Most businesses have people that help move their enterprise forward. They’re called employees. Many businesses have a few other people that are kind of like employees, but aren’t. They’re called independent contractors or subcontractors.
Given that the cost of an employee is typically higher than that of an independent contractor, it makes sense that business owners would like as many of the people that participate in the business operations as possible to be independent contractors.
Instead what I want to talk about are the proper steps to take when you do have a legitimate independent contractor or subcontractor (I will henceforth refer to them as IC/Subs). Why follow proper steps? Because doing so will keep your insurance companies happy.
Why care about keeping insurance companies happy? Because if they are not happy, they will 1) charge you more premium and/or 2) cancel you. And once one insurance company is unhappy with you, they all tend to be unhappy with you. It’s like all the insurance companies go to the same parties and talk about you….
Let’s assume you’re a contractor that specializes in remodeling residential kitchens. You and your crew do most of the work, but you use subcontractors for all electrical work. Let’s also assume that it is clear that your electrician meets all the qualifications of a subcontractor as dictated by the state of California. All is good, right? Almost, but not quite.
You now need to follow three steps:
- Make sure your ICs/Subs have General Liability insurance of at least $1,000,000 per occurrence. If they have employees, make sure they have Workers Comp as well.
- Make sure your ICs/Subs list you as an Additional Insured on your General Liability policy. (They do not need to and cannot list you as an Additional Insured on their Workers Comp, so don’t worry about that).
- Get a Certificate of Insurance from your IC/Sub proving that above two items are true. The certificate of insurance should be on an Acord 25 form. If you want to know what one looks like – click here.
To go back to the example above, it is the electrician that needs to have $1,000,000 worth of insurance and list the kitchen remodeler as an additional insured on its General Liability policy.
Some of you might be thinking, “I see why this makes insurance companies happy – they’re selling more policies.”
I hear you, but that’s not why they do it. The reason is because when an IC/Sub has its own insurance, it removes all doubt as to whether your insurance company will have to pay a claim on the IC/Sub’s behalf. You see, you could go through all the steps to make sure an IC/Sub is really an IC/Sub and not an employee, but if an accident happens and the IC/Sub doesn’t have his own insurance, the injured party (which may be the IC/Sub’s own employee) will look for coverage somewhere, and lawyers are really good at creating ambiguity about whether the IC/Sub was really acting in the capacity of an IC/Sub or an employee in that particular situation when the loss occurred. This would cause your insurance company to pay a lot of money in defense costs just to prove that they are not supposed to pay the actual claim.
Because insurance companies expect that they will have to pay at least defense costs in these situations, in a final audit, they will charge you the premium as if the IC/Sub is your employee, and then they will likely set your policy up for non-renewal until you start sending copies of Certificates of Insurance as described above and/or verify that you will never use an uninsured IC/Sub ever again. It is so important for insurance companies, that they will often require that you promise to follow these steps before even offering a quote!
So for the sake of keeping your costs down, preventing your insurance from paying a claim when it should not, and preventing your policy from getting cancelled or non-renewed; don’t use uninsured IC/Subs and follow the steps above.