Ghost policies: what a general contractor should ask

What a ghost policy is

A ghost policy is a workers’ compensation policy sold to a business that tells the insurer it has no employees. With no payroll to rate, the insurer charges its minimum premium. The owner is not covered either: in the trade’s description of a ghost policy the owners are excluded from it. So on the day it is sold it covers nobody.

Ghost policy is the trade’s word for it. State agencies use other names. Oregon’s workers’ compensation ombudsman calls it an “if any” policy: the buyer does not expect to hire anyone during the policy year. A 2007 joint bulletin from three Arkansas agencies calls it a minimum premium policy, issued with little or no payroll on it. The certificate form has no box for any of these names.

The trade press describes the usual buyer as a business with no employees whose customer wants a workers’ compensation certificate before work starts. Oregon’s ombudsman puts the same reason first on its list: a contract with a business that requires a workers’ compensation policy. In that case the law does not require the owner to have one.

What it covers and what it leaves out

Why the certificate looks normal

On the ACORD 25 certificate form, the workers’ compensation row shows the insurer, the policy number and dates, a PER STATUTE box and three employers’ liability limits. It has no place for the payroll the policy was priced on, the premium, or the number of people covered. A ghost policy fills in every box a full policy does.

One box gives a hint. The row asks, yes or no, whether any proprietor, partner, executive officer or member is excluded. A yes tells you somebody in that group is left out of the policy. The form asks for a yes to be explained in the description of operations box, so read that box as well. A yes does not prove a ghost policy, because owners of firms with employees can be excluded too. The form marks the answer as mandatory in New Hampshire, so do not read a blank box as a no.

What can go wrong for the hiring contractor

A helper is hurt. Michigan’s workers’ compensation agency says a claim by the employee of an uninsured subcontractor may become the general contractor’s responsibility. The audit rule of the National Council on Compensation Insurance (NCCI) is written for the states whose law does the same. A subcontractor with a ghost policy is insured on paper. Whether its insurer accepts a claim from a helper it was never told about is a question for that insurer. Our guide to a subcontractor with no insurance explains what can fall on you if the coverage is not there.

The owner is hurt. An owner who is excluded from the business’s policy is not covered by it. Arkansas’s bulletin warns that a sole proprietor can become another party’s employee on a job where that party controls how the work is done. Michigan’s agency says a sole proprietor working as an independent contractor cannot draw benefits from the general contractor’s policy. Which of those describes your job is a question for a construction attorney in your state.

The audit. NCCI’s Rule 2-H applies in states whose law makes a contractor responsible for benefits to the employees of an uninsured subcontractor. It charges your policy for those employees unless you furnish satisfactory evidence that the subcontractor has workers’ compensation insurance in force. A certificate of insurance is the first document the rule lists, and a ghost policy’s certificate is one. NCCI marks exceptions and additional rules for some states, and two states publish guidance of their own that bears on a one-person subcontractor:

• Michigan’s agency says an auditor cannot charge premium on money paid to a sole proprietor with no employees. The contractor has to give its insurer reasonable proof of that. A 1989 Insurance Bureau bulletin printed in the same booklet puts the burden of proof on the contractor.
• Arkansas’s 2007 bulletin describes the test applied to payments made to an uninsured subcontractor. The auditor uses a formula to work out how much of each payment was labor. If that is too much for one person, premium is charged for the subcontractor’s employees.

Ask your insurer in writing, before the audit, whether it runs a test like that when the paper on file is a ghost policy certificate. How the premium audit charges for uninsured subcontractors has the rule and the arithmetic.

Questions to ask and what to get in writing

Ask before the subcontractor starts. Put the questions about the policy to the agent named in the PRODUCER box on the certificate as well as to the owner.

• Who will be on our site, by name, and who pays each of them?
• Is the owner covered by the policy or excluded from it?
• Was the policy written with no payroll? If so, has the insurer been told about anyone hired since?
• Do you use subcontractors or day labor of your own? How is each one covered?
• Do the policy dates cover the whole job?

Then get four things on paper:

• A signed statement that the business has no employees. Michigan’s agency lists a sworn statement of that kind among the proofs a contractor can give an auditor.
• A term in the subcontract, worded by your attorney, that nobody else comes on site until you have been told and have seen their coverage. Arkansas’s bulletin tells contractors to make clear to uninsured subcontractors that they may not bring anyone onto the job without letting the contractor know.
• Your own insurer’s answer on what it accepts at audit for an owner-only subcontractor.
• The certificate, and the state exemption document where there is one.

The subcontractor onboarding checklist has a line for the exemption check.

State exemption certificates and where to verify them

Some states give an owner a document to show in place of a policy. Rule 2-H lists a certificate of exemption as evidence beside a certificate of insurance. Each is issued under one state’s law, and these three can be looked up:

Look the document up yourself rather than relying on the copy you were handed. Check the name, the state and the dates. Arkansas’s bulletin says to confirm the dates cover the whole time the subcontractor works for you.

Not every state has one. In a 2022 Alaska appeal the insurer said Alaska has no procedure for a certificate of exemption, so a contractor there has to show insurance. Michigan has an exclusion form for some employers, but its agency returns the ones filed by sole proprietors with no employees. For a project outside the state that issued the document, ask your broker what it is worth there.

When to require a full policy

A full policy here means one the insurer has priced for the people who will do the work. These are the cases for requiring one:

• anyone other than the owner will work on your job: an employee, a helper, or the subcontractor’s own subcontractor
• the job is more than one person can do, or the payments are more than one person’s labor
• your own insurer tells you it will charge for an owner-only subcontractor
• the subcontractor cannot answer the questions above, or will not put the answers in writing

Covering the owner is a separate question, and not always possible. Montana offers self-elected coverage. Michigan’s agency says a sole proprietor cannot receive benefits under the proprietorship’s policy at all. The same agency says a contractor’s demand for a certificate from a sole proprietor with no employees is a contractual matter that it does not regulate. So the requirement is yours to write. Have your broker and a construction attorney settle the wording for the states you work in.

This page is general information about practice in the United States, not insurance or legal advice.