Why Do Subcontractors Need Insurance?

Subcontractors need several types of business insurance to meet legal requirements and protect themselves from financial losses in the event that they fail to properly perform the tasks they are hired to do or are otherwise held liable for someone else’s loss. It is not guaranteed that a subcontractor will receive coverage under their primary contractor’s insurance policies, so it’s important that they buy subcontractor insurance for themselves.

Read below to learn more about the most important types of commercial insurance for a subcontractor to consider purchasing.

Key Takeaways Subcontractors may be required by law to carry commercial auto insurance and workers’ compensation insurance. Other coverage types that could be required by contractors and are otherwise recommended for subcontractors include professional liability, commercial umbrella and BOP insurance. Contractors can purchase subcontractor default insurance to protect themselves from financial losses in case their subcontractors fail to fulfill their contractual duties and are not covered by surety bonds.

What Is Subcontractor Insurance?

Subcontractor insurance is not a singular insurance product, but the term instead refers to a collection of commercial insurance coverage types that can address the risks commonly facing subcontractors. A subcontractor is a person or business hired to perform specific tasks by a prime contractor who oversees the entire project.

While subcontracting is often associated most heavily with the construction industry, subcontractors are also prevalent in other industries, such as insurance, manufacturing, health care, marketing and advertising, transportation and logistics, event planning and film and entertainment.^[1]

What Types of Insurance Policies Are Required for Subcontractors?

In most states, subcontractors are required by law to maintain commercial auto insurance if they use vehicles for business purposes and workers’ compensation insurance if they have employees.^[2][3] While other insurance coverage types are generally legally optional, it is possible that the contractor who hires you could require you to purchase additional types of insurance or bonds.

Types of Insurance for Subcontractors

See the following sections to learn about the main commercial insurance coverages that can be beneficial for subcontractors.

General Liability

With general liability insurance, you’ll be covered if your subcontracting business is held liable for injuring someone or causing damage to their property. For example, if a crane you are operating during a construction project malfunctions and crashes into another building, your general liability coverage could pay to repair the building and cover medical treatments for anyone who is injured in the accident.

General liability insurance also includes coverage for legal expenses in case a bodily injury or property damage claim leads to a lawsuit. In addition, your insurance company will cover your legal fees if you are sued for defaming another person or business or violating their copyrights.

BOP

Along with general liability insurance, you will likely want to obtain commercial property insurance and business interruption insurance, all three of which can be bundled together in a business owners policy (BOP). Notably, it is typically cheaper to purchase a BOP than it is to buy each of these coverage types separately.

If you own an office space or other commercial building, you’ll need commercial property insurance to cover property repairs or replacements in the event that your building or any of the items inside of it are suddenly damaged, destroyed or stolen. Meanwhile, business interruption insurance can help you temporarily relocate or continue to cover ongoing expenses, like payroll and loan payments, if you have to halt business operations due to a covered peril.

For example, if a fire burns down your office building, commercial property coverage could pay to rebuild your office, while business interruption coverage could pay to rent the equipment your office employees need to work from home until the new building is ready.

Professional Liability

Professional liability insurance can cover attorney fees, judgments, settlements and other legal costs if you are sued for negligence, misrepresentation or some other mistake in the performance of your professional duties. For example, if a technology manufacturer hires you to do electrical work on a new line of consumer electronics, your professional liability insurance could protect you from a lawsuit if you make an error in the installation of the electrical wires that causes several of the newly produced devices to experience an internal breakdown.

Workers’ Compensation

If one of your employees falls ill, gets injured or dies on the job, workers’ compensation insurance can cover their lost wages, medical treatments, rehabilitation expenses, disability payouts and death benefits, as needed. An employee can generally file a workers’ compensation claim regardless of whether your business is at fault for their injury.^[4]

For example, workers’ compensation benefits may be available to an employee who breaks their own thumb while trying to hammer a nail.

Commercial Auto

You must carry commercial auto liability insurance that can cover someone else’s medical bills or car repairs if you or your employee is responsible for a commercial vehicle accident. Depending on where you operate, you could also be required to carry additional commercial auto coverages, such as uninsured and underinsured motorist coverage.^[2] For more thorough protection, consider investing in physical damage coverage, which can pay to repair or replace your commercial vehicle after a sudden peril or collision, even if your business is at fault.

Commercial Umbrella

In the event that a costly lawsuit forces you to exhaust the coverage limits on your general, professional, auto or other liability insurance policy, you can turn to commercial umbrella insurance to cover the rest of the claim. For example, if you have $1 million worth of professional liability insurance but your negligence leads to $1.5 million worth of losses for the business you are subcontracting for, your commercial umbrella coverage could pay out $500,000 to make up the difference.

Additional Policies To Consider

Some other business insurance policies and similar products that subcontractors should consider include the following:

• Inland marine insurance: Although commercial property insurance covers business-owned items while they are in your commercial building, you will need inland marine insurance to cover items in transit, like when you’re driving to a jobsite.
• Tools and equipment insurance: Tools and equipment coverage is a type of specialized inland marine insurance that extends coverage to your employees’ personal tools and even their clothing, along with equipment your business borrows.^[5]
• Equipment breakdown insurance: Equipment breakdown coverage is necessary to insure your equipment against certain perils that aren’t covered by commercial property insurance, such as short circuits and mechanical breakdowns.
• Environmental insurance: Also known as pollution liability coverage, environmental insurance can cover legal fees and cleanup costs if your business is held liable for creating an environmental hazard, such as allowing harmful substances to seep into a water supply or failing to properly dispose of hazardous waste.
• Builders risk insurance: Construction subcontractors may need to buy builders risk insurance to cover damage to a property while it is still under construction.
• Surety bond: Your lead contractor may require you to purchase a surety bond, which ensures that the surety company will pay the contractor or the entity that hired them if you fail to fulfill your contractual obligations.

Keep in mind that, unlike an insurance company, a surety company will require you to pay it back if a claim is filed on your surety bond.

Does Contractor Insurance Cover Subcontractors?

Since subcontractors are typically considered to be self-employed, a primary contractor’s insurance policies may not extend coverage to their subcontractors, which is why subcontractors usually need to purchase their own insurance coverage. That said, there may be some exceptions in specific circumstances, depending on your state’s laws.

For example, general contractors in North Carolina have a legal obligation to make sure their subcontractors’ employees are covered by workers’ compensation insurance. If the subcontractor cannot produce a certificate of insurance, then the general contractor must obtain workers’ compensation coverage for the subcontractors’ employees.^[6]

A contractor may also have the option to buy subcontractor default insurance to cover their losses after a subcontractor fails to adequately carry out the tasks they were contracted to do.^[7] This coverage type may be beneficial for contractors whose subcontractors are not covered by their own professional liability insurance or surety bonds.

How To Get Subcontractor Insurance

To find the best commercial insurance policy for your subcontracting business, you should compare quotes from about three to five different insurance companies. You can get a quote by giving an insurer relevant information about your business, such as your location, industry, annual revenue and more. However, it can take a long time to individually contact several insurance carriers and go through their respective quote-requesting processes.

That’s why you should let SmartFinancial comparison shop for you. When you fill out our online questionnaire to let us know what kind of insurance you need, we’ll connect you with an insurance agent who can help you figure out which insurance policy makes the most sense given your budget and coverage needs. Get started on receiving your free commercial insurance quote today!