How to Minimize Subcontractor Insurance Risk
When using independent contractors/subcontractors (this includes both individuals who are not on your payroll and companies that are legally established business entities), minimize your subcontractor insurance risk. For the purposes of this article, I’ll call them subcontractors.
First, there is no such thing as a “1099 employee.” The IRS, US Department of Labor, and insurers all agree on this issue. Employees are on payroll and receive a Form W-2 each year. Those who receive a Form 1099 are subcontractors (unless the IRS later determines you incorrectly treated people who should have been on payroll as subcontractors, which can result in severe monetary penalties, but that is not today’s topic). In your contracts, specifically prohibit your subcontractors from hiring lower tier subcontractors without your prior written consent.
Commercial General Liability (CGL) Insurance: This insurance is meant to cover your company’s owners, officers, and employees. If you submit a claim based on actions of an uninsured or underinsured subcontractor, your insurance policy may not extend coverage to subcontractors. Even if your insurer does pay, expect them to cancel your policy and your next policy will either be extremely expensive or you could be deemed uninsurable (out of business).
Do not allow subcontractors to handle or use your equipment or tools unless their own CGL policy is sufficient, and covers them for such situations. My insurance agent tells a story of Company A allowing Company B to use an extension cord owned by Company A. A member of the public tripped, was badly injured, and since Company B was uninsured, Company A was forced to pay the claim.
Errors and Omissions/Products and Completed Operations Insurance: The same issues exist as do for CGL.
Automobile Insurance: The same issues exist as do for CGL.
Workers Compensation (and Employer’s Liability) Insurance: Regarding workers compensation insurance, there is somewhat better news. If your subcontractors or any lower tier subcontractors do not carry their own insurance policies, many workers compensation insurance providers will insure them as part of your policy. However, you must declare the entire applicable payroll and any claims will go against your policy with a consequence of potential rate increases.
Check with your underwriter to see what your policy covers. Some company owners and officers elect (it depends on state law) to voluntarily waive workers compensation coverage for themselves (they cannot do this for their employees). If the applicable state allows this practice, and if the company owners and officers elect to exercise this option, make sure your contract clearly states this is the case; then require proof the state has approved the election, and complete all of this before the subcontractor begins work.
For all of the above: In your contracts, require from all subcontractors and any lower tier subcontractors, that their policies provide a certain dollar value of coverage (the specific amounts are your decision) and name your company as an additional insured with a waiver of subrogation; require their insurance agents to provide certificates of insurance stating all of this to you before subcontractors begin work; enforce these requirements without exception.
Category: Business Growth & Strategy Risk Management