Contractors' Toolkit

Contractors & Subcontractors Insurance Program Team

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“They have always been there for us in years past, and we are very confident they will be there for us whenever we need to call on them in the years to come.”


Joe Scanzillo, Scanzillo Corporation

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8 Common Questions About an Insurance ...

As a contractor, you know worker’s compensation (WC) and general liability (GL) insurance policies are necessary. Because premiums for these policies are based on an estimate of your payroll and/or sales, which can change from year to year, insurance companies will perform an audit at the end of the policy period to make sure they collect enough money to cover your risk for the prior policy period. It can be unsettling any time your books are being scrutinized by an outside party, but an insurance audit is done to settle up on what is owed.  Do you wonder why this is necessary or what is involved? Let’s take a look at some common questions we receive about insurance audits to make sure you’re prepared for one when the time comes.

    1. Why are audits performed? Insurance premiums are largely based on risk exposure, and in the case of worker’s compensation or general liability insurance policies, that exposure is measured by the insured’s payroll and/or gross sales. Because payroll and gross sales are always fluctuating, premiums are estimated at the beginning of the policy period. At the end of the policy period, an audit is performed and the insured either receives a refund or owes more money depending on where original estimates were from the actual figures.
    2. Where does the audit take place? An audit will occur either at the insured’s place of business, their residence or, in some instances, where the payroll or sales records are kept (such as a bookkeeper’s or accountant’s office). The auditor will send a notice of the date and time that he or she will be on site (which you can change, if necessary). The insurance company may decide to forego an in-person audit and send you a self-reporting form to complete and return to them. It all depends on the size of your company, the ease of your prior audits, whether you use an automated payroll service (Paychex or ADP, for example), etc.
    3. When does the audit occur? The audit will be conducted annually, typically 30-60 days after the policy period ends.
    4. What happens during an audit? Each audit is unique. During an in-person audit, an auditor will arrive at the pre-determined location and will need a quiet place to review your information. He or she will look at sales figures and total payroll. The insurance term is remuneration, which includes such things as straight time pay, bonuses, sick time, holiday pay, etc. It does not include severance pay or the “half” portion of overtime pay. The auditor will also look at the subcontractors you have paid over the year and whether or not you have a current COI for each one. Important to note: If you don’t have a subcontractor’s COI, you will be charged for his or her worker’s compensation and general liability. This can add up to significant dollars.
    5. How do you prepare for an audit? Locate a clean, quiet area for the auditor to use while he or she is on site. Gather all of the information your insurance company requested (including but not limited to payroll records, sales records, tax forms, your subcontractors’ certificates of insurance, etc.) for review. Remain on-site or designate someone with knowledge of your records to stay on site to answer questions on the day of the audit.
    6. Is it possible to dispute the findings of your audit? Yes; in fact, Mason & Mason disputes about 20% of the audits that are billed each year. Usually, most disputes are related to the validity or lack of subcontractors’ certificates of insurance and how the auditor wants to classify certain employees or subcontractors.
    7. What happens if my exposure changes during the year? If you find that your sales have exploded midway through the policy period or that your payroll dropped significantly due to a layoff, having a discussion with your agent can be worthwhile. The original payroll or sales estimate can be adjusted midterm but only if you inform your agent to make the change. If sales explode and no notice is given to your agent, you may have a hefty audit premium due. On the other hand, some GL policies are set at a minimum premium with your original payroll/sales estimate. So if you are going to fall short on your estimates, it is very important to address this midterm change, the key is open communication with your agent.
    8. What are “payasyougo” premiums and do they eliminate the need for an audit? The majority of new WC policies are on a monthly or weekly payroll reporting basis, otherwise known as “pay-as-you-go”. This means that each pay period, you or your payroll company report your company’s payroll to the insurance company and you pay exactly what you owe based on the reported payroll. This option can be great for your cash flow. “Pay-as-you-go” does not eliminate the need for an annual audit. An audit is still performed to verify your payroll/sales at the end of the policy period and confirm that each sub has provided a COI.

Insurance audits don’t have to be stressful. By keeping accurate and up-to-date records and ensuring you have COIs for each of your subcontractors, you’ll find insurance audit time is just another day at the office. Of course, if you have any questions during your audit, feel free to reach out to Mason & Mason or your insurance broker/agent for help.


What does Primary and Noncontributory mean? ...

