Not always, and you cannot know until you have current certificates and endorsements on file for every sub. Long-standing working relationships often run ahead of the paperwork. Collect proof from every sub and put insurance requirements in a written subcontract. Make current proof a condition of new work and, where your subcontract allows, of payment. An uninsured sub can show up on your workers' compensation audit bill and in your claims. This guide is for buyers of contractors, installers and service businesses that hand part of the work to other companies.
The short answer
- Your customer contracts set requirements for you; written subcontracts should pass the same requirements down to your subs.
- Collect a current certificate of insurance plus copies of the additional insured and waiver endorsements, not just the certificate.
- If a sub had no workers' compensation of its own, your audit can treat its workers as yours and charge you premium for them.
- Some general liability policies limit or remove coverage for work by subs who do not meet stated insurance conditions.
- Set a rule in month one: no certificate and no signed subcontract, no new work, and no payment where your subcontract allows it.
Why are inherited subcontractor relationships a risk?
In an owner-run business, subcontractor relationships often live in the owner's phone. The seller knew the tile crew, the electrician and the crane operator, trusted them, and rarely asked for paperwork. That trust does not transfer to you, and neither does the seller's memory of who was insured.
Common findings in the first month after closing:
- No written subcontract at all, or a one-page agreement with no insurance section.
- Certificates that expired one or more years ago, or certificates naming the seller's entity as the certificate holder.
- Subs who carry general liability but no workers' compensation, sometimes relying on an exemption or a policy that covers only the owner.
- Limits lower than your customer contracts require you to provide, so a claim caused by the sub may land on your policy instead of theirs.
- 1099 workers treated as subcontractors who look more like employees.
None of this means the seller ran a bad business. It means the paperwork never caught up with the work. Your job is to make it match before an audit or a claim tests it.
What happens at the workers' comp audit if a sub was uninsured?
A workers' compensation premium starts as an estimate. After the policy year, the carrier audits your records and sets the final premium; see premium audit. The standard policy used in most states counts pay to your own employees and also to other people doing work that could make your insurer liable. In many states, if a subcontractor has no workers' compensation of its own, the law can treat you as the employer of its injured workers (their statutory employer), so your insurer counts them.
If you cannot show that the sub lawfully carried its own coverage, the auditor may add the sub's labor to your premium base. Where the sub's payroll records are missing, the policy lets the insurer use the contract price instead. How much of that price counts depends on the state and its rating bureau. North Carolina's rate bureau manual, for example, sets minimum percentages. The math is walked through in 1099 contractors and the workers' comp audit bill. In North Dakota, Ohio, Washington and Wyoming, workers' compensation runs through a state fund with its own rules.
The usual proof is a certificate of insurance showing workers' compensation in force for the dates the sub worked for you. Keep it. A certificate collected after the audit starts may not help if it does not cover the right dates. For how audits work in general, see understanding your premium audit.
Can an uninsured sub affect my general liability coverage too?
Yes, in three ways, depending on your policy:
- Premium. Many contractor general liability policies are rated partly on the cost of subcontracted work, and some charge more at audit for subs who cannot show their own insurance. Check the premium basis on your declarations page.
- Coverage conditions. Some policies carry an endorsement that limits or removes coverage for work done by subs unless the subs carried stated limits and named you as an additional insured. These hide in the forms schedule; see insurance exclusions that quietly kill coverage.
- Claims. If a sub damages a customer's property and has no insurance, the customer and its insurer are likely to look to you. Your policy may respond, but the loss goes on your record and erodes your limits instead of the sub's.
This is why the transfer of risk to subs is a pricing issue as well as a claims issue. The deeper strategy is covered in contractual risk transfer with subcontractors.
What should I collect from each subcontractor?
| Document | What it shows | What to check |
|---|---|---|
| Certificate of insurance | A summary of the sub's policies and limits on the date issued | Your entity as certificate holder, current dates, limits at or above your requirements, each line you require |
| Additional insured endorsement | That your company is an insured on the sub's general liability | Blanket or names you; covers ongoing and completed work if your contract requires both |
| Primary and noncontributory and waiver endorsements | That the sub's policy pays first and its insurer will not pursue you | On each line your subcontract names |
| Workers' compensation proof | That the sub covers its own workers | A policy covering employees, not only the owner, that lists the state where the work happens. An exemption certificate usually covers only the owner or officers it names, not the sub's employees, and must be valid in that state. |
| Auto and umbrella | Coverage for vehicles and higher limits | Limits that match your requirements, and that the umbrella follows the endorsements |
| Professional liability (design or engineering subs) | Coverage for design errors, which general liability usually does not cover | A claims-made policy with a retroactive date that reaches back to their work for you |
| License, where required | That the sub can legally do the work | Active status for the trade and state |
Ask for endorsements as well as the certificate, because a certificate does not create coverage. Some subs may offer a policy that covers only the owner and no employees; read what a ghost workers' comp policy is before you accept one. For collection tips, see collecting certificates from subcontractors and what insurance a subcontractor needs.
