Uh oh. You just found out that one of your go-to subcontractors doesn’t actually have general liability insurance. This could spell trouble if something goes wrong on the job site. Don’t panic just yet though – there are still steps you can take to protect yourself. Let’s break down why subcontractor insurance matters, your responsibilities as the general contractor, options if subs don’t have coverage, and key takeaways so you can avoid any nightmare scenarios.
Why Subcontractor Insurance Matters
General liability insurance is critical for subs for the same reason it’s essential for you – it provides protection in case of an accident or lawsuit. Without coverage, you could be on the hook for huge expenses even if the subcontractor was at fault. Yikes! Here’s why you should insist subs carry adequate insurance:
- Shields you from liability claims. If a sub’s shoddy work leads to property damage or injuries, their GL policy would cover the damages rather than yours. Don’t leave yourself vulnerable!
- Your policy probably won’t cover them. Most general contractor insurance policies specifically exclude damages caused by subcontractors. You’d likely be completely uncovered.
- Lawsuits are expensive. Even a minor accident on a job site can turn into a lawsuit easily exceeding $10,000 or $20,000 in legal fees and payouts. Ouch!
- Subs need protection too. Subcontractors also benefit from having their own liability coverage to defend against injury claims or “he said, she said” lawsuits.
The bottom line is you want to avoid paying out of pocket for accidents caused by subs. Insisting on proper insurance coverage for everyone on the project is key to preventing this.
General Contractor Responsibilities
As the GC, you’re still on the hook legally for issues caused by subcontractors, even if you have an airtight contract stipulating they carry insurance. Here are some of your key responsibilities:
- Carry adequate GL coverage. General contractors are generally required by law to carry their own general liability insurance in case of incidents on the work site. Make sure your policy limits are sufficient!
- You can still be sued. If a subcontractor causes an injury or property damage, the client can still name you in the lawsuit since you were overseeing the project. Yikes!
- Breach of contract risks. Many construction contracts require all subcontractors to be insured. If you fail to confirm subs’ coverage, you could be in violation of your own contract. Not good.
- Verify subcontractor insurance. Part of your project oversight duties as GC involve verifying subs have up-to-date insurance certificates before starting work.
So while you may not be directly responsible for a subcontractor’s mistake, you can still get caught up in the aftermath. Following good risk management practices by verifying insurance certificates is key.
Subcontractor Insurance Requirements
Many GCs are surprised to learn there are no laws requiring subcontractors to carry GL coverage – it’s merely recommended as a best practice. Here are some tips on managing subcontractor insurance requirements:
- You can mandate coverage. Your subcontracts should contain clauses clearly specifying insurance limits and requiring COIs.
- Enforce COI collection. Before subs start work, insist on seeing a certificate of insurance proving they have active general liability coverage.
- Use insurance tracking software. Collecting and managing COIs from multiple subs across different projects can be a nightmare without automation. Consider using software to maintain compliance.
- Meet contract requirements. If your client required all subcontractors to be insured, verify this to avoid breach of contract.
- Be specific on limits. Spell out general liability coverage limits subs must carry, like $1 million per occurrence.
Though you can’t legally force subs to have insurance, you can certainly mandate it as a condition of working with you. Protect yourself and your business by requiring COIs upfront.
Options If No Sub Insurance
Despite your best efforts, you may occasionally encounter subs who don’t yet have active GL coverage in place. While not ideal, there are still steps you can take to mitigate your risk:
- Add them as additional insured. Some GCs add uninsured subs as additional insureds on their own GL policy for an extra premium. Downside: still leaves sub unprotected.
- Use indemnification clause. You can include an indemnification clause in the subcontract making them financially responsible for any damages/lawsuits. Provides some recourse if issues arise.
- Purchase surety bond. These bonds act as insurance to cover losses. Drawbacks are the coverage limits may be insufficient.
- Assume the risk. You can choose to simply proceed without confirmed sub insurance in very low-risk scenarios. Not recommended!
- Only use insured subs. The safest option is to only partner with subcontractors who already carry adequate GL coverage. A slight inconvenience upfront could prevent huge headaches later.
Aim to avoid these situations altogether by screening new subs’ insurance status before contracting them. But if an uninsured sub slips through, these alternatives can help mitigate your exposure.
Consequences If No Sub Insurance
Falling back on the above options is far less desirable than ensuring proper subcontractor insurance coverage in the first place. Here are some of the potential consequences if you fail to verify a sub has active GL insurance:
- Expensive legal fees. Without insurance, legal expenses from an injury or property damage claim can spiral quickly. Attorney fees alone often exceed $10,000.
- Out of pocket costs. You may have to cover damages, medical bills and other expenses if the uninsured sub can’t pay. Some GCs have faced six-figure hits from incidents involving uninsured subs.
- Project delays. If an incident halts work while sorting out the aftermath, you may miss critical deadlines and get hit with late fees. No bueno.
- Reputational damage. Word gets around if you complete projects with uninsured subs. This could hurt your chances of winning future bids.
- Insurance premium hikes. Claims resulting from uninsured subcontractors can increase your own insurance rates over time.
- Breach of contract. Failing to ensure subcontractor insurance when required by the client can equate to a contract violation.
Clearly there are just too many risks to ignore the insurance status of subcontractors. A few hours verifying coverage upfront could prevent months of headaches down the road.
Managing subcontractor insurance compliance on projects feels like a never-ending battle sometimes. But keeping subs properly insured is just too critical to let things slip. Here are some key tips as you think through your risk management approach:
- Make GL insurance mandatory for all subcontractors you hire – don’t compromise here.
- Include clear insurance requirements and COI collection in your subcontracts.
- Verify certificates of insurance BEFORE subcontractors begin work on site.
- Utilize insurance tracking software or services to automate COI management if needed.
- Have a risk management plan if subs occasionally slip through cracks without coverage.
- Document everything! Maintaining records of sub policies provides protection.
By making subcontractor insurance compliance a top priority for your business, you’ll reduce your risk substantially and safeguard your company’s assets. Don’t learn these lessons the hard way like some GCs unfortunately have. Stay proactive so you can rest easy knowing subs are covered!