How to avoid paying an uninsured subcontractor

Check that each sub's insurance is current before every payment, not only when they start. Track every policy's expiration date and ask for renewals 30 days ahead. If coverage has lapsed, flag the sub where you approve invoices, so a payment doesn't go out by accident while you sort it out.

Why does it matter if you pay an uninsured sub?

Because the risk can come back to you. If an uninsured sub's worker is hurt or the sub damages property, the claim can land on you and your policy, and your insurance audit may charge you for the gap.

• Injured workers. In many states, a general contractor can be responsible for workers' compensation for a sub's employees when the sub has no coverage. Florida's statute, for example, makes the contractor responsible for the employees of subs who haven't secured coverage, and requires the contractor to ask each sub for proof of it (Florida Statutes, section 440.10).
• Property damage and injuries to others. If the sub has no liability coverage, the injured party or property owner may look to you.
• Your insurance audit. At the end of your policy period, your insurer may ask for certificates for every sub you paid. Under the standard NCCI subcontractor rule used in many states, if you can't show a certificate for a sub you paid, the auditor can count what you paid that sub as payroll for your own workers' comp premium. Rules vary by state and insurer.

When should you check a sub's coverage?

Check at three moments: before the sub starts, before each payment, and whenever one of their policies expires. Checking only at hiring is the most common gap, because policies renew on different dates during a job.

How do you check coverage before a payment?

Look at the sub's soonest expiration date and compare it with the payment date and the dates the work was done. If any required policy has expired, don't approve the payment until you have a decision on it.

1. Find the soonest expiration across general liability, auto, workers' comp and umbrella. That's the date that matters.
2. Compare it with the work dates and the payment date. A policy that expired halfway through the billing period is a gap, even if a renewal arrives later.
3. If a policy has expired, ask for the renewed certificate from the sub and copy their insurance agent. The agent usually sends it faster.
4. Check the new certificate the same way as the first one: right company, right dates, right limits, you listed correctly.
5. Write down the date you checked and what you saw.

Keep in mind that a certificate is a snapshot of coverage on the day it was issued. The ACORD 25 form says it's issued for information only and doesn't change the policy. It doesn't prove the policy is still in force on the day you pay.

What should you do if a sub's coverage has lapsed?

Pause, talk to the sub and their agent the same day, and decide what to do based on your subcontract. Whether you can hold payment, and how, depends on what your subcontract says and on your state's rules, so check both before you act.

• Talk to the sub and their agent. Many lapses are paperwork: the policy renewed but nobody sent you the new certificate.
• Read your subcontract. Many subcontracts require current insurance as a condition of payment or of working on site, and say what happens if it lapses. Your rights to hold payment generally come from the contract.
• Check your state's payment rules. Many states have prompt payment laws that set deadlines for paying subs and the reasons and notice required to withhold. On New Jersey state contracts, for example, a contractor that withholds payment from a sub must give the sub written notice (N.J.S.A. 52:32-41).
• Talk to your attorney before holding money. Holding payment without a contractual basis can create its own dispute.
• Decide about the work. Letting a sub keep working uninsured should be a decision you make, not something that happens by default.

How do you make sure nobody pays them by accident?

Put the flag where payments get approved, not only in your tracking list. The person who cuts checks needs to see “Hold” before a payment goes out.

• In your tracking spreadsheet, add a column that shows “Hold” when coverage has expired. Our free COI tracking spreadsheet does this automatically.
• In your accounting software, use a note or payment hold on the vendor record if it has one, and remove it when the renewal arrives.
• Make it a rule that pay applications and invoices aren't approved for a sub flagged “Hold” without your sign-off.

What records should you keep?

Keep every certificate, when it arrived, and the history of each lapse: when coverage ended, when you asked for the renewal, and when it arrived. At your insurance audit, that history shows which periods each sub was covered for.

• Every certificate for each sub, with the date you received it
• The dates you requested renewals, and who you asked
• When you found a lapse, what you decided, and when coverage was restored
• Any written notice you sent the sub about payment

For the full tracking routine, see how to track subcontractor certificates of insurance.

FAQ

This guide is general information, not legal or insurance advice. Talk to your insurance agent and attorney about what to require from your subs.