There’s a lot to know about how to deduct or withhold from uninsured subs. Its critical that you properly administer this important function because just one small mistake can be very costly. Furthermore, once you’ve made the mistake, you may not realize it until your audit and by that time it will probably be too late go back to the sub and ask for more money.
Of course, its our recommendation that you don’t use any uninsured subs because doing so places your own insurance loss record at risk which can result in future rate increases or non renewal by your carrier. It also results in administrative hassle and expense. The vast majority of subs used by our builders are insured. Most builders plan on using only insured subs; however, the reality is that most end up with at least several uninsured subs despite their best efforts.
The insurance carriers that write Work Comp and General Liability usually don’t have a problem when a builder uses an uninsured sub. However, there are some exceptions. Many carriers that write Work Comp for builders won’t insure a builder that intends on using an uninsured roofer sub due to the high risk nature of this type of work. Also, from a General Liability perspective, you’d never want to use an uninsured mechanical sub such as one that performs electrical, plumbing, or HVAC work as these areas are also considered to be high risk for occasional large losses.
An uninsured sub can be simply defined as one that can’t provide you with a valid certificate of insurance for either Workers’ Compensation, General Liability, or both for the time period that they perform work for you. We’ve produced an excellent video on how to properly collect certificates of insurance and I strongly recommend that you check it out because there’s a lot to know and a lot that can go wrong in this area.
At the end of your policy year for both Work Comp and General Liability, you’ll be audited and you must provide the auditor with a valid certificate of insurance for each sub that you use. If you do this, you won’t be charged extra for the use of uninsured subs. If you can’t provide a valid certificate of insurance, the auditor will make a charge as if the uninsured sub were your employee.
This extra insurance charge upon audit is a cost of doing business that should be accounted for. Its standard within the industry for builders to deduct or withhold from their payments to uninsured subs to offset this extra insurance charge.