Why your Subcontractors Need Workers’ Comp Insurance (and What to Look for on their Certificates of Insurance)

When it comes to hiring subcontractors or 1099 employees, there’s a lot to think about. From searching for and hiring the right professional, to making sure they’re onboarded correctly, and more – it can be stressful.

But don’t think we’re going to let you forget about your subcontractors’ insurance. As business insurance experts over here at Berry Insurance, we always stress that our commercial clients consider their subcontractors’ insurance before bringing anyone on.

So in this article, we’re going to dive into workers’ compensation specifically. You’ll learn why your subcontractors should have their own workers comp, how much insurance they should have, how to get a proof of insurance, and what to look for on that proof of insurance. 

Why you want your subcontractors to have workers’ compensation

While you get to determine how you hire subcontractors or 1099 employees, it is certainly in your best interest to make sure your subcontractors have insurance.

If your subcontractors don’t have their own insurance coverage, you will have to report that person’s payroll on your workers’ compensation policy. And that means increased workers’ compensation costs for you.

That’s why we always recommend anyone hiring subcontractors or 1099 employees ensure those hires have their own insurance.

Getting proof of insurance from subcontractors

But it’s not enough to just ask your subcontractors if they have insurance – you also need proof.

I would love to live in a world where you can trust anyone’s word, but because we don’t, you really need to obtain proof of coverage to cover your back.

Having proof of coverage will also come in handy when your workers’ comp audit comes up and you can show your insurance company proof that your subcontractors had insurance so that you do not in fact have to pay for them on your policy.

And the best way to get proof of insurance is through a certificate of insurance (COI). 

Certificates of insurance:

A certificate of insurance is a slip of paper (a digital or printed document), proving you have 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 your insurance policy including:

• Company name
• Insurer name
• Type of insurance
• Policy numbers
• Policy effective dates
• Coverage limits

Essentially, the COI serves as a proof of insurance so other businesses you work with know you have the insurance protections essential to minimize risks. It serves as a peace-of-mind before entering into a business agreement.

For more information about certificates of insurance, read this article: What is a Certificate of Insurance and Why Do I Need it?

How to get a certificate of insurance:

To get a COI, there really isn’t a lot you need to do. 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 (which we’ll get into more below.) 

The subcontractor will then need to contact their commercial insurance agent and provide them with your name, address, and insurance requirements.

If the contractor already has the proper coverage, the agent will issue the COI for the contractor to give to you.

If their insurance coverages do not meet your requirements, they can either buy the extra coverage, or decline to take on the job for you.

What to look for on certificates of insurance:

You’re probably wondering what you need to do once you get the COI. How do you actually determine if your subcontractors have adequate coverage?

First of all, you’ll want to make sure your subcontractors have workers’ comp at acceptable limits. What those limits should be can vary from job to job but we typically recommend at least $500,000. If you have concerns about what limits are right for you, definitely check with your agent.

But there are a few other areas you’ll want to check to make sure the coverage is correct, active, and adequate.

For this section, we’ve included an image of what your COI may look like. Follow along by looking for the letter corresponding to each section on the image.

1. Named insured: This section should include the name of the contractor. 
2. Insurance company: This section shows the insurance company your contractor has the business insurance policy through. Sometimes, there may be more than one insurance company listed. This just means they have different carriers for their different types of insurance. You’ll want to look at the insurance types section to make sure the correct policies correspond with the correct carriers.
3. C. Insurance types: This section shows the types of insurance the COI is proving insurance for. You will want to check here to make sure it includes all the types of insurance you are requesting.
4. Limits: Across from the insurance types, you’ll see the policy limits associated with each type of insurance. Again, make sure these limits match the amount you requested.
5. Policy effective date: This section shows the term of the commercial insurance policy, meaning when it started, and when it will expire. If you expect your project or construction job to extend beyond the policy expiration date, you’ll want to make sure the contractor or company renews their policy and you get a new COI from them.
6. COI date issued: The date issued shows the date the COI was created, so for one, you’ll just want to double check that the date is correct and within the policy effective period. You’ll also want to note that a COI is only a snapshot in time, meaning that it can only prove insurance was active on the issue date. Theoretically, a contractor could get a COI as proof of insurance, then cancel the policy the next day. (We’ll get into what to do about that in section G.)
7. Special conditions: This section is where the agent should list the property address for the job, and any job details or your special requirements. We recommend to our clients that they be listed as an "additional insured" in this section to protect them against liability lawsuits. If you are listed as an additional insured, you will usually be notified if the policy cancels, leaving you unprotected.
8. Workers’ compensation: Under the workers’ compensation section, there will be a check box indicating whether the owner is included under the policy. Sole proprietors and officers of corporations can opt out of workers’ comp coverage, so the check box will show you whether they are included or not. There may also be language about it in the special conditions section if the owner is not included. If the sole proprietor or officer is one of your subcontractors you’ll need to make sure that the certificate spells out that they do have workers’ comp.
9. Signature: And of course, you will want to make sure the document is signed by the contractor's insurance agent, indicating that it is official.

Make your audit easier by managing your COIs

There are a lot of moving parts to hiring subcontractors. But one of those parts you can’t ignore is ensuring they have the right insurance.

Obtaining proof of insurance before hiring subcontractors will help make sure you don’t have any issues or surprise payments down the road.

If your company hires a lot of subcontractors, effective COI management will be crucial to a smooth audit. You’ll want to make sure you have all your certificates organized in one place so you can hand them over during the audit to make sure you aren’t paying for your subcontractors on your policy.

But hey, that’s not the only thing you should be doing to make sure your audit runs smoothly. To learn more audit survival tips, read this article: 5 Steps to Get Through Your Workers Comp Audit.