Photograph of a construction worker working at sunrise framed by the arm of an excavator machine. On the right side is an illustration of subcontractor insurance documents.

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Business insurance can help mitigate occurrences or disasters that can severely impact or destroy the good standing of your business. It’s important to know which policies make the most sense for your business, and how to choose policies that provide the right type of coverage to keep you protected. Let’s take a look a subcontractor insurance: when it’s needed, what happens if a sub goes uninsured, and what policies subs can use to protect their businesses from risk.

Do subcontractors need insurance?

There’s an easy answer to this question, and that response is an overwhelming “yes.”

“Subs absolutely need insurance. It’s very difficult to qualify for subbed-out work if you don’t carry your own insurance,” says Steve Genett, Head of Insurance Operations at Procore. “If something goes wrong, liability could hit the GC’s policy, which dilutes liability insurance limits, negatively impacts their claims history, and forces them to deal with a claim that’s not really their fault.”

For example, assume you paint residential structures of all types. Let’s also say you’re painting the exterior of a historic home that has many unique features. A heat source used to remove old paint on the home causes a fire. 

You, or your employees, could be found to have caused damages that cost several hundred thousand dollars for repair and restoration. Losses like this don’t occur frequently, but you must plan for the small chance that an event like this may happen. 

Subcontractor business liability insurance should be retained since a catastrophic claim could bankrupt most all painting contractors. Also, GCs don’t want exposure to claims like these, so subcontractors can find it very difficult to land work if they don’t carry their own liability insurance. 

Are subcontractors covered under the general contractor’s insurance?

You could get hired by a general contractor (GC) for a new construction or remodel project, but you can’t assume you’re covered under a GC’s policy. In fact, an owner or financial institution may ask to be listed on your policy as an additional insured. Project owners or GCs will want a certificate of insurance proving that you have your own liability insurance. 

While you could get some minimal protection from a GC’s coverage, there are some things to consider. Usually, the coverage only applies to the liability piece of the contractor’s policy, and the amount of protection may be less than the dollar limit chosen by the GC. Also, another contractor’s policy only comes into play when you’re performing work for that GC. Finally, the GC’s policy won’t provide any coverage for tools, equipment or vehicles. 

Learn more: Does GC Insurance Cover Subcontractors?

What happens when a subcontractor is uninsured? 

When a subcontractor is uninsured, the business can still be liable for any property damage or injury to others. If your business is found to have caused an injury or accident, the other party will seek damages. These damages would then have to be paid from the assets of your business. 

Medical expenses, property damage, and legal defense costs can grow quickly. An uninsured business would likely not have the financial resources to pay a large legal settlement. Such an occurrence could threaten the existence of your contracting business.

The bottom line is: Subcontracting work will be very difficult to secure if you carry no insurance or policies with inadequate coverages.  

7 insurance policies subcontractors may need

To lessen the daily risks you face on the job, a variety of insurance coverage will help insulate your organization from financial damage. Some policies or coverage endorsements may apply to your business and others may not. Since you know your business better than anyone else, you can tailor an insurance package to your liking. Here are some essential policies that most subcontractors purchase. 

1. General liability insurance

Using the example of the painter, a significant fire would be a worst-case scenario for a subcontractor who didn’t carry liability insurance. This coverage helps indemnify a third party if you were to damage a customer’s property. Dollar amounts for coverage are customizable and can range into the millions for small-to-medium-sized companies that take on residential and small commercial jobs. 

2. Tool or equipment floaters

You’ve made a significant investment in tools and equipment, so a theft of business items could cost you money. A tools floater might apply $10,000 in coverage for damage to drills, saws, or ladders, while an equipment floater provides much higher coverage amounts for things like bobcats, skid steers, or ATVs. Almost every insurance carrier will add this type of coverage to a liability policy, providing you with a solid base for a comprehensive insurance program. 

3. Business auto insurance

Since you’re likely familiar with personal auto insurance, commercial coverage works much the same way. There is coverage for damage to your owned, hired, and non-owned business vehicles in addition to a property damage component if you damage another party’s vehicle or belongings. Liability coverage is also a part of business auto policies if you collide with another vehicle and injuries occur. Commercial auto liability extends only from a separate vehicle policy and is not associated with general liability coverage. 

4. Workers compensation insurance

This type of policy only applies if you have employees. It helps your workers replace income if they are injured on the job. It also provides coverage for medical expenses should those injuries or illnesses require medical attention. Rates for workers comp are dictated by the specific trade you pursue, and also by the dollar amount of claims you may have incurred in prior years. Excavating companies that blast rock away from construction sites, therefore, may pay more in premium than interior painting entities that perform less risky functions. 

5. Commercial umbrella insurance

This type of policy offers your business additional liability coverage that extends beyond the amounts chosen in your GL or business auto insurance policies. It serves as an additional safety net for businesses in the event of a large claim. Business umbrella insurance is relatively inexpensive for most contractors. It’s worth exploring when you consider how quickly legal, medical, and property damage expenses can mount— separately or in total. 

6. Employment practices liability

This policy is only necessary when you have a workforce. It helps cover legal costs if an employee files a lawsuit related to wrongful termination, harassment, discrimination, and breach of employment contract, among other claims. It’s important to understand that punitive damages and civil or criminal penalties do not fall under the umbrella of EPLI coverages. 

7. Cyber insurance

For electronic recordkeeping, bookkeeping, and accounting, cyber insurance is a must-have. You can think of a significant loss of electronic records like a fire that destroys all your valuable paper documents. Cyber insurance helps with the cost of data recovery or restoration if your business computers or other storage devices are attacked by malicious viruses or ransomware perpetrators. Many policies also provide limited coverage for paper documents that are breached because of an oversight or lapse in security. 

Pick the policies right for your business

A thorough review of your contractor’s insurance plan will reveal which policies make the most financial sense for your business. You may currently own some or all of these policies, yet it’s always a smart practice to analyze the coverages, especially as your business grows. That growth necessitates that you get paid completely and in a timely manner.

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