Why Do Subcontractors Need Insurance?
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Subcontractors need insurance to protect against financial loss if they are held liable for a third party’s injuries or property damages while on a job. While you won’t find a policy called “subcontractor insurance,” subcontractors can purchase various types of commercial coverage that safeguards against costs related to liability, business property losses and more.
Keep reading to learn about the insurance requirements for subcontractors, the types of coverage available and their costs.
What Is Subcontractor Insurance?
Subcontractor insurance is commercial coverage that is customized for independent contractors hired by a general contractor to perform a specific task or job as part of a larger construction project — a house builder who hires a floor installation subcontractor, for instance. While “subcontractor liability insurance” isn’t technically a product sold, several types of commercial coverage are available that can protect a subcontractor for liability exposure related to injuries or property damages. Subcontractors can also insure their tools and equipment.
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Types of Insurance for Subcontractors
Subcontractors and other independent contractors have a large swath of coverage to choose from to make sure they’re protected, including general liability, professional liability and commercial property insurance.
General Liability Insurance (GLI)
Also called commercial liability insurance, GLI offers financial security if a subcontractor is held responsible for a client's personal harm or property damage, paying for the client’s injuries or reimbursing them for physical property losses. If the claim escalates to a lawsuit, GLI will pay for legal costs. GLI also provides coverage for copyright, libel and slander. GLI monthly rates can be between $25 and $100.
Here are some situations when your commercial general liability insurance might make you liable for the damages of another party:
- When a customer enters your work area, they trip over some debris and get harmed.
- Someone lodges a legal claim against you, charging you with misleading advertisements.
Professional Liability (Errors and Omissions)
Also called errors & omissions insurance, professional liability insurance provides coverage for errors made while performing a service, such as carelessness, deception or bad advice. For example, if a subcontractor claims to use domestic materials for projects but is sued by a customer who alleges this is untrue, professional liability insurance would help cover the legal costs. Monthly rates can range from $25 to $100.
Equipment Breakdown and Commercial Equipment Insurance
Equipment breakdown insurance pays to repair or replace your business equipment (e.g., power drills, power saws, air compressors) when they suffer a sudden mechanical or electrical breakdown. Covered losses include electrical shorts and arcs and motor burnouts. Equipment breakdown insurance can cost between $50 and $100 every month.
Commercial property insurance usually covers losses caused by external forces, like fires, and vandalism and theft. Monthly rates can be between $25 and $50.
Neither insurance policy will cover losses related to normal wear and tear or lack of maintenance.
Workers’ Compensation Insurance
If any of a subcontractor’s employees are hurt while on the job, workers' compensation insurance will cover some of their lost wages and medical expenses, regardless of fault. Covered expenses may include medical treatment, rehabilitation, lost income, disability and funeral fees. The average monthly rate is $70.
Commercial Auto Insurance
Similar to ordinary auto insurance, commercial auto insurance provides liability and can include physical damage protection for work-related activities. For example, if a subcontractor is the at-fault driver in a car accident while driving to a client location, commercial auto insurance would pay the other driver’s medical and repair bills. Monthly rates can be between $75 and $200.
Commercial Umbrella Insurance
Commercial umbrella insurance increases your total liability limits but only after exhausting the limits in your other commercial liability policies. For instance, if a subcontractor is held liable for $1.5 million but only has $1 million in liability insurance, a commercial umbrella policy would cover the remaining $500,000. Subcontractors can expect to pay a few hundred dollars per year for $1 million in additional liability coverage according to Nationwide.
Also called pollution insurance or pollution coverage, environmental insurance covers losses related to unanticipated releases of pollutants into the environment. This type of coverage is usually excluded in ordinary liability policies and may be useful for construction subcontractors. The cost for coverage can start at $208.
What Are the Insurance Requirements for a Subcontractor?
Insurance requirements for subcontractors will consider the specific terms of the contract with the general contractor, as well as any state or federal laws that may apply. Some common types of commercial coverage requirements for subcontractors may include:
- General liability insurance: This coverage protects the subcontractor from liability for any injuries or property damage that may occur during the course of their work.
- Workers' compensation insurance: This coverage is required in most states and provides financial support to employees who are injured on the job.
- Professional liability insurance: Also known as errors and omissions insurance, this coverage protects the subcontractor from liability for any mistakes or oversights that may occur while rendering a service.
Does Contractor Insurance Cover Subcontractors?
Contractor insurance generally does not extend coverage to hired subcontractors but can apply if the general contractor can be held liable for the actions of a subcontractor. For example, if the general contractor fails to properly supervise the subcontractor or fails to ensure that the subcontractor has the necessary coverage in place, the general contractor may be held liable for any injuries or property damage that the subcontractor causes.
What Happens if a Subcontractor Doesn’t Have Liability Insurance?
If a subcontractor or handyman does not have at the very least a general liability insurance policy, they may be at risk of financial loss in the event of an accident or injury that occurs while performing a contracted service. Without liability insurance, an expensive claim that leads to a lawsuit can easily force a small subcontracting business to go bankrupt.
Additionally, general contractors will typically hire workers who have insurance over those who don’t, making the necessity for coverage all the more important for subcontractors. Liability losses that a subcontractor causes can derail the larger project and general contractors will want to work with professionals who can cover liability issues related to their work.
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