What happens if a subcontractor has no insurance

Three ways it reaches you

“No insurance” can mean no workers’ compensation, no general liability, or a policy that ended partway through the job. This guide covers the United States, where most of the rules are set state by state.

An injured worker can claim against you

Workers’ compensation provides medical and lost wage benefits to an employee hurt at work. Where a subcontractor has not bought it, the law in most states can move the liability up to the contractor that hired the subcontractor. This is often called the statutory employer rule.

A 2009 article in Insurance Journal counted 44 states and the District of Columbia with a statute on the point. We have not recounted it. The wording differs from state to state, and so does how far it reaches.

Where the law lets a subcontractor go without, as in Texas, your subcontract may be the only thing that requires workers’ compensation.

If your workers’ compensation insurer pays the worker, it is a claim on your policy. Experience rating by the National Council on Compensation Insurance (NCCI) compares an employer’s own payroll and loss records, usually the latest three years, with those of similar employers. The result can raise or lower the premium. Ask your broker whether a claim like this would count in yours.

Whether the rule applies to a given injury depends on the state and the facts. Take that question to your construction attorney.

Your own insurers can charge for them at audit

After a policy period ends, your insurer can audit your records to settle the final premium. Subcontractors you cannot show were insured can be part of that bill.

Workers’ compensation. NCCI’s Basic Manual has a rule on subcontractors (Rule 2-H). NCCI’s manual is not public, so what follows is the rule as a 2013 Tennessee order quotes it. A 2022 Alaska decision applied the same rule.

Under the rule, the contractor must furnish satisfactory evidence that the subcontractor had workers’ compensation in force for the work. Three documents may be used: a certificate of insurance for the subcontractor’s policy, a certificate of exemption, or a copy of the policy. Without that evidence, additional premium is charged for that subcontractor. If you supply the subcontractor’s complete payroll records, the insurer may use that payroll. With no records, it uses the full subcontract price. Ask your insurer for the wording that applies to your policy today.

General liability. The general liability pricing rules, as IA Magazine quotes them, have a classification for subcontracted work. It applies only to work done by adequately insured subcontractors. Work by a subcontractor without adequate insurance is classified and rated under the classification for that operation. Each insurer sets its own test of “adequate” before the policy starts. Ask your broker what your insurer’s test is, and whether your own requirements meet it.

Some states have their own rating organization and their own rules, so ask your insurer which rule governs your policy. Our guide to workers’ comp audits and uninsured subcontractors goes through the paperwork, and the premium audit exposure calculator estimates the charge.

A liability claim can fall on your own policy

A subcontractor with no general liability policy has no insurer to take a claim. There is also no policy for you to be an additional insured on. An indemnity clause in your subcontract, as far as your state enforces it, is a promise from the subcontractor, worth what the subcontractor can pay.

So a claim that names you is handled by you and your own insurer. Whether you are liable for a subcontractor’s work is a question for your attorney.

Read your own policy with your broker before you count on it. Some contractors’ policies carry an endorsement, a page that changes the policy’s terms, with requirements for subcontractors, such as a written indemnity agreement in your favor. Insurance Journal lists four penalties these endorsements typically use when the requirements are not met:

• no coverage for a loss from that subcontractor’s work
• a higher deductible or retained limit
• a lower limit
• a higher rate on that subcontractor’s cost

A claim your insurer does pay goes into your claims history, not the subcontractor’s.

Sole proprietors and exemption certificates

A one-person subcontractor is the hard case, because the law may not require them to insure themselves. Minnesota’s labor department says its law does not require some independent contractors and business owners to cover themselves. Tennessee goes the other way for construction: everyone must be covered, owners included, unless an eligible owner has registered an exemption with the state.

Where a state issues one, an exemption certificate is its record that an owner has opted out, and NCCI’s rule lists one as evidence at audit. Not every state issues one. In the 2022 Alaska decision the insurer said that Alaska has no procedure for a certificate of exemption, so a contractor there has to show evidence of insurance. Before you rely on an exemption:

• Check it with the state. Tennessee publishes its exemption registry for anyone to search.
• It covers the owner only. Tennessee says exempt owners must still insure all of their employees, even if they have only one. If the owner shows up with a helper, the exemption says nothing about the helper.
• “They are all independent contractors” does not settle it. Minnesota warns that a subcontractor’s workers may still be treated as employees under workers’ compensation law.
• Ask your own insurer what it accepts. Virginia’s commission notes that a contractor can be charged extra premium where a subcontractor’s coverage is not present. That is why some contractors require coverage even from sole proprietors.

Some sole proprietors buy a workers’ compensation policy written on the basis that the business has no employees, so that they have a certificate to show. It is often called a ghost policy. The ACORD 25 is the standard certificate of liability insurance. Its workers’ compensation row has a Y/N box asking whether any proprietor, partner, executive officer or member is excluded. Our guide to ghost policies has what to ask next.

If one is on your site now: what to do this week

1. 01

   Pin down what is missing, and since when

   Find out which policy is missing: workers’ compensation, general liability, or both. Find out whether it was never bought, lapsed on a known date, or exists and was never sent to you. Ask the subcontractor’s agent as well as the subcontractor, and write the dates down. In the Tennessee case the charge covered the uninsured months only, so the dates are worth money.
2. 02

   Call your broker

   Ask whether your general liability policy has a condition about subcontractors’ insurance. Ask what your workers’ compensation insurer accepts as proof, and how this subcontractor will be treated at audit.
3. 03

   Decide whether the work goes on

   Until there is coverage, an injury on that crew could be yours to pay. Whether you can stop the work or hold a payment depends on your subcontract, and your state’s prompt payment law may limit holding a payment. Take this one to your attorney before you act.
4. 04

   Get coverage, or the right paper, in place

   Get a current certificate for each required policy, sent or confirmed by the agent. For a business with no employees, get the state’s exemption document where the state issues one, and check it with the state. Also get the owner’s written confirmation that nobody else will work on your site.
5. 05

   Collect what limits the audit charge

   Ask for the subcontractor’s payroll records for the uninsured period, and keep any job paperwork that shows how much of the price was labor. With payroll records the insurer may use the payroll and not the full subcontract price.
6. 06

   Check the rest of your list

   Look for anyone else who is expired or has nothing on file. If the list is a spreadsheet, the free spreadsheet check reads it against a standard set of requirements. It needs no account.

How to keep it from happening again

The first two lines are rules to put in writing, with no exceptions. The other four are the paperwork behind them.

• No certificate, no start. Nobody is scheduled until a certificate for each required policy is on file and has been checked against your requirements.
• Check before payment. Accounts payable looks at each subcontractor’s status before every payment run.
• Proof of workers' compensation from everyone: a certificate, or the state's exemption document for a business that truly has no employees.
• Every policy's end date recorded, and the renewal asked for about 30 days before it.
• Certificates kept for the whole period each subcontractor worked, ready for the audit.
• The requirements, and what happens when they are not met, written into the subcontract and read by your attorney.

The subcontractor onboarding checklist puts the first rule on one page. This guide is general information, not legal or insurance advice.