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What You Need To Know About Subcontractor Insurance Coverage

Monday, March 24, 2014/Categories: business-liability-insurance

[Update: Jan. 31, 2017] For a more detailed look at how to work with subcontractors, check out our new eBook, Need Subcontractors? How to Hire Like a Boss

If you face a claim related to work done by your subcontractor, you don’t want to find out too late that your insurance policy won’t pay. If you’re hiring independent contractors, it pays to know in advance whether your business insurance policies provide coverage for them or the work they do.

General Liability

If you carry general liability insurance for your company, alone or as part of a Business Owner’s Policy or BOP, you may assume that any personal injury or property damage involving any work done by your company would be covered. But if that work is done by a subcontractor on your behalf, beware: it may not be.

In policies offered by some insurance companies, damage caused by your independent contractor while representing your company on the job is excluded from your general liability coverage. So, if your subcontractor accidentally drops your client’s server, the client could go after the subcontractor for damages. But if that fails, you’re the one who will be held financially accountable.

That’s why many small companies won’t work with subcontractors unless they carry their own general liability insurance. How can you be sure your subcontractor is insured? First, require it in their contract. Second, ask to see proof of coverage, typically in the form of a Certificate of Insurance. It is also a good idea to require that your subcontractor name your company as an "Additional Insured" on their general liability policy. When you are an Additional Insured, your company is protected by the subcontractor's policy, just as they are. That way, if you are sued as a result of damage the subcontractor causes, the subcontractor's insurance company is required to cover your company for the claim.

Are you an independent contractor? Click here to see a sample liability insurance quote

There’s another good reason why you want your subcontractors to be insured: If your own general liability carrier determines that you’re using an uninsured subcontractor, the carrier often has the right to consider that subcontractor part of your company and to increase your premium accordingly. That’s right – even if there’s not a claim, you can be stuck paying for the general liability coverage your subcontractor should have had in the first place.

Workers’ Compensation

Workers’ compensation insurance covers employees’ medical and disability costs related to work-related illnesses and injuries. Many states mandate workers comp insurance for W2 employees, but some states can also require that you cover your uninsured 1099 contractors. So be sure you’re familiar with the laws of the state(s) where you and your clients do business, and ask your agent or broker for clarification if you need it.

Regardless of state law, it’s always a good idea to require that your subcontractors carry workers’ compensation insurance. Why? Because if your subcontractor isn’t covered and an on-the-job injury occurs, you could be held financially responsible.

Suppose you bring in a subcontractor whose employee suffers a back injury while on a client site. The subcontractor company is uninsured – but that won’t stop the employee from seeking damages. When he doesn’t get any compensation from his own employer, your company is the next logical place to turn. And unless you’re paying premiums to cover contractors, he may not be covered by your workers’ comp insurance, so you could be either paying his medical bills out of pocket or facing a lawsuit.

As with general liability insurance, you can require in your contract that independent contractors carry workers’ comp insurance. Alternately, you can add the subcontractor’s employees onto your own policy, and then pass the costs on to the subcontractor as part of your agreement.

Professional Liability/Errors & Omissions

Many clients will require you to carry errors & omissions insurance, just in case a mistake you make on the job costs them money. They want to be sure you’re able to compensate them in the event of a financial loss caused by your company’s error. So whether the person who makes the mistake is an employee or an independent contractor, you want to be sure you’re covered with E&O insurance.

When shopping for a professional liability policy, look for clauses that protect your company from claims related to the work done by subcontractors on your behalf. But, keep in mind that in many cases, your professional liability policy only protects your company, so if both you and your subcontractor are sued, the subcontractor is responsible for their own defense costs. That’s why it’s wise for all subcontractors to carry their own E&O policies as well – and you can easily require that they do by including it in your contract and asking for proof of coverage.

Remember – your client may bring suit months or even years after you and your contractor have completed work, so be sure to keep your professional liability coverage active as long as you’re in business. Because errors & omissions insurance is issued on a “claims-made” basis, you must both maintain continuous coverage to ensure protection.

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