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Should Your Agency Require Subcontractor Insurance?

Your independent insurance agents and other 1099 contractors will likely hire subcontractors. Many of these people and small businesses offer specialized services, including IT, office remodeling, or temporary clerical assistance.

While no one anticipates legal issues in these relationships, it remains possible. Your best course of action is to ensure everyone has their own insurance policies–or takes steps to provide coverage when liability arises.

(Note: This article simplifies a complex legal issue to overview how subcontractor insurance helps your agency avoid legal ordeals. It should not be considered complete legal advice.)


The Subcontractor Debacle

In the client-contractor-subcontractor relationship, everyone should have their own general liability and E&O insurance. A debacle arises when the subcontractor makes an error but doesn’t carry insurance.


What is a Subcontractor?

You likely hire many contractors, including independent insurance agents, IT consultants, and cleaning staff. These individuals work freelance or on particular projects and do not have employee status. A contractor works directly with you, the client.

Subcontractors work for contractors. For example, your independent insurance agent may hire someone to remodel their home office or handle their IT needs. Also, you may hire an IT contractor to install your new in-office high-speed network, but that contractor may hire a subcontractor whose expertise is Internet security.


Potential Problems with Subcontractors

The two most common legal issues with subcontractors include errors and omissions and premises liability.


Errors & Omissions

Most contractor-subcontractor relationships are invisible to clients. You will likely never meet subcontractors.

But their mistakes can affect you and your relationship with the contractor. For example, you hire an independent IT specialist to upgrade computers and mobile devices. The specialist subcontracts with network security professionals to fix your online security gaps during the upgrade.

While doing the upgrade, the subcontractor works carelessly and releases the personal information of your insurance customers to the Internet. Suddenly, their names, addresses, birthdates, and other legally protected information are exposed for public consumption!

Liability may manifest in the following ways:

  • You pursue the contractor for negligent hiring damages;
  • The contractor pays your damages and then pursues their subcontractor in a subrogation claim;
  • Customers damaged by the information breach may pursue you, the contractor, and the subcontractor for damages; and
  • As a result of the resultant liability, you and the contractor may pursue subrogation against the subcontractor to cover damages and expenses arising out of the security breach.

If everyone carries general liability, E&O, and cyber liability coverage, this scenario is stressful and painful but covered. Everyone gets through the ordeal, and while they may face higher insurance premiums, it is handled.

But complications arise if the subcontractor does not carry insurance. You and your independent agent may cover customers’ damages out-of-pocket or use your own insurance to help them. Then recouping those damages depends on a lawsuit against the subcontractor and their available assets to pay a judgment. That payment is not guaranteed, and you may lose insurance coverage or face a financial black hole.


Premises Liability

Premises liability refers to damages arising out of hazardous conditions on your property. It is one area where there is no get-out-of-liability card: As a property manager or owner, you must keep your premises in a safe condition for anyone invited–including customers, contractors, their subcontractors, and your employees.

Taking the example above, your IT contractor visits your office to upgrade network cabling. Their network security contractor joins them to enhance your online safety. While they climb the stairs to your office, one of the stairs breaks, and the subcontractor falls and injures themselves.

In this case, the IT contractor had no duty to maintain your office premises and has no liability to their subcontractor. On the other hand, you have that duty to anyone visiting your office. So, your general liability insurance must cover the subcontractor’s injuries in this case. You cannot just hope their insurance or your contractor’s insurance will cover the accident.


Subcontractor Insurance & How It Helps

Generally, all subcontractors should carry:

  • General liability
  • Errors and omissions/Professional liability
  • Commercial auto insurance (if driving is a part of their services)
  • Workers’ compensation

Many subcontractors fail to purchase insurance because they believe their contractor’s insurance covers them. In most cases, this is never true. Most policies do not cover subcontractors unless the policyholder adds them as an additional insured.

The security breach in the example above falls under the subcontractor’s insurance. Your IT specialist and agency can file damage claims against it. You receive compensation for expenses and damages. The insurance also helps customers affected by the breach.

But if the subcontractor doesn’t have insurance, it becomes dicey quickly. Your IT specialist will scramble to seek damages from their own insurance or pursue the subcontractor directly with a lawsuit. You consult with an attorney and may decide to pursue the IT specialist’s insurance policies and the subcontractor directly.

Meanwhile, you have customers who will likely pursue everyone to collect their damages. Your insurance company may settle with them or deny the claim, meaning your agency is responsible for paying out-of-pocket damages.


How to Protect Your Agency

As you likely see, uninsured subcontractors can cost your agency. While you will probably not face liability against the subcontractor or contractor, any customer claims can affect your bottom line and reputation.

You can protect your agency by:

  • Requiring subcontractor insurance: The best way to do this is to make it a provision in your contracts. You do not need to request proof, as that may be too overbearing in an independent contractor arrangement. But if it is a contractual requirement, you have a remedy.


  • Requiring additional insureds: You may also require additional insureds in a contractor’s policy as an alternative to requiring subcontractor insurance. Many professionals deal with the same subcontractors, so additional insured is a reasonable precaution.


  • Review your liability policies: Check the limits on your general liability, E&O, and cyber liability policies every year. Make sure they reflect your current customer load and possible damages. For example, if you start storing more documents online, you need better network security and a cyber liability policy to support it.


  • Maintain premises safety: As mentioned above, you are always on the hook if someone injures themselves on your business property. Fortunately, most of these accidents are preventable. Do not put off repairs and throw away any unstable furniture that could fall and hurt someone. If you rent an office and find an unsafe condition, report it to the property owner immediately and document it. That step removes any liability from you if they do not repair the hazard.


American Agents Alliance can help your agency avoid liability by providing these membership benefits:

Become a member today, learn how to avoid preventable legal issues best, and focus on giving your customers the best experience possible.

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