Mitigating Risks: The Importance of Subcontractor Insurance Verification

July 25, 2023

Are you a busy construction contractor who has to juggle what seems like a million priorities + your full time job? While you may not give much thought to lawsuits, it’s important to consider potential risks. 

As a primary contractor,  you can still be held liable for your subcontractor’s mistakes. If they don’t have insurance you could be responsible for covering all legal expsenses and payouts. 

That’s why liability insurance is critical for not only protecting yourself but all entities involved. It not only covers things like attorney feeds but can also help pay for damages and legal costs if you lose the case. 

To protect yourself against subcontractor errors, you must require that each subcontractor (no matter how big or small) has their own contractor liability insurance. Before hiring them, through check their insurance credentials and include contractual language mandating sufficient coverage. 

In addition, it is also essential to request proof of their policy, usually in the form or a certificate of insurance. With each certificate of insurance you must regularly verify and monitor each certificate to ensure continuous coverage. 

In this article, we touch on everything you need to know about how to protect yourself from subcontractor issues. If something goes wrong on the job site, does the general contractor’s insurance cover damage, or does that fall to the subcontractor? What happens if the subcontractor isn’t adequately insured in the first place?Here are a few of our most common questions: 

What Happens If My Subcontractor Does Not Have Insurance?

One of the main insurance questions that arises between contractors and subcontractors is who is responsible for what, and whether subcontractors need insurance.

Most states do not have laws that require subcontractors to have liability insurance to complete jobs. This creates some potentially significant risk to both the general contractor and the client who’s hiring them for the job.

That’s because it’s rare that a subcontractor would be automatically covered through the general contractor’s liability insurance. A majority of insurance policies exclude any damages that are caused by someone who isn’t you or your direct employees.

If an insurance claim is filed against your business for something an uninsured subcontractor did, your business could be fully liable for the damage out of your pocket.

Are subcontractors covered under the contractor’s insurance?

Some insurance companies will allow general contractors to extend their liability insurance policy to subcontractors on a project-by-project basis, but not all will. This is why it’s essential that general contractors insist that subcontractors have their own insurance policies.

Which insurance policies should your subcontractor consider? 

When signing a contract, employers and contractors often outline the specific types of insurance coverage they require. This may include providing proof of insurance, such as a certificate of insurance, and naming their company as an additional insured on liability insurance policies.

Here are some key insurance policies that are commonly requested:

General Liability Insurance: This policy is crucial for subcontractors and small business owners. It offers protection against lawsuits for bodily injuries, property damage, and advertising injury caused by your business. Many companies won’t work with subcontractors unless they have this coverage.

Errors and Omissions Insurance (E&O): Also known as professional liability insurance, E&O provides financial protection if a client accuses you of making an error on the job or failing to meet contractual obligations. It’s often required in contracts and offers peace of mind when facing professional liability lawsuits.

Business Owner’s Policy (BOP): Combining general liability insurance and commercial property insurance, a BOP offers comprehensive coverage at a lower cost than purchasing individual policies. It protects against damaging someone else’s property and provides coverage for your own business assets.

Workers’ Compensation Insurance: Required in most states for businesses with employees, workers’ compensation insurance provides financial protection in case of work-related injuries or illnesses. It covers medical costs and lost wages, ensuring you’re taken care of if you’re unable to work due to a job-related incident.

Commercial Auto Insurance: If your business owns vehicles, commercial auto insurance is essential. It provides coverage for accidents, theft, vandalism, and weather-related events involving business-owned vehicles.

Hired and Non-Owned Auto Insurance (HNOA): If you use your personal vehicle for work purposes, your personal auto insurance may not cover you in the event of a work-related accident. HNOA offers liability protection for personal, rented, or leased vehicles used for business purposes.

Fidelity Bonds: These bonds protect your company from financial losses resulting from employee fraud, theft, or forgery. They are often required by contractors and businesses to safeguard against potential losses.

Ensure you have the necessary insurance coverage to protect your business and comply with contractual requirements. Consult with insurance professionals to find the best policies for your specific needs.

How can you verify a contractor or subcontractor’s insurance? 

Clients can verify a contractor or subcontractor’s insurance by requesting a Certificate of Insurance, or COI. This document is provided directly from the insurance company and validates that a business holds the proper insurance coverage that you require.

A valid COI will include the company’s name and mailing address, the contact information for the insurance company, what type of insurance policies the contractor or subcontractor holds, the effective dates and coverage limits of those policies, and any other people or entities or additional insured that are listed.

By requesting an official COI from contractors and subcontractors, clients can get peace of mind knowing that they won’t be held liable should damage be done during a job.

How do contractors and subcontractors handle completed operations liability?

Completed operations liability is a type of insurance policy that contractors typically purchase as a bundle with their general liability insurance.

The policy will provide coverage for any bodily injuries, damage to property, and resulting legal fees that are caused by either the installation of a product that was faulty or faulty work in general. 

In most states, there is a time limit of 10 years on damages for construction projects. As such, completed operations liability plans typically will last for that long.

They begin as soon as the work and contract is finished, and the work is put to the use it was intended for. 

