Subcontractors: Employees Or Independent Contractors For Insurance?

Whether a subcontractor is considered an employee for insurance purposes depends on the situation. Subcontractors are typically not covered under their employer's business insurance and are usually expected to have their own small business insurance. However, in certain cases, subcontractors may be added to the hiring party's insurance policy as an additional insured. While subcontractors are not usually required by state laws to have their own business insurance, they may need it to comply with licensing requirements and qualify for contracts.

Subcontractor insurance requirements

While subcontractors are not usually required by state laws to have their own business insurance policies, they may be asked to get liability insurance and/or workers' compensation insurance to get hired by certain employers. This is because contractors and/or employers don't want to risk being held liable for a subcontractor's actions.

Subcontractors are also sometimes required to carry insurance to comply with state laws and licensing requirements. They may also need their own insurance to qualify for contracts and protect against financial losses. For example, any customer or contractor may require subcontractors to carry certain types of insurance, especially for federal government contracts.

Additionally, subcontractors are usually not covered under their employer's business insurance policies. Therefore, it is recommended that subcontractors get their own insurance coverage. This can include:

• General Liability Insurance
• Workers' Compensation Insurance (especially for construction projects)
• Professional Liability Insurance (also known as Errors and Omissions or E&O insurance, and very important for IT subcontractors)
• Commercial Auto Insurance
• Tools and Equipment Insurance
• Builders' Risk Insurance

Subcontractor insurance benefits

Subcontractors are not usually covered under their employer's insurance policies and are often expected to have their own insurance. Subcontractor insurance is a range of policies designed to protect subcontractors financially against claims of third-party injuries and property damage.

Protection from Financial Loss

If a contractor is found liable for an injury or mistake, the costs—including medical costs, legal fees, and damages—can be overwhelming. Liability insurance provides financial protection against these risks, while equipment insurance and property insurance cover repair or replacement costs if the business's physical assets are damaged, lost, or stolen.

Compliance with Laws and Contract Requirements

In many areas, certain types of insurance, such as workers' compensation and liability insurance, are legally required for businesses, including contractors. Contracts for certain projects, especially commercial and government projects, also often require proof of specific types of insurance and adequate coverage to protect against potential risks.

Professional Reputation

Carrying adequate insurance coverage can enhance a contractor's reputation. It shows potential clients that the contractor is professional, prepared for risks, and able to handle issues responsibly.

Compliance with Contractual Requirements

Although not legally required, most contractors impose general liability insurance and workers' compensation coverage as conditions before working with a subcontractor. This prevents them from taking on more risk than is necessary. Contractors will often require proof of these types of policies and sufficient coverage before signing a contract.

Subcontractor insurance types

Subcontractors are not typically required by state laws to have their own business insurance policies. However, they may be asked to get liability insurance and/or workers' compensation insurance to get hired by certain employers. Subcontractors can also be required to carry insurance to comply with state laws and licensing requirements.

• General Liability Insurance: This type of insurance is the most common out of all policies that you can get. It covers property damage, personal injury, medical payments, and advertising injury right up to the limit of your policy. While not mandatory for subcontractors to operate in the US, many contractors impose this type of policy as a requirement for doing business with you to protect their assets and investments.
• Professional Liability Insurance: Also called errors and omissions (E&O) or malpractice insurance, this policy is crucial for subcontractors. It protects you financially from claims resulting from service-related mistakes and oversights. It is required for government projects under the Federal Acquisition Regulation (FAR).
• Workers' Compensation Insurance: Unlike most businesses, subcontractors are not legally required to purchase workers' compensation insurance. However, contractors often make it a condition before doing business with you. This insurance covers the cost of medical care and a part of lost income if you become injured or sick while doing your job.
• Tools and Equipment Insurance: If your business depends heavily on your tools and equipment, then having the proper coverage for these items is important. This type of insurance covers the cost of replacing or repairing your tools and equipment if they are lost or damaged.
• Commercial Vehicle Insurance: If your business uses vehicles to transport staff or perform business-related duties, then you are required to have commercial vehicle insurance. It covers hospital and legal expenses associated with injuries or death if the driver is at fault, as well as property damage liability.
• Surety Bond: This type of policy is not insurance, but it is worth mentioning. A surety bond protects your client in case you are unable to finish a job. It covers the costs for the client to find a new contractor to complete the work.