A common stipulation in a contract between a general contractor and a subcontractor is that the subcontractor names the general contractor as an “additional insured” on a “primary and noncontributory basis.” Although common, “primary and noncontributory” is a term that can cause confusion among general contractors and subcontractors alike. We are breaking it down for you below so you can understand what it means and why it’s important.

“Primary and Noncontributory” meaning

It’s important to understand that primary and noncontributory concerns additional insured coverage.

When it comes to a construction project claim, it is not unusual for a subcontractor and the general contractor to both be named in a suit. If found liable, each party’s general liability insurance policy would typically pay their respective cost of defense and settlement for their own insured.

However, when a subcontractor is required to name the GC as an additional insured on a “primary and noncontributory basis”, their insurance covers the GC in a claim (arising out of the subcontractor’s work) as if they were an insured on the sub’s policy. The “primary and noncontributory” wording means the subcontractor’s insurance must pay first (primary) without seeking the general contractor’s liability insurance to pay (noncontributory).

Why this endorsement is necessary

In a standard construction project, many subcontractors are hired to perform a piece of the whole construction job. If the general contractor and his or her insurance policy were involved in every claim, the GC’s assets could be exhausted in no time, often because the division between the claim payments is not made based upon fault.

What else you should know

Who pays for claims in excess of policy limits is often arbitrary. You are a subcontractor with a $1 million general liability insurance policy and a $5 million umbrella policy. A claim is made against you and a general contractor for $1.5 million. Depending on the situation, you may be liable for the entire amount with $1 million coming from your general liability policy and $500,000 from your umbrella policy, or you may be liable for only $1 million and your general contractor would be liable under his or her general liability policy for the remainder. The determination depends on the insurance companies, the court and/or the jurisdiction.

Also, no two policies are alike. Like any insurance policy (auto, home, liability, etc.), general liability policies vary in coverage and limits from company to company, insured to insured. We do not recommend buying a policy based on premium alone; forms and wording should be compared before signing on the dotted line. If you buy insurance solely on price, you may be saving yourself money in the short term, but with inadequate or incorrect insurance, you might end up paying dearly in the long run.

Understanding how to manage and mitigate risk can be a daunting task. Like you know construction, we know insurance. Let us put our knowledge to work for your advantage and build your insurance program right the first time.


The Contractor’s Checklist for Properly Hiring ...

General contractors bear a great deal of responsibility when hiring subcontractors for a job. Not only is the GC putting his or her reputation on the line by choosing a sub to perform a certain function, but they are exposing themselves to significant risk by entrusting others to bring a project to fruition. For these reasons, it is imperative that GCs mitigate their risk by requiring that each subcontractor signs a subcontractor agreement before they are hired that entails the following minimum provisions:

  • The subcontractor must carry Commercial General Liability Insurance with at least $1,000,000 per occurrence and an aggregate of no less than $2,000,000.
  • Each subcontractor must name you, the GC, as an Additional Insured on the General Liability policy on a primary and non-contributory basis for on-going and completed operations.
  • All subcontractors must carry Workers’ Compensation insurance. It is important to note that the workers’ compensation law requires you as the GC to insure workers of uninsured subs and may even make you responsible under many circumstances to insure injuries to a sole proprietor. Without a Certificate of Workers’ Compensation from each subcontractor, an insurance auditor will likely make a charge for each sub who is lacking the insurance or proof of the insurance when the payroll audit is made.
  • A Certificate of Insurance (COI) must be provided before a sub starts any work. This must be an original COI with an original agent signature (no copies). Without an original COI, the subcontractor will not be paid.
  • The subcontractor agreement should include a hold harmless or indemnity clause. This states that the GC is not responsible for any claims, damages, losses, and expenses (including legal fees) arising out of the subcontractor’s work, as well as the work of the subcontractor’s subcontractors.

For more than three decades we’ve developed the industry know-how and trade organization relationships that are critical to proper insurance policy design. We understand the subtle nuances of construction insurance and how each detail affects the way you, as a contractor, do business. We’re happy to put that knowledge to work. Whether you are a general contractor and need guidance on how much insurance to require or you are a subcontractor who needs assistance making sure you are meeting the obligations of your contract, Mason & Mason is here for you.

The information provided above is for informational purposes only.  As an insurance agency and not a member of the Massachusetts or New Hampshire bar associations, we strongly suggest you consult an attorney before making any decisions on the wording and/or use of legal contract documents.