Why Contractors Should Have Subcontractors Purchase Liability Insurance

December 14, 2022 | Insurance 101

It’s a common practice and effective strategy in many cases for contractors to hire subcontractors (sometimes referred to as 1099 workers) to handle certain aspects of projects. The subcontractor typically specializes in the type of work they’re being hired for and can complete it efficiently and effectively, allowing the contractor to focus on other tasks.

However, there is a crucial factor that you must pay attention to: Workers you subcontract work out to must have their own subcontractor’s liability insurance.

Man pointing at board, heap big important vest

Contractors, Subcontractors, and Liability Insurance

As every contractor knows, even well-run jobsites are places with numerous risks. At any moment, a worker might:

  • Damage client property
  • Cause an injury
  • Unintentionally violate some rule, regulation, or law

If these or other types of incidents occur, a client may sue. In fact, clients can always file lawsuits that allege wrongdoing. And even if the person or company sued has done nothing wrong, there are costs associated with the necessary legal defense.

Are Subcontractors Covered Under a Contractor’s Insurance?

The relationship between subcontractors and contractors can be affected by contracts, local laws, etc. In some instances, subcontractors are covered under the contractor’s policy, but not always.

Why wouldn’t a subcontractor have their own liability insurance? That varies, too. Some may not know they need it. Others may not want to pay for subcontractor liability insurance. And some subcontractors may realize they need it and be willing to pay for it but simply haven’t taken the time to purchase it.

Whatever the reason, a subcontractor’s lack of adequate insurance can negatively impact the contractor. On the flip side, ensuring subcontractors have their own insurance by getting Certificates of Insurance (more on that below) can potentially lower a contractor’s insurance costs and minimize future insurance cost increases. Consequently, as a contractor, you should ensure that a subcontractor has the necessary coverage before you agree to hire them.

Hiring a subcontractor with the understanding that they’ll obtain insurance before work starts can be problematic. Imagine that you’ve arranged for the necessary work permits, coordinated the arrival of materials, and scheduled this project and others to follow, only to learn when a subcontractor arrives at the jobsite that they’ve failed to buy insurance.

That scenario puts you in a bind: Do you allow them to begin working without insurance? Temporarily pause the project until they can get coverage? Fire them and hire another subcontractor? None of those outcomes is desirable, and allowing a subcontractor to work without insurance is a significant financial risk that you shouldn’t take.

When considering the issue of liability insurance for a subcontractor, some contractors might think, “What are the odds that something will happen in the few days until they get around to buying insurance?” And it’s true that the subcontractor might conceivably work for days, weeks, or longer without incident. Or, they might cause costly damage with the first swing of their hammer. You just don’t know. That’s why having coverage before work begins is essential.

Insurance for Subcontractors: Obtain a Certificate of Insurance

Nobody wants to look distrustful, especially of someone with whom they hope to have an effective and mutually beneficial business relationship. However, if a subcontractor says they have the necessary liability insurance, you shouldn’t simply take their word for it.

Perhaps they make that statement fully intending to buy insurance later that day but aren’t able to for some reason. Or maybe they believe they have the necessary coverage when, in fact, they don’t have the type of insurance or insurance limits required to protect themselves and you.

The only way to be sure someone has sufficient subcontractor’s liability insurance is to review the Certificates of Insurance they provide. (Their insurance company can tell them how to get a Certificate of Insurance.)This type of document indicates:

  • check
    The name of their insurance company
  • check
    The named insured on the policy—meaning the entity or individual that the policy covers
  • check
    Details on coverage amounts and limits
  • check
    The policy’s effective date

If the information on the COI meets your requirements, you can move forward with the project confident that the subcontractor has proper financial protection.

Essential Insurance for Subcontractors and Contractors

The types of insurance you need and require of your subcontractors will vary, but these policies are commonly purchased in this industry:

  • General Liability Insurance. Also known as commercial liability insurance, a general liability policy covers damages and legal costs associated with injury claims by customers and other people you don't employ, damage to other people's property caused by your business, and medical costs associated with these incidents.
  • Workers' compensation insurance. This type of insurance, which is almost always required for companies with employees, helps protect your business if your employee is injured, contracts an illness, or dies on the job. It can cover medical costs, legal fees, and lost wages due to the injury.
  • Business owners policy. Also called property & liability insurance, a business owners policy (BOP) combines general liability insurance with coverage for your company’s property.
  • Commercial auto insurance. This insurance is for company-owned or leased vehicles. It can cover your legal fees and the medical costs of others if your employee is at fault in an accident. It can cover the cost of damages even if the vehicle is used for personal activities outside of its primary business use.
  • Umbrella insurance. Liability policies have a maximum value they’ll cover in the event of an incident. Umbrella insurance adds another layer of protection, covering costs that exceed the limit of another biBERK liability policy, subject to its own limit. Without it, you may be responsible for anything over your policy limit.
  • Cyber insurance. This coverage can be purchased as an add-on to another policy. It helps cover costs related to system hacks or data security breaches in which sensitive information has been stolen, and fraud has occurred or there is a reasonable expectation that it might happen.

Confirm Coverage and Get Working!

Buying insurance for your company is easy. You can get instant, self-service quotes for small business insurance online and then make your purchase. The same is true for your subcontractors. Coverage purchased from biBERK is very affordable and effective almost immediately, so there’s really no reason why a subcontractor can’t get their own policies before starting a project.