The Role of the Sub-Contractor in Your Scottsdale, AZ Business
When we sit down with potential clients such as General Contractors, one of the first things we hear from them is “I sub everything out and, therefore, my insurance should be lower”, which many times it is, but where it gets interesting is when we go over exactly what constitutes a subcontractor and what the General Contractor needs to know and do.
One of the first things I hear from General Contractors is “I just 1099 them, so that makes them a subcontractor, right?” Nothing could be further from the truth. First of all, if you are going to utilize subcontractors, they must have current Scottsdale General Liability Insurance and also name your company as an additional insured on their policy. In addition, the subcontractor must have workers’ compensation insurance as well. The client should be aware that more and more General Liability insurance policies being issued these days have an exclusion for independent contractors, meaning if you hired an independent contractor with no General Liability Insurance, and if their work should cause a claim, there may be no coverage for this claim. In addition, your company could also be liable for a worker’s comp claim should this independent contractor get hurt on the job, which could end up costing your company thousands of dollars in medical bills.
A good example of what possibly could happen to your company by not following the proper procedures: the General Contractor hired a subcontractor to do a very specific job, and the work had to be done now and quickly. The GC just assumed that the subcontractor had insurance because the subcontractor came recommended, and he would simply get a certificate of insurance from the sub after the job was done, because he figured with such a small job, what could possibly happen? Needless to say, that was far from the case.
Unfortunately, accidents do happen and this was a very bad one. The damage done by this subcontractor will easily reach six figures. Afterwards, the GC asked to get the name of the sub’s insurance company, and to his complete surprise, not only did the sub not have insurance but also was not licensed or bonded. This General Contractor’s Insurance Policy is not covering any of the damages due to the very specific exclusion, and now the company is in danger of shutting down.
Two additional areas that we try to make very clear to our clients concerning the use of subcontractors by our General Contractors is that they should never hire a subcontractor with lower liability limits then their own limits, and also to make sure that the insurance the subcontractors have is the proper insurance for the job they were hired to do, and to make sure the sub’s insurance policy does not have any exclusions that could put our clients at risk. An example of this would be if one of the subs you hired to perform work on a new custom home or a new commercial building, and the subs insurance contained an exclusion for new construction, thus rendering his insurance null and void.
We highly recommend that clients sit down with a professional and experienced Arizona contractor insurance broker to review how they are using their subcontractors and to make sure they are covered. If you would like to sit down and discuss this in greater detail, we, at PJO Insurance Brokerage, would welcome the opportunity to talk with you.
PJO Insurance Brokerage
By Patrick O’ Neill
4103 E. Prickly Pear Trail
Phoenix, Arizona 85050