Contractors: Proactively Manage Your Subs’ Insurance

Nearly every residential and commercial construction project today requires the use of subcontractors. They’re indispensable for getting projects done.

But when a contractor is busy managing the big picture, subcontracts can often become an afterthought. When it comes to insurance requirements, that can be a disastrously costly mistake.

Here are two possible scenarios:

  • A residential general contractor working on a multi-family project hires a plumbing subcontractor. The GC obtains the sub’s Certificate of Insurance but fails to confirm there are no limitations for multi-family habitational projects. Two years later, plumbing problems lead to a claim against the GC, who only then finds out the plumber had a multi-family habitational exclusion on his policy. Now the GC is on the hook for a $45,000 loss.
  • An electrical subcontractor lets his insurance payments fall through the cracks and the insurance gets canceled for nonpayment. Meanwhile, he’s working on a project for a home builder, and the general contractor has no idea the sub’s insurance has been canceled. One day a fire breaks out due to an electrical error, causing $50,000 in damage. The subcontractor claims he didn’t know about the cancelation, and no notification was sent to the GC. So, the GC’s insurance has to cover the loss.

These and similar scenarios happen all too often. The result is usually a costly claim for the contractor. And keep in mind – even on a small job where you don’t think it matters, it does. Even someone hired for $100 can end up causing a million-dollar claim.

Be proactive about your subs’ insurance requirements.

You can avoid many costly claims by taking some commonsense steps to manage your subcontractors’ insurance provisions. For example:

  • Always have a subcontractor agreement in place and obtain Certificates of Insurance.
  • Have a system for reviewing those Certificates of Insurance to ensure that what’s in the contract aligns with the requirements of your project.
  • Track your Certificates of Insurance with a tool such as QuickBooks, which can alert you not to pay your subs until there’s proof of insurance on file.
  • Use a calendar as an appointment reminder to follow up.
  • Alternatively, if you regularly subcontract a substantial amount of work, get updated Certificates of Insurance from subs at the same time every year.
  • Consult with your attorney and insurance agent before signing any contract to make sure all insurance provisions are in order.

Did you know? If you don’t have proper insurance from your subs, you can be retroactively charged back by your insurer.

Case in point: When one GC was audited by its insurer, the insurer discovered that the GC had paid a subcontractor $100,000, with no Certificate of Insurance on file. So, the insurer back-charged the GC an additional $5,000 to cover the added $100,000 of insurance exposure. It was an unbudgeted cost they weren’t prepared for.

Ask your insurance broker to help you stay on track.

Your insurance broker should help you effectively manage your subs’ insurance requirements. Here at Propel, we are happy to assist in reviewing your subs’ Certificates of Insurance to make sure everything is in order – and that you’re properly covered.

If you’re not getting this level of service and expertise from your insurance broker, consider Propel Insurance.

Michelle Newberg

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