Risks of Hiring Subcontractors Without Insurance

Hiring subcontractors can be a cost-effective way to get specialized work done, but it comes with significant risks if they don’t have proper insurance. According to the Bureau of Labor Statistics, in 2023, the construction industry reported 173,200 incidents, highlighting the potential for costly accidents in high-risk industries.

When subcontractors lack essential insurance coverage, these risks multiply. If something goes wrong—such as an injury or property damage—you could be held responsible, even if the subcontractor was at fault. This can result in unexpected lawsuits, financial setbacks, and potential strain on client relationships.

In this post, we’ll explore what subcontractor liability insurance is, the risks of hiring subcontractors without it, and the steps you can take to protect your business from these risks.

What is Subcontractor Liability Insurance?

Subcontractor liability insurance protects businesses from the financial and legal risks associated with subcontractors’ actions. If a subcontractor causes an accident, property damage, or faces a lawsuit, their insurance policy steps in to cover the claim. 

This prevents your business from bearing the financial burden or liability.

What Happens If My Subcontractor Does Not Have Insurance?

Hiring an uninsured subcontractor exposes your business to significant risks. Without proper insurance, you could be responsible for any accidents, property damage, or lawsuits caused by the subcontractor. 

This can lead to unexpected costs, legal challenges, and potential disruptions to your operations. Here’s what can happen if a subcontractor doesn’t have insurance:

• You could be held liable for damages: If a subcontractor damages property or causes an injury on the job, your business may have to cover the repair costs, medical expenses, or any settlements resulting from the incident.
• Increased risk of lawsuits: Without insurance, subcontractors cannot handle legal claims on their own. If a third party sues over damages or injuries, you may become the target of the lawsuit as the prime contractor.
• Higher costs for workplace accidents: If a subcontractor gets injured on the job and lacks workers’ compensation insurance, your company could be responsible for their medical bills and lost wages.
• Potential project delays: When an uninsured subcontractor is involved in an incident, resolving the situation often takes longer. This can lead to expensive delays and damage your client relationships.
• Reputational damage: Clients expect you to work with professionals who have proper coverage. Hiring uninsured subcontractors can harm your reputation and make future clients hesitant to trust your business.

Are Subcontractors Covered Under the Contractor’s Insurance?

One of the biggest misconceptions in the construction and contracting world is that subcontractors are automatically covered under the contractor’s insurance. 

In most cases, this is not true. Contractors’ insurance policies, like general liability insurance or workers’ compensation, are typically designed to cover the contractor’s own employees—not subcontractors.

Here’s what you need to know about subcontractor coverage under a contractor’s insurance:

• General liability insurance exclusions: Most general liability policies specifically exclude subcontractors from coverage unless they are explicitly added to the policy as additional insureds. Without this step, any claims caused by subcontractors won’t be covered.
• Workers’ compensation coverage: Workers’ compensation policies often exclude subcontractors unless they are treated as employees. If subcontractors don’t carry their own workers’ comp insurance, the responsibility for covering workplace injuries may fall on your business.
• Project-specific coverage: Some contractors’ policies allow you to extend coverage to subcontractors on a project-by-project basis. However, this approach can be costly and may not provide comprehensive protection for all claims.

What Insurance Should a Hired Contractor Have?

It’s always safer and more effective to require contractors and subcontractors to have their own insurance rather than relying on limited coverage from a contractor’s policy. 

Ensuring proper coverage minimizes financial and legal risks and gives you peace of mind that the contractor can handle any incidents that may arise.

Here are the key types of insurance every hired contractor should have:

• Commercial auto insurance: If the contractor uses a car for work, commercial auto insurance covers accidents, damage, or injuries involving those vehicles. This is particularly important for transporting tools and materials to job sites.
• Products and completed operations insurance: This protects against claims related to work defects or damages caused after the project is completed. For example, if a deck built by the contractor collapses months later, this policy covers the resulting claims.
• Professional liability insurance (errors and omissions): This covers mistakes or oversights in the contractor’s work. It’s especially important for contractors who provide specialized services, like architects or engineers.
• Tools and equipment insurance: This policy covers damage, theft, or loss of tools and equipment used by the contractor. It ensures that work can continue without costly interruptions due to missing or damaged tools.

