Subcontractor risk – four steps to ensure proper insurance is in place

This article was produced in partnership with Amwins Group, Inc.

Gia Snape, of Insurance Business, sat down with Yulanda Dudley, associate director of Amwins Program Underwriters’ Roofing Contractors insurance program (part of the Amwins Underwriting division), to discuss the challenges insureds may face if they fail to ask the right questions and obtain proof of insurance from subcontractors.

As demand for new homes and building projects picks up post-pandemic, the construction industry is seeing a resurgence. However, this increase in business opportunities for contractors also means the potential for more exposure.

A shortage of skilled labor, higher cost of materials, and inflation are also adding pressure to the industry. In the roofing segment, subcontractor risks are growing as general contractors take on more work.

According to Yulanda Dudley (pictured), associate director at Amwins Program Underwriters (APU), more insureds are taking on subcontractors to capitalize on the increase in projects. But underinsured or uninsured subcontractors pose an enormous risk and could lead to losses for insureds, Dudley warned.

“Subcontractors can bring expertise to a project, but it's important that contractors make sure that they are insured and have the correct limits to align with the project,” she said.

“Many times, contractors don’t ask the right questions when selecting subcontractors. They must ensure that any subcontractors hired for the job have the appropriate insurance.”

How has subcontractor risk grown in the roofing industry?

APU’s Roofing Contractors program, which has been in place since 2013, adopts careful controls to ensure contractors and subcontractors are adequately covered while on the jobsite.

“We see a lot of insureds that list subcontractors on their applications, and we must ask the question if they're insured and that [subcontractors] have certain limits,” Dudley told Insurance Business.

“Most roofing contractors are used to that question, and for the most part, they are doing the right things. But it's important that we make sure everybody understands the risks that they pose by having uninsured or underinsured subcontractors.”

Those risks include liability lawsuits or unwanted claims for insureds, Dudley added.

Roofing contractors may employ third-party professionals for certain aspects of a project, such as providing sheet metal or gutter services. However, it’s increasingly common for general contractors to have roofing accounts and bring in subcontractors to carry out the work.

“An insured may own a company but not necessarily have any employees. They may accept the general contract and contract the work out to others,” Dudley said.

“Another possibility is that the insured has several projects in the pipeline and his employees are already working on a project, so he may subcontract the next project so that his business can continue.”

What steps should contractors take to reduce subcontractor exposures?

Dudley said agents should ensure that their clients take the following steps to assess a subcontractor’s insurance coverage.

• Check for the appropriate limits – Dudley strongly advised that subcontractors should have at least $1M in limits, or limits that align with the roofing contractor’s insurance itself.

            “If the project is larger, they may need $2M in limits,” she said.

• Ensure that they have adequate coverage – The subcontractors’ insurance policy must carry workers’ compensation insurance and general liability.
• Look at the subcontractors’ experience – A more experienced roofing professional will be less prone to mistakes or accidents. It’s essential for contractors to investigate their subcontractors’ track record and experience, and whether they are following OSHA (Occupational Safety and Health Administration) guidelines.

            “Contractors can find that information on published websites for OSHA guidelines, as part of their background check on subcontractors,” said Dudley.

• Authenticate their proof of insurance – Contractors must ask for a valid certificate of insurance from their subcontractors and check the policy effective and expiration dates.

            “Subcontractors must have [written proof] on hand, and the contractor can’t take it based upon their word,” Dudley said. “The coverage must be in effect at the time the                    subcontractors are working for the insured.”

• Assess the subcontractor’s safety and risk management programs – Dudley also stressed the importance of subcontractors having a robust safety program and good record-keeping of any claims. There should also be a supervisor at the project site tasked with maintaining safety protocols among subcontractors.

           “Are they using safety harnesses? What types of safety gear are they wearing? How does the workplace look?” she asked. “Insureds can't just leave it to the                                      subcontractors, even if they trust the subcontractors; having someone supervise the work is very important.”

The biggest thing agents and their roofing clients must ensure is that subcontractors are insured and have written proof, said Dudley.

“It's always good to have the documentation, but ensuring oversight of every project to mitigate against any future losses is also important,” she added. “Of course, we can't prevent accidents from happening, but we want to make sure that all the controls have been put in place and the insured has the proper coverage in case something happens.”