Risk management is part of any successful business, and it is especially true in an industry fraught with as many dangers as construction. Accidents that cause injury, damage, or death occur on worksites across the country every day.
Preventing those injuries is your first line of defense. That might include actions like creating and enforcing a safety management program, providing proper safety training, offering protective gear when appropriate, etc.
Contractor Insurance is Key to Managing Risk
Unfortunately, accidents can still occur. That’s where contractor's insurance comes in. The right coverage will protect your employees, your customers, and your business.
You probably know all this, but what happens when a subcontractor that you’ve hired is injured or causes an injury or damage? Hiring subcontractors is a prevalent practice in the construction industry because the more people you have working on a job, the more you can get done, right?
We think it’s pretty safe to say that’s true, but subcontractors also add another level of risk, which makes it essential to understand the role contractor insurance plays with subcontractors. Here’s some info that may help.
Subcontractor Risk Considerations
#1 - Employee vs. Subcontractor
With an employee, you are required to pay Social Security and Medicare taxes, pay unemployment tax on wages, provide workers’ compensation in many cases, etc. The headaches and expenses of an employee can quickly add up.
But with subcontractors, you don’t have to pay the same taxes or provide WC insurance. Therefore, some contractors misclassify employees as subcontractors. Sometimes it’s even done by mistake because there are so many variables that determine whether or not someone is an employee.
Even the IRS admits there is no simple formula to determine if a worker is an employee or an independent contractor, and factors which are relevant in one situation may not be applicable in another. “The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination,” according to the IRS
Misclassifying an employee as a subcontractor can end up costing you more in fines and penalties than you would have paid if they were classified correctly. This makes it imperative that you make the right classifications. Here are some tips to do that.
Determine the Business Relationship
First, you need to determine the business relationship that exists between you and the person performing the services including your degree of control over them and their independence. The IRS provides these three categories to provide evidence of that control or independence.
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
#2 - Get Subcontractor Insurance
If you have determined that you are dealing with a subcontractor and not an employee, you do not need to worry about workers’ compensation insurance; however, you still face risks. Don’t assume that your contractor’s liability insurance will cover you in the event that a subcontractor’s work causes damage or injury. Damages caused by individuals other than your employees are excluded in many general liability policies.
Your first step is to make sure that all of your subcontractors have their own general liability coverage that is adequate to cover any injuries or damage. Have them to provide a certificate of insurance as proof. The International Risk Management Institute (IRMI) suggests the following minimum general liability insurance limits for subcontractors:
- $1,000,000 each occurrence (the combined single limit for bodily injury and property damage);
- $1,000,000 for personal and advertising injury liability;
- $1,000,000 aggregate on products and completed operations;
- $2,000,000 general aggregate.
#3 - Get Listed as an Additional Insured
You should also make sure that your subcontractors include you as an additional insured on their commercial insurance policy to protect you against their negligence.
Be Prepared - Contact Us Today!
Accidents happen, but the right insurance will help protect your business. For more information about contractor insurance and any time of business insurance you may need, contact American Insuring Group at (800) 947-1270 or (610) 775-3848 or contact us online.
You can rest assured that we'll find you affordable contractor insurance at a great price because our independent agents are free to scour the market and to compare policies among lots of competing providers.