At TWFG Khan Insurance, we understand the importance of working with contractors who have the right insurance coverage. 

Our team specializes in helping businesses ensure subcontractors meet all necessary insurance requirements, including general liability, workers’ compensation, and more. With our expertise, you can confidently protect your projects from unexpected risks.

How Can You Verify a Contractor or Subcontractor’s Insurance?

Verifying a contractor or subcontractor’s insurance is a straightforward yet essential process that safeguards your business and ensures your projects remain compliant and protected. Here’s how you can verify their insurance effectively:

• Request a certificate of insurance (COI): Ask the contractor or subcontractor to provide a COI, which is an official document from their insurance provider. It lists their coverage details, including policy types, limits, and expiration dates.
• Check the policy’s validity: Verify that the COI includes:
  
  • The contractor’s name matches their business name.
  • Coverage dates that are current and will remain active throughout your project.
  • Adequate policy limits for your project’s size and risk level.
• Ensure your business is listed as a certificate holder: Ask the contractor to include your business as a certificate holder on the COI. This ensures you are notified if their coverage changes or is canceled.
• Contact the insurance provider: To confirm the COI’s authenticity, call the insurance company directly. Verify the policy details and ensure there are no lapses in coverage.
• Look for project-specific endorsements: If needed, ensure the contractor has project-specific coverage, such as additional insured endorsements or completed operations insurance, for added protection.
• Verify coverage for subcontractors: If the contractor plans to hire subcontractors, check that their insurance policies extend coverage or require subcontractors to provide their own COI.

Protective Measures if a Subcontractor is Uninsured

While it’s always best to work with insured subcontractors, there are measures you can implement to reduce liability and safeguard your operations. Here’s what you can do:

• Require a hold harmless agreement: Include a clause in your contract that shifts liability to the subcontractor for any accidents, damages, or claims caused by their work. This agreement protects your business from being held responsible.
• Add the subcontractor as an additional insured: Work with your own insurance provider to add the subcontractor to your policy as an additional insured for the duration of the project. This can extend coverage to include their work, although it may increase your premiums.
• Purchase a contractor’s liability policy: If the subcontractor cannot secure their own insurance, you can purchase a separate liability policy specifically for their portion of the work. While this is an added expense, it ensures your project is protected.
• Monitor workplace safety closely: Reduce the risk of incidents by implementing strict safety protocols and requiring the subcontractor to follow them. Provide oversight to ensure compliance with all safety guidelines.
• Verify subcontractor compliance regularly: If you’ve arranged temporary coverage or added the subcontractor to your policy, monitor their activities and ensure they meet the agreed-upon conditions throughout the project.
• Consider alternatives: If the subcontractor refuses to obtain insurance or poses too great a risk, explore other options, such as hiring a different subcontractor who carries the required coverage.

Why Choose TWFG Khan Insurance for Subcontractor Liability Insurance?

At TWFG Khan Insurance, we know the risks you face when hiring subcontractors. Our team specializes in helping businesses like yours secure comprehensive insurance solutions to protect against the unexpected.

With years of experience in high-risk industries such as construction, maritime, and oil and gas, we provide the expertise you need to navigate subcontractor insurance requirements easily. Here’s how we can help:

• Customized coverage options: We tailor subcontractor liability policies to meet the specific needs of your business and projects.
• Comprehensive risk management: We help you identify potential gaps in coverage and provide solutions to mitigate risks.
• Trusted carrier partnerships: We work directly with top-rated insurance providers to secure reliable policies at competitive rates.
• Ongoing support: Our team is available around the clock to answer questions, assist with claims, and ensure your business stays protected.

Don’t let the risks of uninsured subcontractors jeopardize your operations. Let TWFG Khan Insurance provide the protection and peace of mind your business deserves. Get a quote with us and ensure you’re fully covered today!