Outsourcing and subcontracting can be attractive in certain situations when compared to utilizing in-house employees. The need may be a question of capacity, such as a temporary requirement for additional labor. Or the job may be limited in scope, and therefore not worth the expense and effort to hire in-house talent. Many times, a project will require specific skills only subs can perform, or equipment only specialty contractors possess. Whatever the reason, utilizing subcontractors does not automatically transfer the necessary risk to them, and subcontractor insurance is only a part of the solution.
Who is a Subcontractor?
First, let’s understand this definition from an insurance perspective: A subcontractor is one who brings their own tools, manages their own work, and carries their own subcontractor insurance. If they do not carry their own subcontractor insurance, they are simply your part-time employee. How a sub is paid does not enter into the equation, even if by 1099.
When a claim occurs, one of the first items examined is the contract with the sub. If such a contract is not in place, cases show any disagreement in responsibility will most likely be decided in favor of the sub. However, putting a contract in place is easy. Your insurance agent can even provide opens in a new windowexample contracts to adapt and utilize.
“…UTILIZING SUBCONTRACTORS DOES NOT AUTOMATICALLY TRANSFER THE NECESSARY RISK TO THEM.”
The contract should stipulate that the subcontractor is responsible for their product or service, any damage it causes, and subcontractor insurance requirements. If not, then by default your business is shouldering the liability, all the while lacking the control typically exercised over in-house employees – not a favorable position. Just as good fences ensure neighbors remain friends, clearly defined contracts ensure quality subs are retained, even through a claim scenario.
Subcontractor risk arises in two main areas:
- Liability: Consider what your subcontractors are doing. Can their product or service cause injury or property damage? As an example, one of our clients subcontracted a roof replacement. A year later, they discovered $50,000 of water damage due to a leak dripping inside the walls. Or what if you operate a manufacturing business? Could the sub-component you outsource injure someone or cause damage to your own product? No matter what your business operations, ensure your contract clarifies liability with regards to subcontracted work, along with the levels and types of subcontractor insurance.
- Workers Compensation: A subcontractor’s employees, if injured on the job, can claim benefits under your workers compensation policy if your sub does not have one. Ensure you obtain certificates of insurance from all your subs evidencing work comp coverage. Additionally, many of your 1099 employees are entitled to the protection of your workers compensation policy. Though not a popular topic, these are the facts.
Subcontractor Management Plan
Defining Subcontractor Insurance
A subcontractor management plan will help ensure proper controls are in place while also reducing the likelihood of a claim surprising you in the future. Feel free to download and use our subcontractor management plan.
Certificates of Insurance
The subcontract management plan addresses obtaining certificates of insurance evidencing all required coverages are in place. Be certain to obtain these before entering into a contract with a sub. Advise them payment may be withheld if insurance coverage is not maintained. The types of insurance required and levels of coverage may vary, so be sure to talk to your insurance agent.
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Contact your insurance agent with any questions. Don’t have your agent’s contact information? Get it from your Client Self Service Portal. Not one of our clients? Contact us to see how we can help with all your business insurance needs.
Bankers Insurance LLC is not a law firm. Seek legal counsel before entering into any contract.