Subcontractor Insurance 101
Subcontractor insurance is a type of coverage designed to protect subcontractors and the general contractors they work for. If you think about all the things that could go wrong on a construction site, it’s easy to see why contractors shouldn’t feel safe subcontracting jobs to those who aren’t covered by an adequate insurance plan.
Why purchase a subcontractor contractor or subcontractor general liability plan? Because your work holds the power to protect or injure those around you. It’s important to have the right coverage to safeguard yourself as well as the clients and subcontractors you’re working with. A potential problem with hiring uninsured subcontractors is that you may not be covered for what might happen while the work is being done. However , the general liability and completed operations you’re protected for depends on your coverage.
Subcontractor general liability insurance usually comes standard with two types of coverage: general liability and completed operations. With general liability, you’re protected from all the everyday risks that could happen during the job. Completed operations is a form of liability coverage that insures you after the completion of a job or project. It usually lasts for one year after the final payment has been made.
Why Subcontractor Insurance Is Necessary
The Most Commonly Asked Question about Subcontractor Insurance Is "Why?" It Is Because Poorly Insured or Uninsured Contractors Can Present Financial and Liability Risks.
The main reason subcontractors should carry commercial general liability coverage is because hiring firms, trade contractors and professional architects, engineers and land surveyor firms require it to qualify for projects, respond to requests for proposals, or to accept work. Most of the time those companies carry insurance and refuse to accept cost proposals without it. This makes it a necessity for subcontractors to have commercial general liability and workers’ compensation insurance policies.
Subcontractor insurance is not only beneficial for the subcontractor, but also a requirement of the hiring company or contractor. A subcontractor that does not carry sufficient insurance presents a financial or liability risk to the contractor. For example, if a subcontractor injures a third party or causes property damage, the contractor must step into the shoes of the subcontractor and defend the claim. Some contracts indemnify the hiring contractor for any claims arising out of the claimant’s use of a company’s products or services (which includes contracts to assign the cost of an attorney for liability claims). The result is often the hiring company pays for claims submitted by a third party with regard to property damage or personal injury. If a subcontractor carries sufficient insurance and a claim is made, the hiring company can submit the claim to the subcontractor’s insurer for payment of damages and attorney fees. If the subcontractor carried insufficient insurance or no insurance to address third-party risk, the claim would likely be submitted to the hiring company for defense of the claims. It is not uncommon for those claims to total more than $100,000. This results in exorbitant costs, both in attorney fees and in damages paid.
Common Subcontractor Insurance Policy Types
A subcontractor’s insurance needs will vary depending on the type of work they perform. Here is a selection of common coverage types and the basic protections they provide:
General Liability Coverage
This is a "must have" for virtually all contractors. This type of policy covers damages caused by the "named insured" or those working on behalf of the "named insured," providing both bodily injury and property damage protection. This includes coverage for claims that result from accidents, negligence, and other actions (i.e. property damage, medical expenses, etc.). An underlying liability policy protects the insured to an extent and responds when the named insured is at fault. The primary function of the policy is to pay damages, defense costs, and associated expenses on behalf of the insured.
Workers’ Compensation Insurance
This type of coverage provides benefits to a covered fence contractor for on-the-job conditions in the case of an injury or occupational disease. Generally, an injured employee must show that their injury occurred in the course and scope of employment. It is typical that these policies also contain a "sub-limit" for pain and suffering compensable under tort law.
Professional Liability Insurance
This type of insurance protects against the risks professionals face when providing their clients with "professional services." For example, an architect, engineer, or surveyor could be subject to a claim of professional negligence if they failed to exercise reasonable care in their work to design a facility. In many cases, professional liability is an addition to a general liability policy, but it can be purchased stand-alone and only applies to specific "extra hazards."
Legal Insurance Requirements for Subcontractors
While specific insurance requirements may be unique to the contract and the parties involved, there are state laws and federal government regulations that impose additional considerations. Contracting for construction projects with the federal government is governed by the Federal Acquisition Regulation (FAR). FAR 28.307-2(e) requires the "solicitation" of subcontractors in the contracting officer’s brochures on satisfactory insurance requirements. By implementing this requirement, the FAR in essence mandates the planning of procurement of subcontractor insurance when the transaction involves the federal government. While this federal regulation does not apply when the client is a non-governmental entity, it is a good practice to solicit subcontractors accordingly to keep the project in compliance with the FAR requirements. The many state regulations on the requirement of proof of contractor and subcontractor insurance vary similar to the contracts themselves. For example, Florida Statute § 489.818 makes any unlicensed contractor and their subs liable to a fine of $500 per violation. Additionally, it subjects them to civil legal penalties of twice the loss sustained by an injured party. Many Florida counties also have their own local ordinances reinforcing their lack of tolerance for unlicensed contractors and their subs. In Texas, the licensing of contractors is left to the municipalities. The City of Houston, for example, has a three-page document summarizing its general conditions for providing services on construction projects. The "Service Provider" definition in the document applies to contractors and subcontractors. According to this document, the "Service Provider" is required to provide proof of insurance no less favorable than the requirements of General Services Department and be responsible for the subcontractors and their actions. In states such as Tennessee, municipalities require the same of contractors and subs. The Nashville government has a list of requirements for bid proposals that include the need for copies of General Liability Certificates and the requirement that the contractor and its subcontracts have a General Commercial Liability insurance certificate. California has its own requirements for contractor’s insurance. Among other things, contractors are required to "maintain their insurance coverage in full force and effect at all times during the performance of the contract," and to "secure each subcontractor’s full compliance with these [insurance] requirements." The above examples are by no means comprehensive; each state has its own set of requirements that must be complied with.
