Tag: W2

Let’s just Sub that out……

Risk mitigation standards to keep in mind when using Subcontractors:

The topic of subcontracting comes up in several scenarios when it comes to small businesses, especially contracting and construction. This topic can bring up many questions from a legal, tax, and insurance standpoint. I’ll leave the legal and tax part to your Attorney and CPA. Here we will discuss, from an insurance standpoint, how to protect yourself and your business.

Get info about CPA and Accountants Liability Insurance at www.myinsurancequestion.com

Subcontracting in the perspective of 1099’s vs W-2 employees is generally  a very grey area with most contractors. It does not have to be. Here is why. Working with your independent insurance agent should allow you to determine if your employees truly are 1099 or traditional W2 employees. Many business owners think they have contractors, but to the letter of the law the workers are employees and require your business to cover them under a workers’ compensation policy. When it comes to General Contractors and those who have true subcontractors working for them, you still need to make sure you are protecting yourself.

Most business owners have chosen to utilize subcontractors for a combination of the following reasons: a specialized trade your business does not primarily do, the contractor is brought in for a specific job for a specific purpose, & this person or company you have “hired” is not an employee so you are not providing any typical employer benefits and it is your intent for them to cover their own business liabilities on their own in hopes of taking this off of your company. At least partially take this risk off of your company. When it comes to managing your risk, many business owners wonder, am I doing everything I can to mitigate these risks? There are many benefits of subcontracting work out, but if not done properly you are opening yourself and your business to a significant amount of liability. This liability could be costly, even detrimental to your business.

If you hire subcontractors, find out if you need separate insurance policies at My Insurance Question.com

Here are a few basics requirements that you will want to make sure you verify with all of your subcontractors before they step onto your jobsite:

Confirm proof of Basic Insurance Coverages:

                General Liability: (Common Limit Amount $1Million Per Occurrence/$2Million General Aggregate) This coverage varies from company to company, but the basic coverage is intended to protect from damages to 3rd parties as a result of the business operations for the company being insured. So if your subcontractors work operations cause physical damage or bodily injury to someone (excluding employees). This policy is a basic protection to cover those types of damages. For most artisan subcontractors we typically recommend a minimum limit of $1 Million per occurrence with a $2 Million General Aggregate limit.
                 

                 Workers Compensation: This coverage is intended to cover medical expenses and a portion of lost wages for injuries incurred on the job for employees working for the business. This in particular is commonly overlooked since many subs are owner only companies, however if that owner only company despite not being required by law to carry workers comp gets injured on your jobsite you could see some liability for that. Making sure they provide a certificate of insurance to protect yourself. (Please note: current insurance certificates also point out if any officer the company are excluded from coverage; if you have a sub that does not have employees and they are excluding themselves then their coverage might not be sufficient to protect you)

                Commercial Auto: (Common Limit amount ($1 Million) With some projects there are many vehicles used in the course of the operation. Whether going from one jobsite to another but also going to pick up supplies. Making sure your subs have Commercial auto liability coverage. At least making sure Hired/Non-Owned Auto endorsements are added to their General liability/BOP policy can be a minimum coverage to consider if they truly don’t have any vehicles.

                Umbrella/Excess Liability Policy (amount needed will vary): Umbrella limits to increase the liability limits can be important especially depending on the size of the project and how many contractors your sub works for, a standard $1M/$2M General Liability Limit might not be sufficient. The reason for this is a $1 Million Occurrence limit on General Liability means the most one claim would pay is $1 million. If a sub has 2 claims of that amount, then they do not have any more coverage as their limits have all been used up on a $2 million General aggregate limit. For a small contractor having a $1 Million-$2 Million excess liability limit can be a good buffer to extend that, however for larger contractors this can easily go up to $5 Million or $10 Million and sometimes even higher.

If a subcontractor is doing major projects for you and several other general contractors but doesn’t have higher limits, one or two major claims could potentially wipe out their insurance limits leaving no coverage for the remainder of a policy period. If you have several projects that are total over the subs limits or if you have a multi-million-dollar project, the liability limit of some subs might not be to the level they should be at in the event of a catastrophic claim especially.

                Waiver of Subrogation & Additional Insured: Additional Insured wording for the General liability and Commercial auto coverage and Waiver of subrogation on all three lines of insurance are two good ways to keep your company further protected as the General Contractor. An additional insured endorsement adds certain protections to the Additional insured for jobs the sub works on for you and the waiver of subrogation protects you from the subs insurance company from going after your company for damages. Keep in mind, these are sometimes put on a blanket or individual basis. The blankets in particular typically require a Written Contract between you and the subcontractor. Which leads me to….

                Have a Written Contract: This day in age there is no good reason not to have a written contract of some sort for business conducted, especially in the construction field. Too many things can go wrong so it’s best to have a written contract. Especially on that has a Hold Harmless Agreement, insurance requirements with the above minimums and including the Waiver of Subrogation & Additional Insured requirements for applicable policies. There are many samples of contracts you can find online, as always, check with your attorney to make sure it has everything you need as well.

