Subcontractor Insurance – What Do You Really Need?
To remain successful and competitive as a commercial contractor, it’s vital to invest in your insurance program, not only to protect your company’s assets (and your own), but also because you need it to land larger, more complex projects that will help you grow your construction business. General contractors and project owners stipulate certain types of insurance coverages in their contracts—and if you can’t or won’t comply, they’ll find another contractor who will.
Especially for up-and-coming contractors, it can be a struggle to find an insurance provider who can accommodate your needs, including a trustworthy agent who will help ensure you have the right insurance, without excessive coverage that doesn’t make sense for you.
So, how does insurance for a subcontractor actually work, what pitfalls should you avoid, and how can you find the right provider for your business?
First, it’s important to note that we at Billd are not insurance brokers—we’re experts on helping commercial contractors grow their businesses through a flexible payment solution for construction materials. However, it is our mission to help ensure your business succeeds, so this is our impartial advice for navigating subcontractor insurance based on our extensive construction industry experience.
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What kind of insurance do subcontractors need?
The first step is reading each project contract in detail. This isn’t the fun part, but it’s essential for knowing what kind of insurance coverage you’ll be obligated to comply with, as well as for flagging items in the contract you may not actually need (more on that later).
How much you’ll spend on insurance varies on a case-by-case basis. The contract requirements, combined with your insurance premiums (based on your sales, contract costs, payroll, and/or the number of company-owned vehicles), will ultimately dictate the cost.
To effectively land projects and protect your business, there are three primary policy types you’ll be expected to carry.
1. General liability
This includes coverage defense and payments on your behalf for “Premises and Operations,” which protects you in the event of injury or damage while on the jobsite; and “Completed Operations,” which covers any property damage or injury related to your completed work once the project is finished. This should include “Construction defect” claims resulting from your work or any contractor you hire.
2. Automobile liability
Costly lawsuits related to auto accidents pose a significant financial risk for GC’s and project owners, so this is a common requirement. You’ll either need a commercial auto policy if your business owns its own vehicles, or a “hired and non-owned policy” if you only utilize personal or rented vehicles.
3. Worker’s compensation and Employer’s Liability
Workers comp is designed to pay for medical bills and lost wages for employees who are injured or ill on the job. For obvious reasons, this one’s a critical aspect of any construction contract. Employer’s liability coverage provides protection should the employer be sued for gross negligence related to a worker injury.
Commercial property insurance is another major policy you might need if you have a physical business space because it covers you in case your property, including equipment stored there, is damaged or destroyed.
What types of extra coverage should you opt for—and which could you possibly live without?
Insurance endorsements are optional add-ons to a policy above and beyond the basic coverage. Some are more vital to landing projects than others.
Must-have subcontractor insurance endorsements
- Additional insured endorsement – With an additional insured endorsement, you’re also insuring the project GC and owner to minimize litigation expense for them if someone files a claim against them as a result of your work on a project. This should be applied to general liability and auto policies.
- Waiver of subrogation – A waiver of subrogation is often included in project contracts—and if it is, it’s very unlikely you’ll get around agreeing to it. Project owners and GC’s will often request that it applies across all coverage types, but particularly worker’s comp.
The term “subrogation” means the substitution of one party in an insurance claim by the party who was actually responsible. For example, if a GC accidentally bumped a ladder and injured an electrician on a jobsite, the worker’s comp carrier would normally subrogate against the GC—but with the waiver of subrogation, they can’t. Again, the idea is to avoid unnecessary litigation and rely on worker’s comp policy instead.
Important side note: It’s advisable to get a blanket endorsement for both of these. If you pay $500-750 upfront for a blanket additional insured endorsement or a blanket waiver of subrogation, you’ll be covered throughout your policy term—all year, for every contract. If you don’t, you’ll pay anywhere from $250-500 for these each and every time you sign a contract. Do the math and make the right decision for your business!
Endorsements that might not be essential for your business
Other coverage you might need is based on your specific trade, business and each individual project. Some of the most common types include:
- Umbrella policy – Provides additional coverage above and beyond what’s included in your general liability, auto and employer’s liability. (If you had a $2 million claim but only $1 million in general liability coverage, the umbrella would kick in.)
- Errors and omissions – Also known as “professional liability insurance,” this offers protection from claims about inadequate work or negligence due to a “professional error”. If you aren’t working with architects and engineers, you probably won’t need this one.
- Pollution liability – Protects you in the event of a pollution-related incident as a result of your work. Unless you’re in a trade that’s inherently related to environmental risk (think: asbestos abatement or remediation), you might not need this one.
Again, read your contract first: Once you’ve signed it, you’ve obligated yourself to purchase the policies stipulated within, even if you don’t need them.
With all of this in mind, we wanted to offer a quick checklist for those navigating subcontractor insurance, perhaps for the first time.
Four Ways to Effectively Navigate Subcontractor Insurance
1. Partner with the right agent
You can shop around between an independent insurance agent and direct writers for competitive pricing—however, the first thing to ask is if they’ve worked with other contractors specific to your trade. This will go a long way to ensuring you get the right coverage. In addition, you may want to work with more than one company based on specialty. A standalone monoline worker’s compensation carrier may be a good option to pair with a provider writing your general liability, auto and property insurance.
2. Know your must-haves
- General liability – with a blanket additional insured endorsement and waiver of subrogation
- Automotive liability
- Worker’s compensation
3. Read your contract
The coverage you need boils down to this: is it absolutely necessary to perform my work? That’s why it’s important to partner with an agent who can help you determine what coverage to add and what to strike from the contract if it’s either a) not applicable to your work or b) not cost-effective based on what you’re being paid. Strike it and initial if you think you don’t need it.
4. Weigh the risk and benefits to your business
Landing a project might be contingent on agreeing to the stipulations of the contract, so how hard you’re willing to push back depends on what you’re willing to risk. Sure, you might not need pollution liability, but are you willing to risk getting passed over because of it?
Keep in mind that many GC’s use subcontractor insurance coverage as a sort of qualification process for who they choose to work with. Even if you know you don’t technically need certain types of coverage, if you have room in your budget, it might be worth it to you in the long run if it puts you ahead of the competition.
At Billd, we understand the struggles construction entrepreneurs face, and we’re here to help position your business for success. Learn more about how we can make life, and business, easier for you with flexible contractor materials financing so you can get upfront cash for your materials and get back to what you do best.