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For many companies, hiring subcontractors or 1099 employees can feel like a perfect solution.
It’s a way to get the work that you need done completed, without having to take on official permanent employees. Plus, they have their own insurance!
… At least they should.
Because if your subcontractors don’t have the right insurance and limits, it could end up being costly to you.
But don’t worry. At Berry Insurance, we’ve helped many of our commercial insurance clients navigate this issue and we can help you too.
In this article, we’ll explain why your subcontractors need insurance, and what insurance they should have to make sure you don’t end up paying more than you need to for their labor.
Why you should make sure your subcontractors have insurance:
You could be responsible for injuries or property damage if your subs don’t have insurance
As we’re sure you are aware, the types of jobs subcontractors work on can be very risky.
Between injury, illness, or property damage, there are a number of issues that could go wrong on the job, resulting in an insurance claim.
If something happens to one of your subcontractors or if they make a mistake, if they don’t have the insurance to cover the injury/illness/or damage, they (or their attorney) can actually look to your insurance for coverage.
I know what you’re thinking: “If the accident was their fault, why would I be responsible?”
We know it may not seem fair, but if you’re the person responsible for providing subcontractors with work at the job site, you can actually be held responsible for a claim.
But that is exactly why it is important to make sure your subcontractors have insurance: if something goes wrong, it should affect their insurance, not yours.
And not only do they need to have the right insurance, but they also need to have adequate coverage limits. If they don’t have high enough limits on their policy to cover the damage or injury, again, your insurance could be targeted.
Why does it matter? If you have a history of claims on your commercial insurance, your premiums will increase and it may limit your options for insurance carriers that will work with you in the future.
Your insurance policy might require your subs to have insurance
Just like you don’t want your insurance to cover subcontractor damage or injury, your insurance company doesn’t want to pay it out either.
That’s why your commercial insurance will usually have certain rules, requiring that any subcontractors you work with carry a certain amount of insurance. Your insurance carrier will usually require they have a minimum amount of general liability and workers’ compensation, but they could enforce additional insurance requirements.
If you break this requirement by not requiring and monitoring your subcontractors insurance coverage, your insurance carrier may deny payment if there is ever a claim.
Types of insurance subcontractors should have:
You know the importance of ensuring your subcontractors have insurance. But what types of insurance do they need? And how much?
Well to be honest, the types and amounts of insurance your subcontractors should have depends on the details of the work they’re doing, but we can give you an idea of what you may want to require.
For a clearer idea of what you will need, you should contact your insurance agent.
General liability insurance:
General liability insurance is a type of business insurance policy that covers claims made against your contractor and his business from someone who experienced bodily injury or property damage.
This policy would kick in if your subcontractor causes damage to property or injury to another person on the worksite. Without making sure they have enough coverage, you could be stuck paying for those repairs/injuries.
In most cases, we recommend you make sure your subcontractors have at least $1 million in liability coverage.
Workers’ compensation:
Workers’ compensation insurance covers medical payments and a portion of lost wages for employees who become injured or ill due to work-related causes.
If a contractor working on your site gets injured on the job and he isn’t covered by workers compensation, he could sue you for injuries.
Limits for workers’ comp can vary depending on the work being completed. We typically recommend at least $500,000, but if you have questions, definitely check with your agent.
Commercial umbrella insurance:
Sometimes known as an excess liability policy, commercial umbrella insurance supplements a business’ existing general liability insurance, commercial auto insurance, and workers’ compensation insurance. If a large claim exhausts their underlying coverage, the business umbrella insurance will cover the rest, up to the limit on the policy.
Depending on the value of your work site, and your comfort level, you may want to make sure your contractor has an umbrella policy.
For example, if the job contract is worth more than $1 million dollars, it may be a good idea to have at least $1 million in umbrella insurance (the minimum) to supplement the general liability policy.
If the job contract is under a million and you feel comfortable with it, you might be ok with your subcontractor not having an umbrella, but keep in mind, beyond the value of the job, you also have to be concerned about injury liability, which could potentially also exceed $1 million.
Commercial auto insurance:
Much like personal auto insurance, commercial auto insurance protects against damage and injury liability when driving, except it applies to business vehicles.
If your subcontractors drive as part of their business operations, you may want to require they have commercial auto.
Again, we recommend $1M in commercial auto coverage.
How to prove and monitor your subcontractors’ insurance
The next logical question is: “How can I make sure my subcontractors have the right insurance?”
As much as you want to trust people, you definitely can’t take risks and rely on your subcontractors word -- plus, your insurance carrier may want proof of your subcontractors’ insurance.
That’s where certificates of insurance come in.
What is a certificate of insurance (COI)?
A certificate of insurance is a slip of paper (a digital or printed document), proving someone has insurance coverage.
These could be for any type of business insurance, but are most often needed for general liability or workers compensation insurance.
The COI outlines details about an insurance policy including company name, insurer name, type of insurance, policy numbers, policy effective dates, and coverage limits.
Essentially, the COI serves as a proof of insurance so you know any contractors or business you are working with has the insurance protections essential to minimize risks. It serves as a peace-of-mind before entering into a business agreement.
To learn more about COIs, check out this article: What is a Certificate of Insurance and Why Do I Need it?
How can I get/keep track of COIs?
To get the COIs you need, you simply need to ask the subcontractor to get a COI from their insurance company or agent, showing that they have the types of insurance and limits you want them to.
We actually have a template letter for businesses requesting certificates from their subcontractors.
After you get all the COIs you need, you’ll want to make sure they are accurate, and monitor them to ensure they remain up to date.
Avoid paying more than you need to on subcontractors
When you hire subcontractors, you know what you’re expecting to pay them.
The last thing you want is to receive a large insurance bill for something they did on the job.
By requiring them to have the right insurance and limits, and monitoring their insurance certificates, you can be sure both they and you are covered -- with no surprise claims.
But even though you know your subcontractors have the right protection, it doesn’t mean you can neglect your own coverage. Even the smallest changes in operations can prompt changes to your business insurance. That’s why it’s important to review your commercial insurance at least annually to make sure everything is up to date and you have no gaps in coverage.