What should a written subcontract say about insurance?
If the business has no standard subcontract, this is the month to adopt one. Have your attorney draft or review it, because indemnity and anti-indemnity rules vary by state. On insurance, the core terms are:
- Lines and limits at least equal to what your customers require of you, so you can pass requirements down.
- Additional insured, primary and noncontributory and waiver endorsements on the lines your customers name.
- Proof before work starts, with your right to withhold payment while a sub is out of compliance.
- Coverage after the job: the sub keeps completed operations additional insured coverage, and any claims-made professional coverage with its retroactive date unchanged, for a set number of years after the work ends.
Indemnity wording, flow-down to sub-subcontractors and how the pieces work together are covered in contractual risk transfer with subcontractors. The meaning of the endorsement terms is explained in additional insured, waiver of subrogation and primary noncontributory.
What does an uninsured sub cost in practice?
A hypothetical example. A buyer acquires a remodeling contractor. Three months after closing, a laborer working for a roofing subcontractor falls from a ladder on one of the company's jobs and needs surgery. The certificate on file showed workers' compensation, but the sub's policy had been canceled for nonpayment two months earlier, and nobody had checked. In many states that can make the company the injured worker's statutory employer, so the claim can go to the company's own workers' compensation policy. The carrier pays benefits, subject to the policy and state law, and $90,000 of medical and wage costs now sits on the company's loss runs. A claim that size can raise the experience mod (the factor that adjusts workers' compensation premium for past claims) at future renewals, and those are numbers the buyer's lender and investors will watch. Asking the sub for a fresh certificate before the job started would likely have shown the lapse. The figures are illustrative only.
Uninsured subs can also add to your workers' compensation audit bill; see 1099 contractors and the workers' comp audit bill and new owner review: workers' compensation.
What should I do about subs in my first 60 days?
- List every sub paid in the last 24 months from the accounts payable ledger, with amounts and type of work.
- Ask each active sub for a current certificate naming your entity and copies of its endorsements.
- Mark each sub compliant, partly compliant or not compliant against your requirements.
- Adopt a written subcontract, reviewed by your attorney, and have active subs sign it.
- Tell accounts payable to check the register before paying a sub, and ask your attorney how to handle payment for work already done while a sub is out of compliance.
- Track expiration dates in one register; see set up certificate tracking in your first month.
- Before the next audit, gather certificates covering every period each sub worked.
- Give your broker the list so the policy's subcontracted cost estimate is accurate.
Morrow can review your sub certificates against your customer contracts and your policies and point out where the requirements do not line up, though any change to your own policies is up to the carrier.
Keep reading
- Contractual Risk Transfer: Making Subcontractors Carry Their Own Risk
- Do 1099 Contractors Count in Your Workers' Comp Audit?
- Set Up Certificate Tracking in Your First Month as Owner
- Additional Insured, Waiver of Subrogation and Primary Noncontributory
- Payroll Estimates and Surprise Workers' Comp Audit Bills
- All guides for new business owners
Frequently asked questions
What proof should I ask a subcontractor for before work starts?
A current certificate naming your entity as certificate holder, copies of the additional insured, primary and noncontributory and waiver endorsements your subcontract requires, and proof of workers' compensation that covers the sub's employees for the dates of the work. A certificate alone only summarizes coverage, so keep the endorsements on file too.
What happens if my subcontractor has no workers' compensation?
In many states your workers' compensation insurer can count the sub's workers as yours at audit and charge you premium for them, and an injured worker of the sub may be able to claim against your policy. Rules vary by state, so ask your broker.
Do I need written subcontracts if the seller never used them?
A written subcontract is how you pass your customers' insurance requirements down to your subs and give yourself the right to stop work or withhold payment. Have your attorney draft or review one, since indemnity rules vary by state.
What if a sub only has a workers' comp exemption instead of a policy?
An exemption usually covers only the owner or officers it names, not the sub's employees, and it must be valid in the state where the work happens. If the sub brings employees to your job, ask for a workers' compensation policy that covers them, or your audit may count their pay and an injured worker may claim against your policy. Rules vary by state, so ask your broker how your carrier treats exemptions.
Can I just stop using subcontractors who are uninsured?
You can, and many owners do. Others give a sub a short deadline to get coverage before the next job. Either way, do not let new work start until current proof is on file, and ask your attorney before withholding payment for work already performed, since your subcontract terms and state payment rules may apply.
References
- NCCI: Workers Compensation and Employers Liability Insurance Policy, WC 00 00 00 C (copy hosted by Guard)
- North Carolina Rate Bureau: Basic Manual, Rule 2, Premium and Payroll (subcontractor rules)
- IRMI: Additional insured (definition)
- IRMI: Certificate of insurance (definition)
Just bought a business? Get your insurance reviewed.
Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.
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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.