Contractors and subcontractors are a key part of many projects, from design and building to repairs, renovations, and landscaping. When you work as a contractor or subcontractor, it’s important to understand how your status affects situations where you could be held liable and take steps to ensure that you have the right insurance coverage to protect your company. 

What is the difference between a contractor and a subcontractor?

A contractor is a person or entity hired to perform work or services as specified under the terms of a contract. These workers are generally hired to work on a specific project or for a specific time period. A subcontractor is hired to perform work as part of an existing contract and is generally hired by and reports to a contractor. 

The contractor-subcontractor relationship is most often seen in the construction industry. Contractors are often responsible for large projects with many parts and may hire subcontractors to perform more specific, specialized portions of the project—for example, a construction company building a new bathroom for a client might hire a plumber to install plumbing. 

It’s possible for the same company to function as a subcontractor on one project and a contractor on another, depending on who hired the company. It’s also possible for subcontractors to hire their own subcontractors. 

General Contractors

When completing larger construction projects, a client may hire a general contractor to oversee the entire project. This type of contractor would be responsible for hiring and managing subcontractors as necessary to complete the project, and all subcontractors would work for the general contractor. 

Independent Contractors

An independent contractor is a person, business, or corporation that is contracted to provide work or services as a nonemployee. This means that the entity that is paying for services has the right to control or direct the result of the work but not how or what will be done. Every independent contractor is a contractor, but not every contractor is an independent contractor. 

In the construction industry, some property owners may choose to manage all aspects of a project themselves, rather than delegating a general contractor to manage it. When multiple contractors are hired directly by the client and work alongside each other, they are known as independent contractors because they all report to the client and do not manage each other.

When can you be held liable as a contractor or subcontractor? 

When you hire a contractor or a subcontractor, there is a risk that those you hire will cause bodily injury, property damage, or other harm in the course of their work. If this happens, you could be held liable for the actions of the contractors or subcontractors you’ve hired. If an accident occurs, it’s common for all parties involved to be sued. Dealing with lawsuits can be expensive and time-consuming, so it’s crucial that you ensure that any contractors you hire—and subcontractors they hire—have sufficient insurance coverage. 

It’s important to be aware that your own liability insurance policies may specifically exclude coverage for losses or damage caused by subcontractors. To protect themselves, contractors typically require subcontractors to have appropriate insurance policies, and they often require that subcontractors add them as additional insureds as well. 

What is an additional insured?

An additional insured is a company or person that is able to file insurance claims under another company’s business insurance policy. When you work as a contractor or subcontractor, this is a common requirement, as one company’s activities may increase risk for the company they are working with. Having additional insured status can help companies avoid filing a claim with their own insurance policy, meaning they will have fewer claims on their record. 

Commonly, contractors will request to be added as an additional insured under subcontractors’ insurance policies, and clients will ask to be added as an additional insured on contractors’ policies. This means that if a subcontractor causes damage and you, the contractor, are named in the lawsuit, you can have the claim covered under the subcontractor’s policy rather than your own if you are listed as an additional insured. 

Additional insured status can be added by endorsement to many types of insurance policies, such as general liability, commercial property, and commercial auto insurance. Coverage can be added for a particular period of time, for the length of a particular project, or for the length of the policy. Since contractors and subcontractors often work with others, they may have a blanket additional insured endorsement that extends coverage to everyone that fits within a specifically defined group.

Example:

• You are an electrician. A general contractor hires you to install wiring in a building extension. The general contractor requires you to add them as an additional insured on your general liability policy for this project. If your electrical work causes harm and both you and the general contractor are sued, the general contractor’s legal expenses would be covered by your insurance policy because you have listed the general contractor as an additional insured. 

How can you verify a contractor or subcontractor’s insurance? What is a certificate of insurance?

A certificate of insurance (COI) is a short document that summarizes what insurance policies you have active and serves as proof of insurance. The certificate of insurance will include information on the type of insurance coverage you have in effect, the limits of your policy, the dates of coverage, and other relevant facts. If you need to provide a COI, you can request this document from your insurer or insurance broker or agent. 

Whether you are being hired directly as a contractor or working as a subcontractor, it’s likely that the companies you work with will request a COI to verify that you have appropriate insurance coverage. Similarly, if you are hiring subcontractors, it’s a good idea to ask for a COI and call the insurance agent or broker to verify the COI. Make sure that the insurance policies will be active during the time you expect to work together and provide suitable coverage.

Example:

• A contractor hires your flooring company to install new hardwood floors as part of an office building renovation. The contractor wants to see your COI to ensure that you have general liability insurance, which would provide coverage if you damage valuable property or cause someone to be injured during the project.

Typically, anyone who receives a COI becomes a certificate holder. As a courtesy, many insurers will notify certificate holders if insurance policies are canceled, although this is not required.

