3 reasons subcontractors need business insurance
In certain trades, insurance is required to obtain a license. Without coverage, you could face financial risks, legal issues and lost job opportunities.
1. Legal and licensing requirements
Some trades, such as plumbing, electrical work and HVAC contracting may require insurance to obtain a contracting license. Subcontractor insurance requirements vary by state and local regulations, but many licensing boards mandate general liability coverage and workers’ compensation.
2. Protection from financial risks
If a client claims your work caused property damage or financial loss, you could face a lawsuit that costs thousands in legal fees. (Not to mention any judgments if you are found at fault or settlements.)
Similarly, if you cause property damage or an employee or client gets injured, you may have to pay for repairs or medical expenses out of pocket.
3. To meet (or exceed) client and general contractor expectations
General contractors and clients often require proof of insurance coverage before hiring subcontractors, even if not legally required. Uninsured subcontractors may miss job opportunities, especially with larger firms or government contracts.
- Clients may require a certificate of insurance (COI) before allowing subcontractors on-site. Proper insurance and the ability to share COIs quickly helps prevent project delays and may help you get hired faster.
- General contractors may ask subs to add them as additional insureds or ask them for their COI status.
The 5 most essential types of subcontractor business insurance
Choosing the right insurance coverage is crucial for protecting your small business. Below are the key types of insurance subcontractors should consider.
1. Subcontractor liability insurance
General liability insurance, sometimes referred to as commercial general liability or public liability insurance for self-employed subcontractors, this policy is foundational coverage. A general liability policy can help cover accidental injuries or property damage caused while performing work.
For example, say you’re a subcontractor installing drywall and you accidentally damage a client’s electrical wiring. Liability insurance for subcontractors can help cover repair costs.**
Many general contractors require subcontractor liability insurance before signing a contract so they aren’t forced to cover claims with their own insurance.
Learn more about general liability coverage for contractors.
3. Workers’ Compensation insurance
Workers’ comp insurance helps protect against work-related injuries and illnesses, medical payments, lost wages and rehabilitation. For instance say your employee suffers severe burns from exposed wiring on a job site and needs to be treated in the ER.** Workers’ comp could help cover the medical treatment and recovery.
Most states require subcontractors to carry workers’ comp, especially in high-risk construction trades. Because of state requirements, general contractors may refuse to hire subcontractors without workers’ compensation coverage to avoid liability. General contractors aren’t required to cover subcontractors on their own policies as subs are often considered independent contractors.
Learn more about workers’ comp coverage for contractors.
2. Tool and Equipment insurance
Many subcontractors invest heavily in specialized tools, and losing them can cause project delays and financial hardship. Consider tools and equipment coverage if you’re a subcontractor who brings equipment to different locations to get a job done. It can help with the cost of replacing or repairing stolen, lost or damaged tools on a job site or in transit.
Say you’re a plumbing subcontractor and someone takes off with your tools while you’re eating lunch. Tools and equipment insurance can help cover the cost of replacing them (up to coverage limits) so you can continue working.
This coverage is sometimes known as inland marine insurance.
4. Errors and Omissions insurance (E&O)
Errors and omission coverage (E&O insurance) can sometimes be called professional liability insurance. This type of coverage can help protect against negligence claims and mistakes that lead to client financial losses due to your professional services.
For example, say you’re an HVAC subcontractor, and you install the wrong-sized heating unit, causing the client to incur additional costs to fix your mistake. E&O insurance may help cover some legal expenses and potential settlements.
5. Commercial Auto insurance
Commercial auto insurance can help protect against the costs of accidents, property damage and liability claims involving business-related vehicle use. If you use your personal vehicle for business purposes, a standard auto policy may not cover accidents — that’s where commercial auto comes in. It can help with unexpected expenses including rental vehicles, towing and underinsured motorists.
What happens if my subcontractor does not have insurance?
Hiring an uninsured subcontractor exposes both the subcontractor and the general contractor to financial risks. If a subcontractor causes property damage, a bodily injury or makes an error that leads to a lawsuit, someone has to pay. Without insurance, that cost could fall on the subcontractor or general contractor.
General contractors aren’t required to cover subs under their own insurance because subcontractors are typically self-employed and not employees. However, general contractors who hire uninsured subcontractors may be held liable for their claims, leading to increased legal costs, delays and potential fines.
Without insurance for subcontractors, a single accident or lawsuit could be financially devastating. Carrying the right coverage may help protect both parties and can ensure compliance with contractual and legal requirements.
