Subcontractors Insurance: Types & Why You Need One

A subcontractor may be subject to legal action for a variety of reasons. A costly legal struggle awaits them regardless of whether or not they are at fault. A proper subcontractor insurance policy can save you from financial loss should something like this occur. Particularly when dealing with government agencies, you may find that insurance is a requirement of the contracts you seek. In this article, we will discuss subcontractors’ insurance requirements, types, and why we need them.

What Is Subcontractor Insurance?

The term “subcontractor insurance” refers to a group of coverage that is meant to cover subcontractors financially in the event of injury or property damage claims made by third parties. Subcontractors are typically linked with building projects, but this sort of insurance also covers those working in fields like advertising, media, and technology.

It is required by law in some industries, such as healthcare, to have such a policy in place. The inclusion of others is frequently a stipulation in a legal contract.

Types of Insurance for a Subcontractor

Different policies are available, each providing varying degrees of coverage for subcontractors. Here are some of the most typical kinds of insurance coverage for subcontractors that you might want to think about purchasing.

#1. General liability Insurance

Subcontractors in the United States do not need general liability insurance to legally do business. However, many contractors will not do business with you unless you agree to purchase such coverage to cover their operations and property. The fact that general liability policies provide such strong protection makes them a popular choice among contractors for their subcontractors.

In the event that a claim is filed against your company due to the following, general liability insurance will cover the associated litigation and settlement costs:

Bodily injury
Property damage
Copyright infringement
Reputational harm, including incidents of libel, slander, and malicious prosecution
Product liability

Some insurance policies may also cover injuries sustained on your company’s property. It makes no difference if someone is at fault or if a lawsuit has been launched.

In addition, there are several variables that affect how much you’ll pay for your general liability policy. Also, read General Liability Insurance Audit: All You Need to Know

#2. Professional Liability Insurance

Subcontractor insurance that includes professional liability protection is also highly recommended. It protects your assets from legal action as a result of complaints about the following:

Negligence
Personal injury
Unfinished work
Breach of contract
Budget overruns

This coverage, which is also known as errors and omissions (E&O) or malpractice insurance, will reimburse you for any litigation or settlement fees you may have to pay as a result of such claims.

The Federal Acquisition Regulation (FAR) mandates that anyone who wants to work on government projects have professional liability insurance. This regulation was put in place to forestall a situation in which private companies would be forced to shoulder government liability.

In addition, such protection is necessary for these companies:

Construction companies
IT specialists, including consultants and cybersecurity experts
Pharmaceutical and healthcare services providers
Professional services providers, including financial and public relations firms
Transportation and logistics service providers

Engineers and architects are not required to carry insurance; however, doing so can protect them from financial ruin in the event of:

Advice and design errors and oversights
Allegations of negligence
Breach of contract

Professional liability insurance covers the cost of fixing or redoing a job that was done improperly. Damages, settlements, and litigation arising from such mistakes are also covered. The following experts make up this group:

Carpenters
Electricians
HVAC technicians
Painters
Plumbers

#3. Workers’ Compensation Insurance

Workers’ compensation insurance is not mandatory for subcontractors, unlike for other enterprises. However, contractors require it as a requirement to work with you, as without coverage, they will be held financially responsible for any accidents that occur on the job. Once a subcontractor signs on with a main contractor, they are treated as if they were full-time employees of the main contractor.

When an employee suffers an illness or injury on the job, workers’ compensation pays for medical expenses and a portion of lost wages. It also provides for your family in the event of your death or disability as a result of an accident on the job.

In addition, there is no culpability involved in the workers’ compensation insurance system. This means that mistakes made by you or your company will not influence the benefits you are due to receive.

#4. Tools and Equipment Insurance

Having adequate protection for your company’s tools and equipment is crucial if you rely largely on them to complete daily tasks. That’s why having protection for your tools and machinery is so important.

In the event of theft, fire, or other covered peril, this insurance for subcontractors will pay to replace or repair your tools and equipment. The typical policy limit for property is $10,000 for items that are less than five years old. Some policies provide coverage for antiques, but only at their real cash value.

Payments for missed revenue and the price of any supplementary materials or labor required to keep the project on time may also be included in the coverage of some plans.

