-provided services

The most complex liability picture occurs when services are delivered by or through the landlord rather than the tenant. A cleaning vendor, HVAC contractor or security firm engaged by property management may create claims that name multiple parties: the landlord, the property manager, the service vendor, the tenant and the tenant’s FM function.

Lease language determines starting positions. A standard “additional insured, managers or lessors of premises” endorsement (ISO Form CG 20 11) names the landlord as an additional insured on the tenant’s CGL policy for liability arising from the leased space. Where the landlord provides services, the directional flow may also be reversed: the tenant or the tenant’s FM function should be named on policies held by landlord-engaged vendors. Many leases only partially address this requirement, and tenant-side FM cannot always rely on the landlord to enforce vendor compliance.

Statutory and judicial limits on risk transfer complicate the picture further. In the U.S., anti-indemnity statutes in most states limit the extent to which one party can transfer liability for its own sole negligence to another. Other jurisdictions reach similar results through different machinery: U.K. and Commonwealth markets through doctrines on construction of exclusion clauses and statutes such as the Unfair Contract Terms Act; civil-law jurisdictions through code provisions on mandatory liability and limits on contractual exclusion of negligence. Lease and vendor language drafted in one jurisdiction may not function as written in another. Multinational portfolios face the same issue at scale.

Quick reference — Jurisdictional equivalents

Practice tracks legal tradition more than geography. Common-law markets generally follow London-market wordings (additional insured, indemnity to principals); civil-law markets generally rely on direct-action rights against the vendor’s insurer under national civil code. Hybrid markets — most notably the Gulf — combine both. The terminology varies; the underlying question is universal: is the client a named beneficiary of the vendor’s policy, both during the work and after?

Market	How the client is named as a covered party on the vendor’s policy
United States	ISO endorsement forms CG 20 10 (ongoing operations) and CG 20 37 (completed operations); CG 20 11 for managers or lessors of premises.
Canada	Insurance Bureau of Canada (IBC) standard endorsements; broadly similar to U.S. ISO forms in structure.
United Kingdom and Commonwealth	“Indemnity to principals” extensions on the contractor’s public liability policy; joint-names insurance on construction works.
Australia	Principal’s indemnity extension on public and products liability policies.
Continental Europe (civil law)	Direct-action rights against the vendor’s insurer under national civil code; reduces reliance on an “additional insured” mechanism in the U.S. sense.
South America (civil law)	Direct-action rights under national civil code; “co-insured” (asegurado adicional/beneficiário adicional) endorsements available in regional markets; contractual indemnification subject to civil-code limits on transferring liability for one’s own negligence.
Middle East (GCC and broader)	Mixed. The Dubai International Financial Centre and Abu Dhabi Global Market operate under English-style common law and use London-market mechanisms. The broader UAE, Saudi Arabia, Qatar and Kuwait apply civil-code rules, but commercial insurance practice follows London-market wordings. Egypt, Jordan and Lebanon resemble continental Europe.
Asia Pacific	Sharply split. Common-law markets (Singapore, Hong Kong, India, Malaysia) follow U.K. and Commonwealth mechanisms. Civil-law markets (Japan, South Korea, China, Indonesia, Vietnam, Thailand) rely on direct-action rights against the insurer; “additional insured” status is less standardized, and contractual indemnification carries more of the load.

The four documentation areas that decide outcomes

Across all three configurations, four documentation areas tend to determine whether an incident becomes a manageable matter or a contested claim. The exhibits below show what good language looks like and what to ask for, in plain English.

Risk transfer language

Indemnification provisions allocate financial responsibility between contracting parties. In plain terms, an indemnification clause says: if a claim arises out of the vendor’s work, the vendor — not the client — pays the legal defense, the damages and the settlement. The strength of the clause depends on the trigger language, the duties it includes and how the relevant jurisdiction allows risk to be transferred.

