Audits for contractors can be challenging. One of the most common questions auditors hear is, “Why do I have to pay for my subcontractors if they carry their own insurance?”
When a contractor hires subcontractors, an additional exposure is created on the jobsite that can result in claims against the contractor. These may include subcontractor negligence or inadequate limits of insurance, which would leave the contractor liable.
There are also possible defense costs when the contractor is named along with the subcontractor in a lawsuit. The potential for liability exposure is also real, if the subcontractor lets his policy coverage lapse.
For general liability policies, the exposure basis for a subcontractor is “total cost.” By definition, total cost includes all labor, materials and equipment furnished, used or delivered for use in the execution of the work.
Total cost also includes all fees, bonuses or commissions made, paid or due.
Properly insured subcontractors are assigned to the corresponding subcontractor work class code based on the type of work performed. If uninsured subcontractors are used, they will be classified to the payroll-based classification that best describes the type of work completed, as if they were employees of the contractor.
A best practice if you’re a contractor would be to require certificates of insurance from your subcontractors prior to paying them for the services performed. This allows you to retain some leverage in obtaining the certificate of insurance from your subcontractor.
Please contact our agency if you have questions about your audit. Thank you for your business!
We recently asked our fans to tell us the most common questions about insurance that they have or that they hear from others. Here are some simple answers for those questions.
• Why did my premium go up when I haven’t had any claims?
Premiums may have gone up for all insureds in your class. Insurance involves a lot of people sharing the losses of a few people. When, overall, losses go up, your share (in the form of your insurance premium) goes up.
• Why did the amount of coverage on my house go up when the value has gone down?
That depends on how you define “value.” If you’re talking about market values which have declined in the current real estate market in the past couple of years, the resale value of your home may be depressed. However, insurance covers the cost to rebuild or replace your home or property. The real estate market has little to do with that. If construction costs rise, your policy limits should increase accordingly.
• Do I need to buy the coverage when I rent a car?
We suggest that you purchase the loss damage waiver in case the vehicle is damaged. While most auto insurance extends to rental cars, your policy probably has exclusions that aren’t in the loss damage waiver. Likewise, there are things the loss damage waiver doesn’t cover that your insurance does. Having both makes it less likely that you will have an uncovered loss.
• Why did my business liability insurance after 18 years and never had a claim go from $17,000 a year to almost $30,000 a year?
Premiums may have gone up for all insureds in your class. Insurance involves a lot of people sharing the losses of a few people. When, overall, losses go up, your share (in the form of your insurance premium) goes up. In addition, your premium may be based on payroll, sales, or some other factor that has increased substantially. If your business is growing rapidly, your exposure to loss probably is too. Your insurance premium may be reflecting that growth.
• Is it true a red sports car costs more to insure than a black sports car (same year, make & model)?
Nope. The color of your car has absolutely nothing to do with the cost of insurance. This myth may be based on the premise that a red sports car is flashier than a black one and might attract the attention of local law enforcement if you’re driving a bit too fast. Getting speeding tickets almost certainly will increase your insurance costs.
• Why does my car insurance go up when my car keeps getting older?
The component of your premium that pays for physical damage claims to your car usually goes down with age. However, other coverages like liability might go up. In addition, experience for that model car or for all insured cars in general may be going up so your increase is similar to that being experienced by others insured by your insurance company.
• What’s my credit got to do with my insurance?
Statistical studies have demonstrated that loss experience is directly proportional to an insured’s credit score. For that reason, some insurance companies use that as a factor in establishing rates if permitted by law in your state.
Courtesy: The Trusted Choice
Employers are told by the states in which they do business how to provide adequate workers compensation insurance for employees. As in other forms of insurance, fair pricing is determined using historical loss data. In the workers comp world, this data is assigned to specific job-types; hence a roofer who hasn’t had a claim in 25 years may still pay a very high rate for his coverage.
While many issues concerning workers comp pricing are out of the employer’s control, lowering the overall cost of insurance is not. Established businesses are often assigned an experience modification factor—or “mod”—a little number that can be an employer’s best friend or worst nightmare.
The mod begins at 1.0 and is the result of a formula consisting of many different factors that represent the severity and frequency of claims. A mod of 1.0 means (absent other discounts or increases) the premium will be the exact calculation of the pre-determined rate for that specific job classification times payroll. Employers who display a better loss history could have a mod lower than 1.0; in contrast, those with more losses will likely see their mod eclipse 1.0. The former will result in a lower premium while the latter will make it more expensive. For this reason, “mod control” should be a priority.
Where does the mod come from? In most states, the calculation uses claims information provided to the National Council on Compensation Insurance (NCCI), the governing authority that ultimately determines the mod, by your workers comp provider(s) over time. The calculation period spans three policy years, beginning with the policy in force four years prior. For example, the mod applied to the premium of a policy beginning on January 1, 2008 was determined using claims information from January 1, 2004 through December 31, 2006.
This long tail is the reason one bad year can sting for a long time. For example, say 2005 was an above-average year for employee injuries at your company. In 2006, you installed an effective loss-control program and have not suffered a single injury since. Unfortunately, the data from 2005 will be used in determining your mod until 2009.
The first step every employer must take in controlling the mod is an effective loss-control program; the only way to get to or below 1.0 is by compounding years of few or no losses. The next step is working with your Trusted Choice® insurance professional to monitor the information used in determining the mod. This information is contained on loss reports that are available from your insurer. Important factors include details about the claim, dollars paid as well as those being held in reserve for claims and information on whether claims are opened or closed. Mistakes are possible and if unnoticed can be costly for years. Don’t wait to review your information—your mod is usually determined by NCCI six months prior to the beginning of your next policy, so report suspected discrepancies immediately.
It’s time to see what you can save: Start managing your mod today.
Courtesy: Trusted Choice®
Jon Jepsen, CIC