Business entities sometimes need to transfer risks to another entity. This is especially true of sub-contractors who take on jobs governed by a larger contractor, also known as a general contractor. The proof you need to make sure that you are safe, should you and the general contractor that hired you ever get served with a lawsuit, is called a certificate of insurance.
With a certificate of insurance, the entity that hired you essentially will have the same policy as you, meaning their policy will not respond until after your policy limits are exhausted. The general contractor, in turn, transfers the risk of their name being named first or equal in a lawsuit to the sub-contractor under them.
A certificate of insurance can apply to all types of insurance, which include:
The types of insurance the general contractor need to list as additional coverage on your policy should be listed in your sub-contractor agreement. But this does not mean that these policies are combined – each is treated as separate, thus precaution should still be taken.
There are 3 major endorsements that are sometimes required by your additional insured:
- Blanket Addition Insured – Simply put, all additional insured are covered under the policy and they do not need to be added one by one.
- Waiver of Subrogation – This takes away the right for you to sue your additional insured.
- Primary Wording – In the event of a claim, your company will be considered as the first liable entity until limits are exhausted – only then will the additional insured step in.
Your coverage period within a certificate of insurance usually accounts for the time you are on the job. However, there can be completed operations coverage that could take effect at a later date, should your work damage property or cause injury to someone through your negligence.
If you cannot provide a certificate of insurance that lists the general contractor on the bottom of the page as an additional insured, the entity that hired you will be required to pay for the additional risk of your work on their policy. This can apply to every type of coverage they have and they are usually audited for a minimum of workers’ compensation and general liability coverage.
What should contractors expect in terms of overall costs?
The most expensive coverages for your entity, if you want to obtain them within a certificate of insurance is almost always workers’ compensation for the insurance company doing the audit. A good rule of thumb to consider when considering potential costs goes like this:
Uninsured sub-contractor = employee (for the purpose of general liability insurance and workers compensation)
The cost of workers’ compensation depends on the type of work the sub-contractor is doing, as well as the scale of the operation. If they are doing roofing in Illinois, the state insurance fund charges a rate of about 40% of payroll. If you paid that sub-contractor $10,000, the insurance company will be demanding $4,000 on audit. If you have an uninsured sub-contractor for a general liability audit, the costs are almost always considerably less, but even so – costs can really add up if you rack up more revenue/sub-contractor costs than expected for your policy period.
What if I hire a sub-contractor without insurance and I don’t pay the additional premium on the audit?
Usually, the insurance company will add the premium to your bill. If you do not pay it, your insurance will go out of force. After that, they will submit your name and birthdate to a national online database called the National Council on Compensated Insurance (NCCI), who will blackball you from obtaining workers compensation insurance in the future. Obviously, this is something all contractors should try to avoid at all costs.
What if I do not have any employees and I only hire subcontractors?
In this case, you are considered a paper contractor. You are considered a general contractor only if you are doing work and sub-contracting out work simultaneously. A good example of this might be a plumber building a home and subcontracting out other work associated with other trades.
Paper contractors need both general liability and workers’ compensation insurance for the following reasons:
If you do not have employees and one of your sub-contractors ends up being uninsured, the risk falls onto you. Say you’re doing work for the “Jones Company” and provide them with a certificate of insurance which lists Jones Company as additional insured for your worker’s compensation and general liability insurance. Then you hire the “Smith Company” to do the plumbing for Jones. But it turns out that Smith Company let their insurance lapse, even though they provided you with a certificate of insurance. If one of the Smith Company employees gets hurt, this will fall under your insurance. In a worst-case scenario, you could be held liable.
Liability works the same way in the event of a general liability claim involving an uninsured sub-contractor – the lawsuit will almost always fall on the entity that hired the un-insured subcontractor.
You should probably have a commercial auto policy with hired and non-owned auto insurance, should one of your sub-contractors ever use one of your vehicles.
What kind of workers compensation insurance should I buy if I do not have any employees?
You’ll need to buy what is called an if-any (or ghost) policy. This policy covers you for any un-insured sub-contractors that you hire using a 1099 form. This is extremely important because it means you have to have a certificate of insurance for everyone you pay. If your sub-contractor does not have any additional employees, then that sub-contractor has to have one of these as well.
The risk keeps flowing down the stream. Your general contractor passes it on to you, then you pass it on to anyone you subcontract to. You usually are excluded from your own policy, but some states like New York make you declare some payroll for yourself. This policy is usually only sold through the state fund in your state, which you can find in the attached map:
(Please note that WA, ND, OH, and WV are Monopolistic states. This means that you must buy your policy directly through the state. Our agency is licensed in all states except Florida, and we can help guide you through this process if you are having trouble getting insurance through your own agency. The cost ranges from about $700 to $2000, depending on the state.)