If you’ve already started your own construction business, or are interested in starting your own business as a contractor in the near future, chances are you see the benefits of being your own boss. Being able to set your own schedule, decide which projects you want to bid and ultimately work on, and taking home those boss-sized paychecks are just a few of the pros to self-employment. But just because you want to own your own business doesn’t necessarily mean you want the stress of performing every aspect it takes to run that business. That’s a lot of hats, and the average sized head is not big enough to hold all of them.
Enter: Contractors. Or subcontractors, more specifically. Subcontractors differ from employees because these are the key guys (and gals) who have the specific training and know-how for those specialized tasks of your project, yet operate under their own business umbrella. Subcontractors are routinely the solution to providing specialized skilled labor, so you can delegate tasks and focus on the bigger picture. But as you award projects out to your construction subs, there are a few things you’ll need to make sure you are reviewing and collecting from them to stay in compliance with your own contractor insurance policies.
Step 1: Verify your Subcontractor is Properly Licensed
Does your state require contractors and artisans to carry a contractor license? Make sure your subcontractors are adhering to those requirements. Some states, such as California, only require a license of most tradesmen if they are performing projects greater than $500 in value. New Jersey, on the other hand, requires a license anytime a business or individual is engaged in home improvement or construction operations, regardless of the project size.
Double check with your state license board for the requirements of carrying a license. Chances are that if you’re required to have one, they are too. Also review the license board to verify the license is current and active. A sub may provide a license number, but if it’s suspended or expired, that means they aren’t compliant. If you are hiring unlicensed subcontractors, you run the risk of incurring fines from the state and being out of compliance with your insurance, which could be grounds to deny a claim if one should arise.
Step 2: Standard Subcontractor Agreement
Having subs complete a standard work contract is the first step toward bringing them onto your project. This not only good practice, but is often required by your own general liability insurance carrier.
A standard work contract for your subcontractors should outline the scope and length of the project, description of work performed, terms of payment, and what happens in the event of a suit or claim. It also outlines the insurance you require them to carry in order for them to step on the site. If you’re not already in the practice of having your subcontractors sign a standard work contract, it’s never too late to start now.
There are a few things your insurance carrier will typically require you to ask of your subs:
* Limits of insurance coverage equal or greater than your own. This makes sure that they have the adequate amount of coverage for the project so their carrier(s) can cover any loss in the event of a claim.
* A hold-harmless agreement, or an indemnity clause. An indemnity clause protects you against any legal action taken against you from a third party based on the actions of and work performed by the subcontractor. This way you or your insurance carrier doesn’t incur the expense of a claim when it’s someone else’s fault.
Step 3: Receive a Certificate of Insurance
Collecting a certificate of insurance, or COI, from your subcontractors is arguably equally as important as having them sign a contract. This is your “proof” that they have the insurance coverage you require in your contract. Just like the subcontractor contract, your carriers require you collect this COI and keep it on file. Proof is in quotations because, unfortunately, that piece of paper is just a piece of paper at the end of the day, so you should always follow up with the agency listed on the form to verify the insurance.
There are two main insurance policies you should always require your construction subs to ist on the certificate: General Liability and Workers Compensation.
Verify your Subcontractor has General Liability insurance
Should a claim arise from the work your sub is performing on the project, you’ll want to make sure they have the insurance to cover the damages. You don’t want a claim to hit your insurance for work you didn’t actually perform. The indemnity in the subcontractor agreement[c] holds you harmless for the work of the subcontractor; making sure they have the insurance to cover a claim is your peace of mind.
Also, make sure their general liability insurance lists you as an additional insured. If the claim does trickle up to you and a homeowner / property manager wants to file a claim on your insurance (since you are top dog on the project), being additional insured means that you can use the subcontractors insurance as coverage instead of your own, further protecting your company from claims. This works to keep your insurance premiums as low as possible by maintaining a clean loss history with your carriers.
Verify your Subcontractor has Workers Compensation insurance
This is similar to verifying your subcontractor carriers general liability because you’ll want to make sure that if the subcontractor is injured on the job, they have their own coverage to pay against those injuries, rather than coming after you. Think your workers comp carrier will deny the claim if a subcontractor without insurance tries to file a claim on your workers comp? He’s a sub, there’s no coverage right? Not so fast....
Workers Compensation policies will cover all individuals hired by your company, whether they are W-2, subcontractors without workers compensation coverage, or that guy you hired for the day. Collecting a certificate showing a comp policy before the sub starts work is your assurance that if something goes awry, they won’t need to look to you to pay the medical bills. Verifying the coverage first is much easier than trying to find insurance at renewal with a claim on your policy.
Whether you’re hiring a subcontractor to paint the sheetrock you just hung on the wall, or to roof that new room addition on a custom home, priority number one will always be to protect you and your company. Refer to your own policies to see if there are any other requirements your carriers are mandating for your subcontractors. And always remember that if you have any questions feel free to reach out to contact us at Citizens, and we’ll be happy to help you navigate hiring subs.