Exhibit A — Sample contract language: indemnification What good language looks like: “To the fullest extent permitted by applicable law, [Vendor] shall defend, indemnify and hold harmless [Client], its affiliates and their respective officers, directors, employees and agents from and against all claims, losses and expenses (including reasonable attorneys’ fees) arising out of or related to the work, except to the extent caused by [Client]’s sole negligence or willful misconduct.” What to ask for: “To the fullest extent permitted by applicable law” — adjusts automatically to local rules. “Defend, indemnify and hold harmless” — three duties: pay legal defense, pay damages, take on the obligation. “Arising out of or related to” — broader and more protective than “caused by.”

Additional insured status

Additional insured status converts the vendor’s commercial general liability insurance into a coverage source for the client. The vendor still carries the policy, but the client is added as a covered party for claims arising from the vendor’s work. Three details determine whether the additional insured status actually functions when a claim arrives.

Exhibit B — Sample contract language: additional insured What good language looks like: “[Vendor] shall name [Client], its affiliates and their officers, directors, employees and agents as additional insureds on [Vendor]’s commercial general liability policy on a primary and non-contributory basis, using ISO endorsement forms CG 20 10 (or equivalent) for ongoing operations and CG 20 37 (or equivalent) for completed operations, with completed-operations coverage continuing for the longer of the applicable statute of repose or six (6) years after completion.” What to ask for: The correct endorsement form. In U.S. practice, both CG 20 10 (ongoing operations) and CG 20 37 (completed operations); in other markets, the equivalent mechanism that continues after work is complete. A completed schedule of named additional insureds. The endorsement does not function until the schedule is filled in. “Primary and noncontributory” wording so the vendor’s policy responds first, before the client’s own coverage is drawn on.

COI currency

Certificates document insurance status at a moment in time. They do not amend the underlying policy, and they do not, on their own, confer rights. Certificates lapse. A current certificate at contract execution may be more than a year out of date when an incident occurs. Renewal tracking is the operational discipline that keeps the documentation current.

Exhibit C — Sample contract language: certificate currency What good language looks like: “[Vendor] shall provide a current certificate of insurance evidencing all required coverages prior to commencement of work and upon each policy renewal. Certificates shall be accompanied by copies of the actual additional insured endorsements. [Client] may suspend [Vendor]’s access to the premises if a current certificate is not on file.” What to ask for: A renewal trigger built into the contract, not a one-time delivery. Copies of the actual endorsement documents to ensure they are completed. An access-suspension consequence that makes the requirement enforceable on site.

On-site documentation when work happens

The contract and the certificate establish the framework. The on-site record establishes what actually occurred when work was completed. A contained incident that produces a claim two years later relies on records that were either kept or not kept at the time of the work. This is the documentation area most directly within FM’s daily control.

Exhibit D — On-site documentation: a working checklist What to maintain at the site: Vendor sign-in record (date, time, individual, scope of work). Daily safety briefing acknowledgment. Photographic record of the work area before, during and after. Same-day incident or near-miss reports. Written scope-completion sign-off. Sample contract language to support the practice: “[Vendor] shall maintain records of on-site personnel, daily safety briefings and work performed; retain such records for at least seven (7) years; and provide copies upon written request.”

Reframing the preparedness budget

The conventional FM risk framework separates day-to-day operational discipline from continuity planning. The contractual and documentation layer falls between them. It is neither the high-frequency, low-severity work of routine compliance nor the low-frequency, high-severity work of disaster planning. It is the high-frequency, mid-severity work that produces most of the claim portfolio.

The mid-range risk game is won in advance, in plain documents that are difficult to dramatize. A correctly named additional-coverage arrangement on the vendor’s policy, an endorsement schedule that is not left blank, completed-operations coverage that does not end the day the work does, an indemnification clause that survives local statutory review, and a certificate tracking system that does not lapse: these are the sources that determine whether an incident becomes a manageable matter or an organizational crisis.

Disclaimer

This article is provided for general educational purposes and does not constitute legal, insurance or risk management advice. Specific contracts, endorsements and statutory requirements vary by jurisdiction and circumstance. FM professionals should consult qualified legal counsel and licensed insurance or risk management professionals when reviewing or negotiating specific agreements.