AboutKristen Mulcahy, CIC Expertise My specialty is commercial insurance for business owners. I can answer questions regarding
liability, property, auto, workers compensation, directors and officers, umbrellas and
risk management for all types of businesses. Risk management or loss control, is taking
measures to reduce the chances of a loss in the first place or, helping you prevent it
from happening again. Insurance can be complicated and confusing and there are no stupid
questions! I own a Risk Management company in New England that provides insurance consultations
to business owners and sight inspections for insurance companies.
Question QUESTION: A family member has been offered a job installing HVAC equipment for a large construction company. He does not need a contractor's license (they told him) but he does need to get subcontractor's insurance. He was already in the process of getting his business license so he could buy equipment for side jobs. What is your advice? Should he see a lawyer? Are there insurance companies that specialize in this type of insurance? He has paid a company to do the paperwork necessary to get the business license.
This is TMI. Basic question: What is subcontractor's insurance and where/how do you get it?
Thank you,
Linda
ANSWER: Linda;
First off, there is no such thing as "subcontractor insurance". If your family member has been hired as a subcontractor to install HVAC equipment this is what he needs; 1)The proper Contractors License, he needs to be licensed to perform this type of work by the state in which he'll be working in, believe me, the company hiring him is WRONG, he needs the proper licensing. 2)He needs a written agreement with the company that hired him and it should include the scope of work to be performed, the agreed upon payment amount and any bonuses for finishing early and maybe penalties if the job is delayed. 3)He needs a Workers Compensation policy to cover him if he is injured on the job. 4) He needs a General Liability Policy that includes Products and Completed Operations. This policy will cover him if say, while doing a job someone trips over duct work he has yet to install and is injured, they sue him for their injuries, this policy will pay for the injuries. If he completes a job and someone comes back and says the job wasn't done properly and caused damage to the building, this policy would cover that. He needs all of these elements in place if he is in the process of starting a business on his own, regardless of what jobs he does. Believe me, if he doesn't take these steps, he'll live to regret it. My last piece of advice is this, many contractors, carpenters, plumbers, etc... start a business as say, Joe's Heating and Cooling, but they don't have an official, formal, business entity (different from a license), they're just a guy doing business as Joe's... when that occurs, they don't realize that if a large loss occurs and they're sued, their personal assets could be on the line. The best way to separate personal from business is to establish a formal business entity such as an LLC or a Corporation. To determine what would be best for him, he should consult with his accountant. The information needed to set this up can generally be found on your state's official website under "Doing Business in XYZ", "Starting a Business", Corporations Commission or Secretary of State, etc... most states have an area dedicated to people starting businesses because they want people to start a business! The thing to remember is this, whether he's doing it full time or on the side nights and weekends, it doesn't matter how small his operation is, it's still a business and he needs his own insurance and he needs the proper state contractors license. A lot of states will prosecute contractors/people who are performing construction related work that they are not licensed to perform.
I hope this has answered your questions and I wish him the best of luck! If you have additional questions feel free to email me again.
Kristen
---------- FOLLOW-UP ----------
QUESTION: Kristen, first of all, thank you, that was VERY informative. He actually received his paperwork today confirming that he is an LLC company licensed to do business in this state. However, to get a contractor's license he needs more schooling and to pass a certification exam. He is taking those classes. The work this company is asking him to do is work he has been doing for 5 years as a company employee of HVAC firms. The person he interviewed with only mentioned #4 above as being necessary to work for them. I can tell you think he is about to be taken advantage of in a big way. Does the fact that he is now registered as an LLC have any bearing on your answer.
Answer Linda;
The fact that he's registered as an LLC really means nothing for this particular job. The biggest issue is that, although he may know what he's doing, he's not licensed to do it and the other company is clearly asking him to get his own General Liability Policy so if anything goes wrong, he's left holding the bag, not them. Now, this is actually a very common practice, when he is properly licensed and doing business, he's going to be hired as a sub on a lot of jobs and the company hiring him will ask for a Certificate of Insurance which is essentially proof that he does have his own insurance in place. If HE ever hires a subcontractor, say a plumber to connect the gas line to a new furnace, he should ask the plumber for a Certificate of Insurance so he knows the plumber has his own insurance in place. It's a common risk transfer practice because he doesn't want to be liable for the work the plumber does because he didn't do the work, if there's anything faulty, the plumber should be responsible for his own work, and as such, needs to have his own insurance.
The biggest problem your family member has right now is that he's not licensed. Any insurance company that will offer him a quote is going to ask for his contractors license number, which he doesn't have. And if by any chance he actually got insurance without a license, if there is a claim, the insurance company may have reason to deny the claim because he's not licensed to do the work in the first place.
Personally, I would discourage him from doing the job all together but I'm sure, in today's economic climate, he doesn't want to turn down an opportunity to make money. If that's the case, an attorney needs to get involved and draft an agreement between the two parties and it needs to include a clause stating that the GC agrees to cover your family member on their insurance policies. If they want him, knowing full well that he doesn't have the proper license, then they should agree to cover him from an insurance standpoint as well. If they won't, I wouldn't do the job, period. There's simply too much risk involved for your family member.