Equipment and tool insurance are optional. However, similar to other forms of subcontractor insurance, certain companies may insist that you have coverage in place before they deal with you. Either as a separate policy or as an addition to your existing commercial property or business owner’s policy, tools, and equipment insurance can protect your company from unforeseen financial losses.

Insurance for tools and equipment does not extend to corporate automobiles or any other vehicles used solely for transporting employees. Commercial auto insurance is a specialized policy designed for this purpose; we’ll go over the specifics of this coverage below.

#5. Commercial Vehicle Insurance

Businesses that utilize automobiles for employee transportation or other company-related purposes must obtain commercial vehicle insurance. Like private auto insurance, it’s virtually universally required. Getting caught without one might cost you a lot of money and make it difficult to get insurance in the future.

Different types of insurance policies may be necessary for your company, depending on the location where it conducts business.

#6. Surety Bond

If you are unable to complete a project due to a lack of funds or business failure, a surety bond will compensate the owner or contractor for their loss. Subcontractor default insurance is another name for this type of coverage. The costs associated with bringing in a replacement subcontractor are covered by this type of insurance policy.

This coverage does not offer the same level of protection as other forms of subcontractor insurance. Instead, it reassures your contractor that progress can be made without your involvement. Large public works projects or those involving construction sometimes necessitate surety bonds.

What Makes a Company a Subcontractor?

When a main contractor hires a business to carry out specific duties or offer services as part of a larger project, that business becomes a subcontractor. Subcontractors are typically specialists in their field and are brought in to handle particular aspects of the project that the main contractor may not have the expertise for. They enter into a contract with the main contractor, agreeing to complete the designated work within a specified timeframe and budget.

Subcontractors are often hired in the construction, manufacturing, and service industries to handle tasks such as electrical work, plumbing, or software development. Unlike employees, subcontractors operate independently and are responsible for their own taxes, insurance, and benefits. This arrangement allows the main contractor to delegate specific tasks to experts, ensuring the overall project is completed efficiently and to high standards.

Are Subcontractors Covered Under the General Contractor’s Insurance?

Insurance is often the responsibility of each individual contractor. There are some circumstances in which the general contractor’s insurance may apply to you, but this is uncommon.

Additional insured endorsements, per project aggregates, and certificates can offer some insurance protection, but if you aren’t the primary insured and your name isn’t on the declarations page, you have no legal right to rely on the policy. In addition, there are insurance policies that will not cover you for mistakes made by other people’s businesses.

Why Do Companies Use Subcontractors?

When a company lacks in-house resources or needs supplemental knowledge, it commonly turns to subcontractors for assistance on large, unique, or different tasks. Cost, quality, and productivity gains are just a few of the many reasons why it makes sense to bring in a specialist for a limited time to work on one or more specific projects. Here are some of the ways in which using a subcontractor might help your company right away:

#1. It’s Risk-Averse and Economical

Subcontractors are a more cost-effective solution than hiring new employees when your company requires help with a sizable project. Hiring a safe and reputable company with lots of specialist experience helps avoid risk as well. In most circumstances, hiring a subcontractor is more cost-effective than handling the work in-house. Employee perks, workplace amenities, and tools are not extended to subcontractors.

By using independent contractors, you can avoid the high cost of benefits and salaries for full-time employees. In the end, hiring a subcontractor saves money compared to adding new employees full-time by roughly 20% to 30%.

#2. No Commitment Over The Long Term

When compared to hiring new, permanent staff, hiring subcontractors gives your company more flexibility to adapt to changing market conditions. You hire the contractors for a limited time period to complete a few specific tasks, and then you part ways. You should know that these meetings can lead to a lasting professional partnership.

However, terminating a relationship with a full-time employee might be more difficult, take more time and money (unemployment, severance, etc.), and lead to legal challenges. That person’s compensation will continue to be due even if you no longer need their services.

#3. Subcontractors Are Useful for Large Tasks

Eventually, you’ll need to expand into more substantial projects if you want your company to thrive. In these cases, subcontractors or team partners can be an invaluable asset that opens the door to working with new, larger clients. This makes it possible to assemble a special team for each client or project and find additional “helping hands” for larger or more specialized contracts.

