Don’t Let a Subcontractor Jeopardize Your Insurance Protection

The term subcontractor is defined as an independent business or person that carries out work for a company as part of a larger project. Many businesses use subcontractors, or “subs”, to handle portions of jobs they feel they don’t have the resources (i.e. man-power, expertise, equipment, licensing, etc…) to handle effectively on their own.

One benefit of using a sub for part of a project is that as an independent business a sub is supposed to be responsible for their own work.  Many businesses find comfort in that thought, especially when subbing out work that is difficult or carries a higher degree of risk, thinking that “at least now somebody else is responsible for that part of the job.”

But is that really the case?  Does subbing out work to another company protect the primary contractor from liability arising out of that work, or do they still have a degree of risk on it?  And what about your insurance: What kind of effect does subbing out work have on your insurance coverage? Are there any precautions you need to take when subbing work out in order to protect your coverage and stay insured?

Risk Management Basics for Subcontracting

So do you still have liability from work you’ve subbed out to a subcontractor?  Absolutely, though that liability can be drastically reduced by the use of some basic risk management techniques:

1. Make sure your sub(s) have their own business insurance in the appropriate type and amounts, and that you get proof of this in writing (see the Insurance Requirements list below for more details on this).
2. Make sure you use an appropriate written agreement for any work you have a subcontractor do for you.  That agreement should clearly spell out each party’s responsibilities and should hold the other party harmless for liability arising out of each one’s own work via an indemnification clause.  There are many resources available that can help you develop a good subcontractor agreement template, but one of the best is to develop a long-term relationship with an attorney experienced in your industry since any agreement they draft for you is what they’ll have to work with if legal disputes arise later.
3. Make sure the sub has the appropriate in-force license for the type of work they’ll be performing.  Most state licenses can be verified on-line.
4. Keep the above documentation current, getting updated agreements and insurance documentation on each new job, or annually for ongoing arrangements.
5. Keep in mind that any legal demands for damages arising out of work you contracted to have done, are going to first come to you, regardless of whether the source of the alleged problem arose out of work that you did directly or contracted out to a sub.  Making sure that you have proper agreements with your sub and that they have their own insurance may reduce the amount of damage you ultimately have to deal with, but that’s only if the sub’s insurance steps up and agrees to take responsibility. Any remaining damages are potentially the responsibility of you and hopefully your insurer to address, which is why many liability insurers still charge a reduced-rate premium on work you sub out: because even properly subbing work out at best only reduces your risk, it never eliminates it completely.

Insurance Requirements for Subs

Because your own insurance has a substantial risk at stake for work you subcontract, insurers often have strict requirements for you to take certain measures to minimize your own risk, with penalties for non-compliance ranging from higher premiums or increased deductibles, all the way up to reduction or even elimination of your own coverage.  So what precautions do you need to take when subbing work out in order to protect your coverage and stay insured?  

Here’s a short list of insurance-related factors to check *every time* you consider hiring a sub:

1. You should obtain a Certificate of Insurance from your sub offering proof of the applicable coverage types:
   1. Commercial General Liability (CGL) covering the type of work you’re having them do should be included at a minimum.  Additionally if they have the relevant exposures then they should also have the following:
   2. Commercial Auto Liability coverage if using vehicles for any part of their work for you
   3. Workers Comp if they have employees
   4. Professional Liability Errors & Omissions (E&O) if they program devices or draw plans/diagrams
   5. Pollution Liability (CPL) if job exposures merit it
   6. Commercial Umbrella if liability limits higher than $1,000,000 are required.
   7. Installation Floater/Builders Risk if substantial values of property of others are in their care.
2. Liability coverage amounts should be at or above a set minimum, often equal or higher than your own.
3. Your sub’s liability policy(ies) should give you Additional Insured status, and possibly other beneficial insurance endorsements you may want to require.  Additional insured status should be indicated both on the sub’s certificate and on an endorsement from their insurance company specifically saying so.
4. You should have a written agreement with your sub that includes an indemnification clause in your favor and states in writing that their insurance is required to name you Additional Insured (having this requirement in writing is often the only way to ensure that their policies provide it).
5. Insurer financial ratings should meet a minimum standard, often set at A- VII.  These ratings are viewable for free by anyone at www.AMBest.com.

While you should check your own policy for its specific requirements, following the above suggestions related to subcontracted work should help you to comply with most requirements mandated by many insurance policies.  If you have questions on what your own policy requires, talk to your agent or broker, or contact us and we’ll be glad to assist. We also have a model Insurance Requirements template that can be used to add similar wording to your subcontractor agreement.

About the Author

Larry St. John is a 20+ year veteran of insurance and risk management for the construction and electronic security industries.

He can be reached at LStJohn@eclipseinsurance.com