[This article was written by Rachel Porter.]
As a general contractor in the construction industry, it is your responsibility to manage and oversee every aspect of the project from beginning to completion. Running a construction project, however, often requires the kind of team effort that involves expertise and skill sets other than your crew. In many of these projects, you’ll probably hire subcontractors to lighten the workload and get things done within the expected time frame.
Hiring a subcontractor is common in many industries. And while it comes with plenty of benefits, it also involves significant risks. Since you are legally responsible for completing all the work in the project, anything that goes wrong or any work that’s not up to standards is on you.
In the construction industry, claims and lawsuits can jeopardize a business’s future and financial stability, especially those resulting from bodily injury or property damage. As general liability insurance policies clearly state that only “your work” is covered, it’s considered a best practice for any general contractor to require liability insurance and other necessary coverages from every subcontractor working on the project.
Why Subcontractors Need to be Insured
For a general contractor, taking on a project means assuming responsibility for the entire build, including all the teams that you hire. Thus, if you make the mistake of onboarding subcontractors without proper insurance, you may end up footing the bill for a variety of claims and lawsuits.
While commercial general liability insurance tends to also cover liabilities arising from subcontractors, some policies specifically exclude independent contractors from the coverage. As the general contractor, you need to be more cautious of your own insurance policies and those that your subcontractors carry. You need to make sure that your subcontractors are adequately covered, or certain losses could spell trouble for you and your company.
So, what types of insurance coverage should you ask subcontractors to provide?
Insurance Coverages Your Subcontractors Should Carry
Before starting a job, any general contractor should request proof of insurance from every subcontractor involved in the project. Four of the most critical coverages to look for are General Liability Insurance, Professional Liability Insurance, Worker’s Compensation Insurance, and Commercial Auto Insurance. These policies and their roles are further explained below.
General Liability Insurance
Your subcontractors must carry a general liability insurance of their own. A GL policy is one of the most important coverages to have as it includes coverage for injuries and property damage. Also, there’s a high possibility that your own GL insurance will not extend to any of the subcontractors you hired.
Your subcontractors, however, should not only have liability insurance but adequate accompanying limits as well. After all, what good is a policy if it can’t cover enough of what it’s supposed to? Ideally, your subcontractor’s limits should be comparable or almost equal to yours. Also, require your subcontractors to add you as insureds on the GL policies. This will protect you in case of any lawsuits related to their work.
Clients nowadays are becoming wiser and more careful in choosing the contractors they work with. They may want to check if everybody involved has the right insurance policies in place and can become reluctant about working with you if any of your hires aren’t adequately insured.
Professional Liability Insurance
Sometimes referred to as Errors & Omissions Insurance, professional liability coverage protects the insured in the event of job-related mistakes or oversights. Your client can file a claim against you should any part of the project fail to meet the discussed standards and cause them to lose money.
Even if the mistake was not intentional, the client could still file a lawsuit against you for a poorly-done job. It’s wise to require E&O insurance from subcontractors to protect both of your businesses from the crippling expenses of a lawsuit. Your subcontractor’s professional liability insurance can cover for the legal costs, in case of a lawsuit, and losses from either consequential damages or the settlement.
Commercial Auto Insurance
Commercial vehicles need separate insurance coverage because they are exposed to more risks. A commercial auto insurance policy provides liability and damage protection for like vans, trucks, and other vehicles used on-site and or project-related purposes.
Any subcontractor that uses their own vehicle when working for a client should have commercial auto insurance in case they get into an accident, hit a company car, or cause injury to another party/ property on-site.
Workers Compensation Insurance
Workers’ compensation insurance is very common among contractors in the construction industry. This type of coverage provides assistance with medical bills and disability costs, should a workplace accident or work-related injury prevent the victim from going to work. While the laws on obtaining workers’ compensation insurance tend to vary from state to state, it’s beneficial for general contractors to require subcontractors to carry this type of insurance coverage.
You see, your worker’s compensation insurance may not extend to your subcontractors and their crew. In case one of your subcontractor’s men gets injured on the job, you may take the hit from paying the bulk of the medical bills and lose wages out-of-pocket.
For your peace of mind, always ask for a copy of your subcontractor’s workers’ compensation insurance certificate before hiring them. This will keep you from worrying about being responsible for on-site injuries and save you plenty of headaches and financial issues in the long run.
Liability Risk Management
One of the biggest concerns when hiring subcontractors is the liability. When hiring a subcontractor for a specific task or aspect of the build, the general contractor must pull all the stops to ensure that they’re working with reliable, trustworthy partners.
The coverage requirements mentioned above should have already been commonplace prior to starting a project or signing new agreements, especially for those who have been in the industry for quite some time. A wise contractor evaluates the risks to ensure he or she is taking bona fide subcontractors on board and that their involvement is beneficial to both the project and the business.
Rachel Porter is the content specialist for Custom Contractors Insurance, LLC, an Arizona roofing and contractors insurance company. When not writing, she enjoys reading and mountain biking with her friends.