I got a panicked called one Saturday afternoon from a client. He had just gotten a call that a house he had built for some friends had flooded due to some faulty work done in the bathroom. Needless to say he was in a complete tailspin. As we talked through it, he mentioned that he had subcontracted the plumbing work to a buddy of his. Because we have worked together for a long time, I knew that we had a plan for all of his subcontractors to have their own insurance. I was able to tell him that he just needed to go to the subcontractor that performed the work and file a claim on the subcontractor’s insurance. And they all lived happily ever after. This was a story with a happy ending.
Unfortunately, this story is only true about 50% of the time.
So often when I talk to contractors they don’t want to hire "insured" subcontractors for various reasons:
“I can’t afford the ones with insurance,”
“It’s a hassle to have that conversation,”
“No one has insurance,"
and my personal favorite, “That will never happen to me.”
But what I usually tell them is you can’t afford not to!
Let’s take the story above, but change it a bit. Let’s say the plumber that was subcontracted did not have insurance. Guess who would’ve been held responsible and required to pay? My insured. That claim ended up costing about $54,000. Which means YOU CAN BE HELD LIABLE.
So often contractors don’t realize that they will take the brunt of their subcontractor’s mistakes if they are uninsured. If they damage something or injure a person and you’ve put them on the job, it’s going to go back on you as the person that hired them. Just like in the story mentioned above, because their subcontractor has insurance it saved that company from a huge headache. You can also be held liable if that subcontractor is injured on the job.
An insured called me one day and said, “Hey, one of my subcontractors just fell and twisted his knee. My sub just told me his workers compensation policy has lapsed and he doesn’t have coverage. What do I do?”
That’s when I had to tell him that most likely the insurance company was going to hold him responsible. We ended up filing the claim on our insured’s Oklahoma workers compensation policy and it paid out. IT CAN COST YOU BIG MONEY.
If you’ve ever bought commercial insurance, there’s a pretty common chance you’ve been through a General Liability Audit or a Workers Compensation Audit.
What is an Audit?
These are processes that insurance companies use to make sure the figures you gave them when putting the policy into place or renewing, usually payroll numbers or gross sales numbers, are correct. This may include looking at financial statements, 941’s or other items that show payroll or gross sales.
Here’s where it gets tricky
If you have uninsured subcontractors working for you, then many times insurance companies are going to figure in your subcontracting costs to your payroll - on General Liability and Workers Compensation. Because they don’t have their own insurance, insurance companies classify uninsured subcontractors as your employee. Fun right? Now some of you might say, "Hey, I’m good. I collect the Affidavit of Exemption." Maybe not. Communicate with your workers compensation company ahead of time. Here is why. Some companies will NOT accept Affidavits of Workers Compensation. Exemption forms depending on what the sub performs for you and how many times they've worked for you. When this happens, you will be required to pay workers compensation on them and that can be a pretty penny, especially if that subcontractor is doing something with a high rate.
So what do I do?
So often I hear people getting frustrated because they’ve just never been told what to do. Here’s a few options:
GET AN AGENT - Firstly, it’s important to have a good agent that can work through your job and write a policy that is customized for your needs. There is not a one size fits all. Explain to them your operations and whether or not you’re using subcontractors or not and make a game plan from there.
COMMUNICATE - I have some of my contractors that flat out say "I won’t use insured subcontractors." We talk through the process and I communicate with the insurance company that subcontractors are used uninsured. This allows this insurance company to cover my insured properly and my insured to understand what happens when and if an incident occurs. It’s important to communicate openly so you don’t buy a pointless insurance policy.
SET A PLAN - Set what limits you’re going to require for your subcontractors to have. A very common limit of insurance for general liability is a $1,000,000 per occurrence limit with a $2,000,000 aggregate though your insurance company may require your subcontractors to have higher or lower limits. It’s important to find out since each company has different rules.
For workers compensation the same rules are going to apply. Some companies will be okay with your state’s minimum work comp limits and some will require $1,000,000 limit.
If you have questions regarding your insurance, ECI is always here. For a quote for your Oklahoma City contractors insurance give us a call at 405-373-2977.