Using Subcontractors And Preparing For Audits
My equipment is damaged now. What are the hidden insurance costs?
April 7, 2025By Adam Puharic, Puharic and Associates, Inc.
Your contracting business is growing and you are now using subcontractors to perform smaller tasks outside of your expertise. You have both General Liability and Workers Compensation in place. Both policies go through an annual audit where you send in payroll records, profit and loss statements, and other sales register type documents. For years, the process was simple: You made X dollars per year, and the policy could be expected to increase or decrease in premium based on whether you made more or less money in a given year.
Now, it is different. The steps below will help you start NOW and the right way so that you can avoid a painful, expensive, and frustrating annual audit. The key is to start now, and to stick to these rules regardless of how much your business may grow.
First, you MUST only use subcontractors who carry their own insurance. Without this, you will be charged a premium at audit time to reflect the amount of work they perform for you. You are essentially purchasing their insurance for them. Suddenly, the subcontractor who was less expensive than others is no longer such a bargain. I reiterate that you MUST without exception only use insured subcontractors. They must carry both General Liability and Workers Compensation.
In some states, like New Jersey, a sole member LLC organization can opt out of carrying Workers Compensation insurance. There are two divergent rules at play here: One, a sole member LLC is not “mandated” to carry Workers Compensation. Two, the state of New Jersey requires ANYONE that works be covered by a Workers Compensation policy. The result of this conflict is that you, in hiring the uninsured sub, are required to pick up this exposure (therefore the additional premium) so that the state can enforce the ALL must be covered rule. Therefore, there is no savings in using an uninsured sub. You either pay them a higher rate when they are insured, or you pay your carrier at the end of the year during audit time.
Similarly for the General Liability, it is critical to regularly obtain a certificate of liability insurance proving coverage is in force at the time of the work performed. You can make it a requirement before issuing final payment. Make sure they carry the same limits or better than you currently do.
Next, your subcontractors should be naming you as Additional Insured with respect to General Liability, and evidence this on a valid certificate of liability insurance. Additional Insured status is critical because it clarifies the lines of responsibility in the event of a claim and prevents your carrier and theirs standing in opposition of one another due to the “other insurance clause” commonly found in your policies. In effect, the two carriers would point fingers at one another and try to force the other to pay first. As you can guess, in this situation, you are left effectively without coverage. Not desirable.
Finally, though not directly related to insurance, we strongly recommend a hold harmless agreement, written by a qualified attorney, to further clarify the responsibilities and duties of each party in the event of a loss or claim. Very generally speaking, a limited hold harmless will say something along the lines of “I am responsible for my sole negligence. You are responsible for your sole negligence, and you agree to pay for our shared negligence during the performance of our work together.” We are not attorneys, so please be sure to contact proper counsel for further assistance.
By using only insured subcontractors for both Workers Compensation and General Liability; by requesting a certificate of insurance and obtaining Additional Insured status on the General Liability policy; and by entering into a properly constructed hold harmless agreement, you can be prepared to maintain your commercial insurance at a pricing and protection level that is consistent with your actual exposure. You can avoid a large additional premium. You can avoid paying for your subcontractors to work with less burden than you have. You can also distribute the risk more fairly.
Puharic and Associates, Inc.is a professional risk management and insurance firm in Manasquan NJ. Puharic focuses on concierge-style risk management to provide 360-degree protection for business owners by combining all insurance coverages under one roof. By creating a 3-dimensional risk profile of the business owners’ risks, from cyber to employee benefits to personal risks, Puharic and Associates helps business owners grow by creating a step-by-step plan for their protection that evolves with them. For more information, please visit www.puharicassociates.com