#4. Lessening of Legal Obligations

Subcontractors do not have the same legal protections as workers because they are not considered to be employees but rather proprietors and operators of their own enterprises. This means that businesses have fewer responsibilities towards their subcontractors than they do towards their regular workers. There will be savings for both employees and businesses because payroll taxes and deductions will no longer need to be sent to the government.

#5. Productivity Boost

Most importantly, hiring a subcontractor can boost production. Simple yet tedious duties might be outsourced to a third party rather than weighing down your staff. If your subcontractor has experience in this area, they can likely do the work more quickly, freeing up your personnel to focus on other important tasks for the company.

How Much Does Subcontractor Insurance Cost?

There is a wide range of coverage options available from various subcontractor insurance providers. As a result, it is challenging to provide a universally accurate estimate of the price of insurance.

The cost of these policies is broken down in the table below. Insurance Business compiled this information from premiums listed on various price comparison and insurance provider websites.

Cost of insurance for subcontractors, broken down by coverage

Type of policy	Average monthly premiums	Average annual premiums
General liability insurance	$40 to $55	$480 to $660
Professional liability insurance	$50 to $60	$600 to $720
Workers’ compensation insurance (Small business with 3–5 staff)	$30 to $60	$360 to $720
Tools and equipment insurance ($10,000 coverage limit)	$15 to $38	$175 to $450
Commercial auto insurance (Comprehensive coverage)	About $150	About $1,800
Surety bond	$1,300 to $3,500	$15,600 to $42,000

However, these are only projections. Your real premiums may be much lower or greater than this estimate, depending on a number of factors, such as:

The specifics of your subcontracting role
The length of time you’ve been in operation
Do you have any prior claims?
How much do you make on average?
Maximum benefits under your insurance

Because of the protections it offers, liability insurance is a popular choice among subcontractors.

What Are the Benefits of Subcontractor Insurance?

Generally speaking, subcontractors are not required by law to carry insurance. There are two options available to you if you wish to protect yourself from potential dangers.

The first thing you may do is request that your contractor add you as an additional insured to their policy. The vast majority of contractors would rather not work with an uninsured contractor, so this is highly unlikely. The reason for this is that if you do so, you will be fully responsible for any risks or liabilities that may arise. You have no idea if their policy provides adequate coverage if they consent to this arrangement.

However, the best course of action is to acquire appropriate subcontractor insurance policies, which offer the subsequent benefits.

#1. Insurance Against Monetary Loss

Damages, medical bills, and legal fees can quickly add up if a contractor is found accountable for an accident or error. Protecting the company’s financial well-being from legal action is the job of liability insurance, while property and equipment insurance pays to fix or replace damaged or stolen items.

#2. Subcontract Insurance Ensures Contractual Integrity

Even though these are not legally required, the majority of contractors won’t work with a subcontractor who lacks general liability insurance and workers’ compensation coverage. Because of this, they are able to avoid taking any unnecessary risks. Before signing the dotted line, most contractors will want to see verification of this insurance and whether or not it provides adequate coverage.

#3. Protection for Workers

Employers need to have workers’ compensation insurance in place to protect themselves and their employees. A catastrophic injury might result in enormous legal responsibilities. If an employee is hurt or becomes ill on the job, workers’ compensation will pay for their medical care and any salary they miss out on.

What Are the Risks of Subcontracting?

The use of subcontractors raises the stakes in your supply chain in the following ways:

#1. Threat to Efficiency and Quality

How can a company be sure that a subcontractor will do a good job and stick to their word? Inadequate output usually necessitates additional time and effort to fix. To address this issue, have the subcontractor provide regular updates on the project’s status and well-documented reports.

Verify that the subcontractor has quality control processes and resources in place to guarantee that the job will be completed as promised.

#2. Schedule Risk

It’s possible that the subcontractor won’t be able to finish the job by the due date. A lack of financial resources could have a negative impact on the subcontractor’s schedule and the project as a whole. There is a high probability of a project delay if the subcontractor does not deliver on schedule.

Overruns in both time and money are possible, as are strained ties with important parties. You may lessen the likelihood of this happening by setting concrete targets and deadlines in the project plan. Also, keep in touch frequently to monitor the performance of your subcontractors.

