Always Request Proof of E&O Insurance
Okay, so hopefully you’re sold on contracts. But they’re not the only form of documentation you’ll want when hiring subcontractors. You’ll also want to make sure they’re carrying Professional Liability Insurance (also sometimes called Errors & Omissions Insurance, or E&O).
Attorney Daniel Lieberman of Devine Law Offices (@DLOLancaster) puts it this way: “It is vital that subcontractors carry their own Professional Liability Insurance.” As an employment lawyer for nearly 20 years, he knows it's crucial that business owners take steps to manage their liability.
E&O Insurance can help cover lawsuits when a subcontractor makes a mistake. When a client sues over a product you deliver, they’ll likely name everyone involved in completing the product. If your subcontractor has their own insurance, their policy can cover their costs, which means your policy has less work to do. Remember: the average contract dispute costs $91,000.
It's also worth noting, as Lieberman points out, that employers and subcontractors are often in a gray area when it comes to legal liability. It's essential that businesses consult with a lawyer about their use of subcontractors and contracts, and it’s just as important to ensure that subcontractors have liability coverage.
What You Need to Know about Subcontractors’ E&O Insurance
To confirm that your subcontractors actually have Errors and Omissions Insurance (and that it's the right amount of coverage to protect you), you'll need to check their Certificate of Liability Insurance [PDF].
What's an Insurance Certificate? It is a single-page document that summarizes the coverage a policy offers, including…
- Expiration date.
- Coverage limits.
Be sure to check insurance documentation each time you hire a subcontractor.
Requesting Proof of Insurance
Perhaps not surprisingly, the first step to requesting proof of insurance involves requiring it in your contracts. Matt Meyers, an attorney with Becker Poliakoff (@BeckerPoliakoff), jokes that he’s one of the “nasty plaintiff lawyers,” meaning he’s the guy who sues you when someone messes up a contract. He knows better than most how to make sure your insurance ducks are all in a row.
To ensure subcontractors have the right insurance, Meyers recommends that your contracts have the following requirements:
- Subcontractors must show you proof of insurance (i.e., a Certificate of Insurance).
- The Certificate of Insurance must show that the policy is paid for and the coverage will be in effect while the contractor is working for you. (It’s also wise to verify with the carrier that premiums have actually been paid.)
- The policy must have adequate coverage (for technology Errors & Omissions insurance, that’s typically around $1 or $2 million).
- Your business must be named as an additional insured on the policy.
- Subcontractors must agree to defend and indemnify your business, holding you harmless in the event of a lawsuit.
Clauses in your contracts may need to be worded carefully to reflect particular case law in your state.
When to Request Proof of Insurance
Before hiring, notify subcontractors of any E&O Insurance requirements they need to meet to begin work. You may want to list these requirements in job postings to weed out any applicants who don't have coverage. During interviews and negotiations, ensure they know they’ll need to show you an actual Certificate of Insurance (a digital copy is fine).
Why do you need to see the Certificate of Insurance? You can risk taking your contractor's word for it, but it's better to do your homework. Verify coverage by contacting the listed insurer to make sure the policy is active.
Why Bother Requesting Proof of Insurance?
Requesting proof of insurance lets you…
- Verify that your subcontractors are financially stable and have taken steps to limit their liability.
- Ensure that your insurance, claims history, and reputation won't take a hit if a subcontractor makes a mistake and the lawsuit falls on you.
Think of it this way: insurance works like a roof. If there's a leak anywhere, your house is at risk. Your coverage may be strong, but if a subcontractor doesn't have coverage, your business is exposed to financial risk.
How Much Technology Errors & Omissions Insurance Do Subcontractors Need?
When you check a contractor's Insurance Certificate, you’ll most likely see technology E&O Insurance that offers protection with a $1 million or $2 million limit. More than 75 percent of our customers choose coverage in that range.
Policies have an aggregate limit and a per-incident limit (called an “occurrence” limit). The graphic above shows the three most common policies among small tech business:
- $1 million occurrence and $1 million aggregate coverage (63 percent).
- $1 million / $2 million (6 percent).
- $2 million / $2 million (7 percent).
Of course, your clients may request more coverage if you’re working on a big project. Naturally, before you tell your subcontractors how much coverage they'll need, go back to the client contract and check its requirements.
Next: Use this Subcontractor Agreement