                Screen Certificates of Insurance: In a time where insurance policies can be very costly, some sub-contractors do try to skirt the system. Fraudulent certificates of insurance whether they are for policies that never existed or for policies that have expired and the sub altered the dates these do unfortunately happen. The best way to keep from becoming a victim of this is to have certificates of insurance sent from the subcontractors Insurance Agent and make sure you are listed as a Certificate Holder. This way their agent will be able to let you know if a policy is cancelled before the expiration date.

These are just a few basics policies you will want to make sure you require from your subcontractors. Consulting with your Insurance Agent and your attorney can be best practices to make sure you doing everything you can to protect yourself. and your business.

 

Underwriting and What It Means to You

I have taken many calls from business owners in search of Work Comp. I would like to say that I have always been able to help. One common exception is when a business can only purchase coverage through the assigned risk pool and the truth is there are many businesses who have no other option.  Assigned risk is outside the volunteer insurance market.  Underwriting these industries is risky for the carrier and that makes it extremely difficult for an agent to find a carrier willing to quote the business.

Insurance agents typically interact with a minimum of 20 workers comp clients per day.

What ultimately puts a business into the assigned risk pool is what is called, underwriting guidelines. What can sometimes be a hurdle is explaining to potential clients that I am not the underwriter. I ultimately do not have the say on if a carrier will take on a particular business (risk).  What makes a business a “risk”, whether it be a high risk or a low risk, is determined by the underwriter with the insurance carrier. There are many factors that determine if an insurance carrier will take on the risk of you and your business.

Insurance Underwriters research and assess the risk each prospect presents. Get all of your questions about underwriting answered at myinsurancequestion.com

Underwriters also research and assess the risk each prospect presents.  This helps to create the market for securities by accurately pricing risk and setting fair premium rates that adequately cover the true cost of insuring policyholders. If a specific applicant’s risk is deemed to be too high, underwriters frequently refuse to cover it.

The most common reason a business is declined coverage on the open market is due to the business not having enough payroll for the exposure. Most construction businesses are going to need between $20 and $30k in payroll to be offered coverage by a carrier on the open market.  Many of my potential clients ask me to just quote with $25k in payroll so they can get the policy they need.  However, the policy will most likely be cancelled in a year due to not enough payroll or premium too small for risk.

The next reason for a business to be declined is because of 1099 or sub exposure. I should say that the amount of sub exposure to w2 employees makes a difference.  Most carriers want no more than 20% of sub or 1099 employees.   Just because a business has chosen to issue 1099 rather than W2’s does not automatically mean the employee is an independent contractor and should not have rights to work comp coverage. Many business owners assume that they do not have to provide coverage for the subs however if the sub or 1099 is not providing a Certificate of Insurance to the contractor or business owner, than the payroll will be picked up at audit. because of this the policy owner will owe in to the carrier for that employee.  Ultimately what carriers worry about most with the subs is if there was a lapse of coverage the contractor would be on the hook for any claims that were to happen.

If I had to pick one other reason for a business to be declined coverage it is because of travel exposure.  By travel exposure I mean using a vehicle to do work related to the business. Carriers deem this a larger risk because when the employees are driving there is a higher rate of claims and the claims tend to be more severe.  It seems these days’ contractors need to go where the work is.  If there is multi-state exposure where employees are traveling out of state or live near the border of two states, that is something that many carriers are not interested in writing.  For instance, if a contractor sends 5 or 6 employees more than 50 miles away to do a job and they all ride together that is 5 or 6 claims that would have to be paid if they were all riding together and were injured in a car accident.  Many employers think that while their employees are driving to work they are not covered under an employer’s work comp policy.  That is accurate if you drive the same route to work every day and generally go to the same place every day.  However, if you as a business owner send your employees on jobs that in tails driving exposure. The driving exposure is anything that would not normally be a part of everyday work. If the employee is solely driving for the reason of doing a job then the insurance carrier would indeed need to pay for the claims that arise out of a car accident.

Insurance is the most common example of underwriting that most people encounter. In order for insurance to work well, risk has to be spread out among as many people as possible. Underwriting helps insurance companies manage the risk that too many policyholders will file claims at once by spreading out the risk among outside investors. Once an underwriter has been found for a given policy, the capital the underwriter puts up at the time of investment acts as a guarantee that the claim can be paid.  This allows the company to issue more insurance to other customers.  In exchange for taking on this risk, the underwriter is entitled to payments drawn from the policyholder’s premiums.

Long story short the 3 reasons for businesses being declined by an underwriter are not enough payroll, too much 1099 or sub exposure and too much travel exposure. These risks are just a few that could result in your business being placed in the Assigned Risk Pool.