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E&O Insurance for Subcontractors: 5 Things to Know

E&O Insurance for Subcontractors: 5 Things to Know

Wednesday, February 03, 2016/Categories: errors-and-omissions-insurance

Subcontracting IT work is incredibly common – that shouldn’t come as a surprise. But when you hire a subcontractor, is there anything you need to do differently with your small business insurance?

Yes. For one thing, you should require subcontractors to have their own Errors & Omissions Insurance and outline that requirement in a contract. Here are five more tidbits you'll need to know before you hire a subcontractor.

1. You Can End Up Paying for a Subcontractor's Errors and Omissions

Getting your subcontractor insurance straightened out is important. If subcontractors don’t have coverage, you leave the door open to lawsuits. A subcontractor’s mistake means liability may fall on your shoulders. And if your subcontractors don't have insurance of their own, you may end up footing the bill.

2. You Might Not Be Able to Add a Subcontractor as an Additional Insured

Subcontractors should have their own coverage because you might not be able to cover them under your own Errors & Omissions Insurance policy.

Often, you can simply add a third party as an “additional insured” to your technology E&O Insurance, but that might not be the case with a tech subcontractor because the work they do exposes you to increased risk. Insurers don’t want to offer the “additional insured” option because it’s a bad tradeoff for them: you don’t pay much extra, but they’re exposed to a lot of added risk.

3. It’s Smart to Require Contractors to Have Subcontractor Liability Insurance

Before you hire a subcontractor, include language in their contract that says they must have insurance (typically Errors and Omissions Insurance and General Liability Insurance) before they start working for you. The contract should...

To learn more about subcontractor contracts, check out “Got Subcontractors? Protect Your Interests with a Subcontractor Agreement.”

4. Yes, You Should Check Your Contractor’s Insurance Certificate

Check the subcontractor’s Certificate of Liability. Really – do it. Check it and call the insurance provider to verify (contact information will be on the certificate). By doing so, you make sure the subcontractor’s coverage is up to date.

It sounds a little paranoid to call an insurance company to check if a subcontractor's coverage is accurate, but it’s not a bad idea. A contractor could have missed a payment or cancelled their policy but still have a certificate on hand. Your check-up call is essential.

If you're not sure about how insurance certificates work, see "What Is a Certificate of Liability Insurance?" for more information.

5. Make Sure Your Subcontractor’s Limits Match Your Client’s Requirements

Say a client requires you to have $1 million in technology Errors and Omissions Insurance. Simple enough. Now you’ll need to make sure that your subcontractors have the same liability insurance limits.

Policies come in different sizes and shapes. By outlining your insurance limit requirements in a contract, you can ensure your subcontractors are meeting your requirements and those of your clients.

Bonus Tip: Double Down on Lawsuit Prevention

Insurance is an important risk management tool because it can help cover expensive professional liability lawsuits. But even better than being able to pay for a lawsuit is being able to prevent it. When you hire a subcontractor, you're exposed to more lawsuits because you're now responsible for the contractor's mistakes as well as your own.

That's not the only reason your risk increases. You also have additional lawsuit risks because of the challenges you face trying to manage a group of workers. Sometimes running an IT project can be like herding cats.

To prevent lawsuits, remember to:

  • Emphasize communication with contractors – especially remote workers.
  • Warn your clients ahead of time if you expect project delays.
  • Implement a standard dispute resolution process (and make sure your subcontractors bring any client complaints to your attention).

For more tips on preventing IT lawsuits, review our post "Common IT Errors and Omissions that Trigger Lawsuits."

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