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Nine ways to avoid a premium audit surprise of uninsured contractors
As Certified WorkComp Advisors (CWCA), we have found that auditors are examining Certificates of Insurance (COI) for subcontractors far more aggressively today than they have been in the past. Most contractors know that subcontractors should carry workers’ compensation (and employers’ liability) and general liability insurance and provide COIs to prove it before beginning any work at the jobsite. But if you do not have airtight certificate management, subs can be picked up as uninsured during an audit, even if you have a certificate on file. The certificate may have expired, was filled out incorrectly, or moved from active to canceled for non-payment or other reasons.This means that what you have paid an uninsured subcontractor can be charged against you as payroll, which can significantly increase your premiums.
A certificate is a snapshot in time and only reflects the active coverage as of the date it was issued. It does not guarantee continued coverage. For this reason, simply relying on the COI to control your exposure is not sufficient. Here are nine things to do to avoid unexpected costs:
- Hire subs you trust. There’s no doubt that among the many challenges general contractors face, hiring good subcontractors is one of the most difficult. While it may be tempting to go with one that is readily available or has the lowest bid, we often hear stories about subs being “unreachable” when there are questions come audit time. They’ve left town, changed phone numbers, and so on. A robust subcontractor qualification program that identifies subcontractors with active, effective safety programs, strong safety records, financial stability, and good reputations can help establish ongoing trusted relationships.
- Get updated COIs on each new job. Keep your documentation current. Every time you hire the subcontractor get a new certificate. Don’t assume that the coverage has continued uninterrupted.
- Check and monitor expiration dates. The coverage effective and expiration dates on the certificate must span the entire length of time that the sub performed work. If the subcontractor’s policy expires before work is finished, you must collect another certificate proving that the subcontractor renewed his coverage. There should be a system in place to monitor expiration dates and require updated certificates of insurance before the policy lapses.
- Keep good records about what work they were hired to do and when they did it. Recently, we’ve seen auditors digging to determine if the policy was canceled mid-term and requiring the insured to break down when and how much the sub was paid during the policy period so they could add them as uninsured. Accurate records of the work they did and when they did it can limit exposure. It’s also a good idea to make sure your invoices spell out materials and labor costs so your company can exclude materials from additional charges. Documentation is key and will simplify the discussions with the auditor if there is an unexpected lapse in coverage after you get a certificate.
- Be sure to read the certificate. Don’t assume that receiving a certificate means the appropriate coverage is there. Be certain there are details about the workers’ compensation policy and not only general liability.
- Have proper risk transfer mechanisms in place. While having a COI is important, the insurance company may not be required to notify you if the policy is cancelled, so you need to protect yourself beyond the COI. You may be able to add provisions to your contracts to require you be notified of the insurance company’s intent to cancel a policy. For coverages other than workers’ compensation, it may be advisable to require your business be named as an additional insured. It’s best to consult your legal counsel to be sure you are protected.
- Know if there are exemptions to the subcontractor’s work comp coverage. Some states allow sole proprietors, members of limited liability companies (LLCs), and corporate officers who own a certain percentage of company stock to opt out of workers’ compensation coverage. Some carriers are picking up exempt officers on audits, particularly if they earn above a certain threshold. You’ll need to be able to prove they are providing coverage for their workers or verify that no additional workers were used. If the subcontractor is an independent contractor, it’s important to document that the subcontractor meets the statutory requirements for independent contractors in the state.
- Be diligent about state laws. State laws vary and out-of-state subcontractors may attempt to apply exemptions from one state to another or to claim that the other state’s coverage is sufficient. Don’t accept the subcontractor’s position as fact – be sure you understand the applicable laws.
- Pay attention to administrative details. Make sure that the subcontractor’s name that appears on the certificate is exactly the same name to whom you make out your check.
Contractor and subcontractor relationships are complicated insurance transactions. As CWCAs we are here to help. Click here to meet with a Duncan Financial Group personal advisor that’s right for you.