Subcontractor insurance costs

Subcontractors are not usually considered employees and are often responsible for providing their own insurance. However, they can be added to a contractor's existing insurance policy, although this is uncommon.

The cost of subcontractor insurance depends on the type of insurance, the level of coverage, and other factors such as the size of the business, the industry, and the number of employees. Here is a list of common types of insurance for subcontractors and their average costs:

• General liability insurance: This is the most common type of commercial insurance and costs on average $30 per month. It covers legal defence in the event of a lawsuit over bodily injury, property damage, or defamation.
• Workers' compensation insurance: This insurance covers medical costs and lost wages for employees who are injured or become ill due to work-related reasons. It costs on average $32 per month for independent contractors.
• Technology errors and omissions insurance: Tech subcontractors pay an average of $59 per month for this insurance, which covers costs when a client sues over the quality of work or blames the subcontractor for a data breach or cyberattack.
• Fidelity bonds: These cover employee theft and cost independent contractors an average of $88 per month.
• Commercial auto insurance: This insurance is required in most states for business-owned vehicles and costs on average $180 per month.
• Professional liability insurance: Also known as errors and omissions insurance, this covers legal fees related to accusations of negligence or substandard work. It costs construction businesses and contractors an average of $74 per month.
• Commercial umbrella insurance: This insurance boosts the limits of underlying policies such as general liability and costs on average $143 per month.
• Builder's risk insurance: This policy covers structures under construction and costs on average $134 per month.
• Surety bonds: These reimburse the client if the subcontractor is unable to fulfil the terms of a contract and cost on average $10 per month.
• Tools and equipment insurance: This covers the cost of repairing or replacing lost, stolen, or damaged tools and equipment and costs on average $14 per month.

Subcontractor insurance and employer liability

While subcontractors are not usually legally required to carry insurance, they may need it to comply with state laws and licensing requirements. They may also need their own insurance to qualify for contracts and protect against financial losses.

Subcontractors are not typically covered under their employer's business insurance. They usually have their own small business insurance, which includes general liability insurance, workers' compensation insurance, and professional liability insurance.

Before hiring a subcontractor, businesses should ask for proof of insurance from the subcontractor. If the subcontractor does not have insurance, the employer will be held liable in case something goes wrong, even if the mistake was made by the subcontractor. Therefore, it is important to ask for proof of insurance as a risk management step.

If a subcontractor doesn't have insurance, the business has two options:

• Choose not to hire them
• Get a tailored insurance policy to cover the subcontractor

• General Liability Insurance: This insurance policy can cover situations including property damage or injuries that can happen regardless of the specific job.
• Errors & Omissions/Professional Liability Insurance: This insurance covers the cost of hiring a lawyer to either defend or settle a lawsuit against you, as well as consequential damages or a settlement. It is important to note that this type of insurance usually does not relate to physical injury.
• Commercial Auto Insurance: If subcontractors use their personal vehicles to perform work for clients, they may need commercial auto insurance. If they get into an accident while performing work, the other driver could potentially sue both the subcontractor and the entity that hired them.
• Workers' Compensation Insurance: This is a common type of insurance that helps cover medical and disability costs if a work-related injury prevents someone from working. While most states require companies to have workers' compensation for full-time workers, a primary contractor's insurance may not extend to subcontractors. As a result, it is often up to subcontractors to have their own workers' compensation insurance.

In conclusion, while subcontractors are not considered employees for insurance purposes, they still need to have their own insurance coverage to protect themselves and their business.

Frequently asked questions