What is a surety bond?

A surety bond is a legal agreement between three parties that financially guarantees the completion of agreed-upon work. In purchasing a surety bond, your company makes a payment to the insurance company and in return for this payment, the insurance company guarantees to the client that the work will be performed according to the contract.

Surety bonds are common in a variety of industries, including the construction industry. If you win a bid for a project but have to back out and can’t complete it, the surety bond company will pay for the cost of the client hiring another contractor. In some situations, such as government projects, you may be required to buy a surety bond in order to bid on a project, and having one can make your company more attractive to clients, as it guarantees your work. Subcontractors do not usually need surety bonds. 

Example:

• Your construction firm is bidding on a project to build a new condominium building. You purchase a surety bond to guarantee that you will complete the project if you win the bid. 

What is a hold harmless agreement? 

Hold harmless or indemnification agreements are a common part of many contracts between contractors and subcontractors. They are intended to reduce liabilities for the party being held harmless. When you sign a contract with a hold harmless agreement, you agree not to hold the other party liable for any incidents of injury or damage. It’s common for contractors to use a hold harmless agreement to require subcontractors to take full responsibility for any problems that occur as a result of their work. This makes it clear who will need to take on financial responsibility in the event of a lawsuit. 

For subcontractors, signing a hold harmless agreement can help you acquire more business—contractors will feel more comfortable entering into contracts knowing that the subcontractor has taken on more of the risk. However, hold harmless agreements are far from airtight. If a subcontractor is unable to pay damages due to lack of funds, the contractor may be held liable, even if they are protected by a hold harmless agreement.

Example:

• A contractor hires a roofing company as a subcontractor, and they sign a hold harmless agreement with the subcontractor holding the contractor harmless. One of the subcontractor’s employees accidentally injures a pedestrian walking by the job site. The pedestrian sues both the contractor and the subcontractor. Because of the hold harmless agreement, the subcontractor is financially responsible for damages.

What insurance policies are contractors and subcontractors likely to need?

Contractors and subcontractors generally need the same types of insurance. What specific insurance policies you will need depends on your individual business, but these are some common types of policies that are frequently relevant when you work as a contractor or subcontractor.

General Liability Insurance

General liability insurance is one of the most common, foundational types of insurance that all companies should have, including contractors and subcontractors. General liability insurance covers legal fees and damages from claims of third-party bodily injury, property damage, personal injury, or advertising injury. If you are a contractor, it’s important to make sure that any subcontractors you hire have this coverage because your own general liability insurance policy may exclude any claims arising from the activities of subcontractors. 

Workers’ Compensation Insurance

Both contractors and subcontractors that employ others will likely need workers’ compensation insurance. If employees are injured, fall ill, or die in the course of their work, this coverage will provide them or their survivors with financial benefits. Contractors should be aware that they could be held liable for the injuries of their subcontractors’ employees if the subcontractor does not have appropriate workers’ comp coverage. 

Umbrella Insurance

On larger projects, contractors frequently require subcontractors to have higher limits of insurance—commonly $5 million or more—which usually exceeds the limits of a general liability policy. Subcontractors will need to get umbrella or excess liability insurance in these cases.

Construction Wrap-up Insurance 

Construction wrap-up insurance may be necessary for very large construction projects that involve many contractors and subcontractors. Since contractors and subcontractors typically provide their own insurance policies, large projects can end up with a confusing number of insurance policies involved, which could lead to gaps in coverage going unnoticed. Commercial wrap-up insurance consolidates all parts of the project into one overall policy that covers everyone involved. This policy would cover any claims that arise. Commercial wrap-up insurance can include employer’s liability, general liability, workers’ compensation, and other types of coverage.

How do contractors and subcontractors handle completed operations liability?

Injury or property damage could be caused by work a significant amount of time after it has been completed. Since many projects involve several contractors and subcontractors, it’s important to understand who would be held liable for damage that occurs after a project is completed. Typically, if a subcontractor performs work for a contractor, it is considered part of the contractor’s work. This means that if a subcontractor installed a cabinet that wasn’t attached properly and fell, injuring someone, the contractor would be considered liable and the incident would be covered by the contractor’s general liability policy. 

However, claims filed under the contractor’s policy would cause their premium costs to rise. To avoid this, many contracts include requirements for subcontractors to provide insurance coverage for completed work claims for a certain period of time (often one to five years) and name the contractor as an additional insured. This means that in the event of a claim, the subcontractor’s insurance would provide coverage. 

Final Word

When you work with or hire contractors or subcontractors, it’s crucial to understand what these terms mean and how they affect your liability. Ensuring that you and anyone you work with have sufficient insurance coverage is a key part of doing business. There are many situations in which contractors could be held liable for mistakes made by subcontractors; making sure that the contractors you hire are correctly insured and list you as additional insured can protect you from considerable legal costs.