#3. Financial Risk

Financial challenges for the subcontractor are possible throughout the duration of the project. Subcontractors’ margins have been under pressure because of rising input costs and increasing interest rates. The possibility of a subcontractor going bankrupt is also considerable, especially in light of the deteriorating state of the business climate. In order to avoid any monetary difficulties, firms should check the financial stability of a subcontractor before hiring them. Determine their financial stability by reviewing their income and expenditure records and cash flow projections.

Contractors should also negotiate and include terms that handle obligations coming out of the subcontractor’s work. In addition, these provisions should be written in clear, specific language.

#4. Relationship Risk

The relationship between the main contractor and any subcontractors working for them is in danger of deteriorating for a number of reasons. The success of the project may be jeopardized if the two parties involved do not get along well. A subcontractor may have a grievance with respect to payment or the contract terms and conditions, for instance. Such disagreements can slow things down considerably and take a long time to sort out.

Is There a Difference Between a Subcontractor and a Contractor?

Yes, there is a difference between subcontractors and contractors.

Contractor:

A contractor is a person or a company that enters into a contract with another entity (such as an individual, business, or government) to provide services, goods, or work.
Contractors can be general contractors or prime contractors. General contractors oversee entire construction projects and may hire subcontractors to handle specific tasks.
Contractors are typically responsible for the overall coordination of a project, managing subcontractors, ensuring quality, and meeting project deadlines.

Subcontractor:

A subcontractor is a specialist or a company hired by the main contractor to perform specific tasks or provide specialized services as part of a larger project.
The client (owner of the project) does not directly contract with subcontractors; instead, they work under the main contractor’s direction and coordination.
They are experts in their field and are hired for their specific skills, such as electrical work, plumbing, or carpentry.

In essence, a contractor is the party in charge of the entire project, and the contractor hires subcontractors to handle particular aspects of the project based on their specialized expertise. Subcontractors work under the umbrella of the main contractor, who is ultimately accountable for the successful completion of the entire project.

Why Do Subcontractors Need Insurance?

Subcontractors need insurance for several important reasons:

Liability Coverage: Subcontractors often work on construction sites or in clients’ homes, where accidents can happen. Subcontractors can avoid legal and financial trouble by carrying liability insurance in the event that their work causes injury or damage to another party’s property.
Property Damage: Subcontractors’ work could accidentally damage the property they are working on or adjacent properties. Insurance covers the costs of repairing or replacing damaged property, ensuring subcontractors don’t face significant financial losses.
Professional Indemnity: Subcontractors, especially those providing specialized services like architecture or engineering, might be held liable for professional mistakes or advice. Professional indemnity insurance protects them from legal claims related to errors or omissions in their professional services.
Worker Safety: If subcontractors employ workers, they may need workers’ compensation insurance. This coverage helps pay for medical expenses and lost wages if an employee is injured on the job, ensuring the subcontractor meets legal requirements and takes care of their workforce.
Contractual Requirements: Main contractors often require subcontractors to have specific insurance coverage as part of their contract agreements. Compliance with these requirements is necessary for subcontractors to secure projects.
Credibility and Trust: Having insurance demonstrates professionalism and financial responsibility. Clients and contractors are more likely to hire subcontractors who are insured, as it provides a level of trust and assurance that the subcontractor can handle unforeseen situations.

In summary, insurance protects subcontractors from various risks, legal obligations, and unforeseen events, ensuring their financial stability and professional reputation in the construction industry.

Conclusion

With the right subcontractor insurance, your business and investments are safeguarded, even in the riskiest of industries. Having an insurance expert who is familiar with your line of work and can explain the specifics of your coverage is invaluable.

Frequently Asked Questions

What is subcontractor default insurance?

If a subcontractor you’re working with stops paying their bills, this insurance might help cover the costs. This is possible if the subcontractor accepts too much work or experiences delays on another job. To find out more about subcontractor default insurance, please contact one of our insurance professionals.

Do I need insurance for my LLC in Colorado?

Yes, commercial insurance is important for Colorado business owners to consider for financial and legal reasons. A company’s day-to-day operations and assets might be severely disrupted by a wide range of work-related catastrophes, such as customer injuries or property damage. Having insurance can lessen the impact of these issues.