can my subcontractor ruin my insurance?

By: adam puharic, puharic & associates, INc.

Congratulations! Your business is growing. You have projects lined up and opportunities for future growth. You need to engage subcontractors to take a portion of your work, and this will enable you to realize your financial dreams.

However, the hiring of subcontractors can also be the source of additional risk and liability. Without taking the necessary precautions, the error of a subcontractor could lead to a denied insurance claim, a ruined customer relationship, and worse – potential personal liability.

First, a disclaimer: This article is for informational purposes only and that readers should contact their insurance provider for assistance in their specific cases.

In the simplest terms possible: Subcontractors work for you, you work for your customers, and you are responsible for both your work and the work of your subs. However, your insurance does NOT automatically include subcontractors. So, a loss or a claim could trigger an insurance carrier denial, or worse, a dispute between the subcontractor’s policy and your own. The customer is left with a loss, and no money to make themselves whole.

There are tried and true ways that any company who uses subcontractors can simplify the lines of authority, clarify whose policy is responsible for the claim, ensure that your insurance responds for those items as you expect it to, and improve your overall risk management. I refer to these items as the Four Golden Rules of subcontractor insurance. If you practice these Four Golden Rules, you will have less uncovered insurance exposures, and more protection as you grow your business. The consequences of not following these steps could undo all of your business growth planning.

Simply stated, all subcontractors must:

1. Carry insurance with the same or better limits than you do.

2. Show you, on an annual basis, a certificate of insurance with valid coverage.

3. Name you as Additional Insured with regards to General Liability.

4. Hold you harmless and waive subrogation on future claims.

Now let’s break down each item:

Without exception, your subcontractors should carry valid General Liability, Workers Compensation for their employees, Professional Liability if their exposure or licensing demands it, and Umbrella if you carry it as well. There could be an entire article written on whether a subcontractor needs Workers Compensation, but for the purpose of this article, if you carry it, so should they.

They should not only carry this insurance, they should also present a valid, current certificate of liability insurance. Your agent should be able to help you decipher it. Additionally, the sub should carry the same or better insurance limits as you carry. Never accept a subcontractor who won’t protect you with the same limits you offer to your customers.

The subcontractors need to name you as an Additional Insured with respect to General Liability. Make no exceptions on this item. The Additional Insured status will allow the insurance policy of the subcontractor to respond to claims you are drawn into on jobs where the subcontractor is involved. You need this to happen so that both policies are not drawn into the claim. For the sub, the cost of working for you is that they agree to use their insurance instead of yours.

Finally, a hold harmless agreement and waiver of subrogation are needed to further simplify and clarify the lines of responsibility. While beyond the scope of this article, for simplicity sake, a hold harmless agreement will define who pays when it is the subcontractor’s fault, when it is a combination of your and the subcontractor’s fault, and when it is only your fault. I am not an attorney, but as a simple rule of thumb, consider the following:

1. Your subcontractor’s insurance should pay when they do something wrong, commonly referred to as their negligence.

2. Your subcontractor’s insurance should pay when you both are involved in something wrong, or shared negligence.

3. Your insurance should pay when it is your sole negligence. A waiver of subrogation promises that if the subcontractor’s insurance pays a claim, they will not seek reimbursement from you.

By practicing the Four Golden Rules of subcontractor’s insurance, you can better protect your own businesses, simplify the chain of responsibility, and bring your business dreams to life with the proper risk management.