Assuring Subcontractor Adherence to Insurance Requirements
A good way to ensure that your subcontractor is complying with your insurance requirements is to incorporate the insurance requirements into the purchase order or contract that they are signing.
Once you’ve established what types of coverages the subcontractor is required to have, you will want to make sure that you require them to deliver certificates of insurance prior to commencing any work and at each renewal. Certificates of insurance are considered to be an industry standard way of evidencing insurance coverage by the Federal government and Fortune 500 companies. There are important considerations, however, when reviewing a certificate of insurance. Only those coverages listed on the certificate of insurance are covered under it. If you’re not certain that your advice to get coverage was included, you will want to make sure that you request copies of the insurance policies to confirm that coverage was obtained. Also, certificates of insurance are illustrative only . In other words, just because the subcontractor provides you with a certificate a day before they are getting ready to perform work, doesn’t mean that the subcontractor has insurance, because it is possible that it was canceled the previous day. If there are exclusions in the policy, the company should insist on endorsements that relate to those exclusions. Another common way of covering these exclusions is to work with the subcontractor to require a "blanket additional insured endorsement", and that the subcontractor does not have "naming endorsement" in place. Also, you will want to consider requiring that the subcontractor provide you with a copy of the policy that was obtained themselves. For large projects, typically the subcontractor can be required to supply an Acord 25 B (the name of the form of the certificates of insurance) that you can review prior to commencement of work. If the project is ever audited, the risk manager may want to obtain copies of the insurance policies delivered to the subcontractor directly from the insurance company.
Insurance Requirement Enforcement Challenges
Enforcing subcontractor insurance requirements, particularly in today’s interactive digital environment, can be notoriously difficult. The challenge begins with the disclosure of critical information. Most subcontractors have websites. By making a simple request and searching a company’s website, your business can usually get a good idea where to look for information. But these days, the inclusion of information on a company’s website does not necessarily mean that what is there is reliable. Companies are now able to craft a marketing image in whatever way they see fit. And to them, marketing their insurance is usually low on their priority list. Business owners understand that the presence of a certificate of insurance from a given insurance company means that this entity is required to meet certain financial obligations. Business owners also realize that a certificate of insurance from a company could mean that they have little or no insurance obligation on the books at all. It is not unusual that a company claims to have insurance, but the policy has words on the face of the instrument which define the company as having no insurance obligation at all. For example, in the workers’ compensation context, many companies have limited indemnity obligations, and they use the payment of worker’s compensation premiums to mask or conceal this fact. They will offer you a workers’ compensation certificate of insurance; however, if you read the policy, you find they are only paying for workers’ compensation benefits for employees, not independent contractors, and the numbers are surprising. Most policies do not include coverage for independent contractors. Combined with the numbers being paid into the insurance plan, what you have is a situation where the company has assumed little or no risk at all, at least as far as its obligations to you are concerned. When you find that you have a subcontractor with insurance that only covers the employee portion of the business because he has only been paying for employees, you may find yourself in a position where you have no insurance at all at that company. The company is marketing itself as an insured business and displaying a certificate of insurance—but the insurance obtained is not going to fulfill the promise of providing you the protection you expect from insurance. Thus, we all unwind additional premiums you should not have paid in the first place. We identify it as a subsidy to help honest business appear to be honest. The challenge here is the ability of an owner to try and enforce provisions that appear or would appear to the untrained eye to be valid, and which are in reality not valid at all. Once you sort through that paper to find out what you really have, then you know the proof you need to pursue your legal claim.
Finding the Right Insurance for Subcontractors
When selecting an insurance provider for subcontractors, there are several factors to take into account. The most important consideration is whether the provider has a good reputation. Subcontractors will not be keen to submit a bid to an insurance provider that does not have a well-established track record and good reputation within the industry. Asking about the provider’s history and licensing status will help the subcontractor better vet whether the provider is worth submitting a bid to.
How the insurance provider communicates and deals with customers in the quote process is another factor to investigate when determining whether to submit a bid. A good provider will be transparent with the subcontractor about the types of coverage options available. Not every provider takes the time to explain this, but subcontractors should aim to work with those who do.
The final factor to consider in finding an insurance provider for subcontractors is cost-effectiveness. Some insurance providers offer lower rates than others, but subcontractors should be careful not to choose the cheapest option out there if this means lower coverage options and a higher chance for claim denial.
Taking the time to fully research the insurance provider could very well mean the difference between getting the bid or not. A subcontractor will be seen as more desirable by project owners if they are insured and have a reliable insurance provider that they can communicate and deal with as needed.
Conclusion: Getting Covered with Subcontractor Insurance
Subcontractor insurance requirements can be complex. We’ve discussed the practical implementation of these clauses — how much insurance a subcontractor must carry, and which types of coverage are required. We’ve also examined the risk you incur if your contract fails to specifically state the insurance that your subcontractor is required to carry, and discussed the pitfalls of failing to understand the nuances of specific language like "regardless of the extent of another subcontractor’s negligence."
Ultimately, the burden is on the contractor, business owner, or firm planning to hire subcontractors to carefully determine how risks are being transferred downline , and how to control those risks. Business cannot simply trust that the other side is fully protected — if for no other reason than because coverage at the general contractor level does not always cover a subcontractor’s liability in the event of a misstep.
The best practice is to fully understand your own risks, and create a subcontractor insurance clause that precisely outlines the minimum insurance coverage a subcontractor must carry in order to provide contracted services. It’s an important step in protecting your own business, and mitigating the risks inherent in a contract with a subcontractor.