In many cases, subcontractors will be required to carry completed operations liability. The general contractor also would be well advised to do so, though, as they wouldn’t be covered under their subcontractors’ policies. 

Does general liability insurance cover subcontractors?

A contractor’s general liability insurance typically will not cover subcontractors. While it’s possible that the insurance company could extend the coverage for a period of time to the subcontractor, it’s usually advisable for the subcontractor to get their own insurance policies.

What happens if a handyman gets hurt on your property?

If a handyman gets hurt on your property, it’s possible that you could be held liable. Whether you could be sued for injuries a handyman sustains on your property depends on how the work arrangement was made.

If you “exercise control” of the job, then you would assume the liability. What this means is that you would be performing the tasks that are typically assigned to a general contractor. This is the case with most jobs that involve handymen, which means that homeowners generally would be responsible if a worker is hurt on their property.

In cases where you don’t exercise control of the work — such as in the case where you hire a general contractor and they sub out the work — then you would not be responsible for the liability. You still would be required to provide a space that is reasonably safe for the workers.

What is a hold harmless agreement?

A hold harmless agreement is essential a waiver that will prevent you or you from being sued if someone is injured or damage is done during a job. The waiver of liability, also referred to as an indemnity agreement, is signed between the parties involved in a particular job.

They’re very typical in service industries, real estate, and construction, though hold harmless agreements are present in other sectors.

Shouldn’t contractors follow safety guidelines?

All contractors should of course follow generally-accepted safety guidelines. Even when they do, though, accidents can occur. Honest mistakes by a contractor can result in significant damage and/or injury. That’s why simply asking contractors to follow safety guidelines isn’t enough.

Get Exactly the Coverage You Need

The type of insurance that contractors and their subcontractors carry is almost as important as the actual work that they do. While it may be rare for insurance policies to factor into situations, when they do, they serve as a godsend.

No matter what type of job you’re hiring a contractor for, you should make sure that they hold the proper insurance coverages that are relevant to the job. You can do this by requesting  COI from all contractors and subcontractors, and then verifying that all of the information is correct.

Cheap contractor bids often mean fewer protections

Some contractors will bid low for jobs so that they can land work. Some contractors that don’t carry the proper insurance coverage will do this as a way to stand out from their potential competition.

It might be enticing to go with these low bids but keep in mind that doing so can result in you taking on too much risk. If the contractor doesn’t have the right insurance, you could be on your own if damage is done or someone is hurt.

Should my company create and enforce subcontractor insurance requirements?

It’s always a good idea to create subcontractor insurance requirements. Doing so will remove any uncertainty from agreements, and make sure that everyone is on the same page from day one. It also ensures that you are fully protected in case something goes wrong on the job.

But, simply creating subcontractor insurance requirements isn’t enough. Your company also needs to verify that the subcontractor is living up to those requirements from the beginning and that they are staying compliant throughout the duration of the job as well.

You can do this by requesting a COI before agreeing to allow a subcontractor to do work for you and then tracking their COI for the whole job. 

Tracking COIs can be quite challenging for businesses that work with many contractors, subcontractors, and other third-parties, though. That’s why working with a trusted company such as Evident to provide a COI tracking program is so valuable.

You will be able to verify and monitor COIs for every company you do business with and ensure that they all remain in compliance with your insurance requirements. 

Does my business insurance cover independent contractors?

Just as is the case for subcontractors, business insurance generally won’t cover independent contractors. It’s possible that some insurance policies will provide coverage for independent contractors, but not all will.

All businesses that hire independent contractors should insist that they carry their own insurance policies so they are protected in case of damage or injury during a job.

What is a general contractor?

A general contractor is a person or company that is hired to oversee an entire project. That entity is responsible for communicating with the client, managing the entire project from start to finish, and then ensuring that the quality of the work is up to the client’s satisfaction.

Some general contractors will handle every aspect of the job in-house. In other words, they’ll hire all the workers on staff and have their workers do all the tasks for the project.

Many, though, hire specialized subcontractors to handle certain aspects of the job. One of the most common examples of this is with home building, where a general contractor will hire an architect to draw up designs, a structural engineer to verify that the design is safe and sound, and specialty companies such as plumbers to do pipe and natural gas work.

Do subcontractors get workers comp?

Subcontractors will receive workers’ compensation coverage from the business that is hiring them if they don’t carry their own policy. If a workers’ compensation claim is filed in this instance, the business that hires the subcontractor will eventually be charged for the payroll.

Businesses and contractors can avoid this situation by requiring all subcontractors to carry their own workers comp policies, and then getting a COI to prove that the insurance policy is in place.

Are Subcontractors Covered Under Contractors’ Insurance?

In most cases, subcontractors are not covered under contractors’ insurance, although the above example of workers comp insurance is certainly an exception. How subcontractors are handled in terms of a contractor’s insurance policy depends on the insurance company they get their policy from.

All contractors should check with their insurance company to see what coverage they are provided with their policies. To be safe, and to protect themselves, contractors should always require their subcontractors to carry their own insurance policies. Contact Us.

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