Using subcontractors is a normal part of the construction business. General contractors, roofers, remodelers and specialty contractors routinely rely on subcontractors to complete portions of their work.
But there is an important insurance question that sometimes gets overlooked: What happens when one of your subcontractors doesn’t carry their own insurance?
The answer can affect much more than a certificate of insurance. Depending on your policy and the work being performed, uninsured subcontractors can affect your premium, insurance audit, eligibility with certain insurance companies and potentially how your policy responds to a loss.
At Contractors Direct Insurance Agency, subcontractor exposure is one of the issues we regularly address when helping contractors structure their insurance programs.
Insured vs. Uninsured Subcontractors
From an insurance standpoint, there can be a significant difference between an insured subcontractor and an uninsured subcontractor.
An insured subcontractor will typically carry their own Commercial General Liability policy and provide a current Certificate of Insurance showing that coverage.
Depending on the project and subcontract agreement, the general contractor may also require the subcontractor to provide Additional Insured status, a Waiver of Subrogation, Primary and Noncontributory wording, or other endorsements.
An uninsured subcontractor does not have their own applicable insurance available for the work they are performing. That creates additional exposure for the contractor hiring them.
“All My Subs Have Insurance” – Make Sure You Can Prove It
This is where contractors can run into problems.
It’s easy to say that every subcontractor is required to carry insurance. The important question is whether you have documentation to support it.
Certificates expire. A subcontractor may change insurance companies. A policy can lapse. Someone may provide a certificate at the beginning of a project and never provide another one.
Months later, when your General Liability or Workers’ Compensation policy is audited, you may be asked to provide Certificates of Insurance for the subcontractors you used during the policy period.
If you can’t produce them, the insurance company may treat those subcontractors differently for audit purposes. That can become expensive.
A good subcontractor insurance process isn’t just about collecting a certificate once. Contractors should have a system for keeping certificates current and documenting subcontractor insurance throughout the policy period.
Can You Still Get Contractor Insurance If You Use Uninsured Subcontractors?
In many situations, yes.
Using uninsured subcontractors does not automatically mean a contractor is uninsurable.
However, insurance companies have different underwriting rules. Some may allow uninsured subcontractors subject to additional premium or other requirements. Others may restrict them, require specific risk-transfer procedures, or decline certain types of subcontracted work.
The type of work also matters. A subcontractor performing relatively low-hazard work can present a very different exposure from one performing roofing, structural work, excavation, electrical work, scaffolding or another higher-hazard construction operation.
The percentage of your work that is subcontracted can matter as well. This is why contractors should be accurate about their subcontractor usage when applying for insurance.
Uninsured Subcontractors Can Affect Your Insurance Audit
This is one of the biggest surprises contractors encounter.
Many contractor insurance policies are written using estimated exposures at the beginning of the policy period. Depending on the policy, those exposures may include payroll, gross receipts, subcontractor costs or a combination of factors.
At the end of the policy period, the insurance company may conduct an audit.
If your policy was written based on subcontractors carrying their own insurance and you cannot provide acceptable evidence of that coverage, some subcontractor costs may be treated differently during the audit. That can result in additional premium.
This is one reason Contractors Direct encourages contractors to maintain organized subcontractor records rather than waiting until an audit notice arrives.
A Certificate of Insurance Is Important – But It Isn’t the Whole Story
A Certificate of Insurance is evidence of insurance at the time it is issued. It does not create coverage or change the terms of an insurance policy.
For larger commercial projects, simply having a certificate from your subcontractor may not satisfy your contractual requirements.
Your subcontract agreement may require the subcontractor’s policy to include things such as:
- Additional Insured status
- Ongoing operations coverage
- Completed operations coverage
- Primary and Noncontributory wording
- Waiver of Subrogation
- Specific liability limits
- Commercial Auto coverage
- Workers’ Compensation coverage
- Umbrella or Excess Liability coverage
The actual requirements depend on the contract.
That is why contractors should pay attention not only to whether a subcontractor has insurance, but also to whether that insurance satisfies the requirements being passed down to them.
Your Customer’s Contract May Require More Than Your Policy Does
Another common problem occurs when a contractor wins a new job and receives the insurance requirements after the fact.
The contractor may already have perfectly valid insurance, but the new contract requires endorsements or limits that aren’t included in the existing policy.
This doesn’t necessarily mean there is anything wrong with the insurance. It means the insurance program and the construction contract don’t currently match.
Some policies and insurance programs offer considerable flexibility when additional endorsements or specialized certificate requirements are needed. Others are designed around more standardized forms and coverage options.
Neither approach is necessarily right or wrong. What matters is whether the insurance program fits the type of work the contractor is pursuing.
For contractors moving into larger commercial work, multifamily projects, property-management work or projects with sophisticated general contractors, insurance requirements often become more detailed.
It is better to identify those requirements before the project begins than after a certificate has been rejected.
Good Subcontractor Risk Transfer Starts Before the Job
Contractors who regularly use subcontractors should consider establishing a consistent process.
That may include requiring written subcontract agreements, establishing minimum insurance requirements, collecting Certificates of Insurance before work begins, tracking expiration dates, and obtaining required endorsements when appropriate.
The exact requirements should reflect the contractor’s operations and contracts.
The goal isn’t simply to collect paperwork. The goal is to know who is working for you, what insurance they carry and whether their insurance satisfies the requirements you’ve agreed to upstream.
Before You Sign the Contract, Look at the Insurance Requirements
One of the best times to identify an insurance problem is before the construction contract is signed.
If a project requires specific liability limits, Additional Insured endorsements, Primary and Noncontributory coverage, Waivers of Subrogation, Per Project Aggregate, Workers’ Compensation requirements or Umbrella limits, your insurance agent should know about those requirements as early as possible.
That gives everyone time to determine whether the existing insurance program can comply and what, if anything, needs to change.
Contractor Insurance Is More Than Buying a Policy
Contractors Direct Insurance Agency specializes in insurance for contractors and construction businesses.
We understand that obtaining the policy is only part of the job.
Contractors also have to deal with subcontractor requirements, certificates, audits, contract insurance specifications, Additional Insured requests, Waivers of Subrogation and the revisions that sometimes come with getting approved for a project.
If you’re using subcontractors – or you’re considering a project with insurance requirements you’re unsure about – send us the requirements before the job starts.
We can help you understand what is being requested and determine what options may be available under your insurance program.
Contractors Direct Insurance Agency
If you swing a hammer or turn a screw, we have the right insurance for you.
