Hiring subcontractors can be one of the best ways to grow a business. You can take on larger projects, bring in specialized skills, expand into new markets, and increase capacity without necessarily hiring a full-time employee for every position.
But there is a question I ask business owners when they tell me they use subcontractors or 1099 workers:
What happens if one of them causes a loss?
That question usually leads to several more. Are they truly an independent contractor? Do they carry their own insurance? Have you verified it? Is there a written subcontractor agreement? What does your contract with the customer require? What kind of work is the subcontractor performing, and does your insurance company know you are subcontracting that work?
At The Koch Insurance Group, this is what we mean when we talk about Subcontractor Risk and 1099 Coverage Structuring. It is not simply about collecting a Certificate of Insurance and putting it in a folder. We want to understand how subcontractors actually fit into your operation and what could potentially come back to your business if something goes wrong.
Calling Someone a 1099 Worker Does Not Automatically Make Them an Independent Contractor
This is probably the first misconception we need to address.
Paying someone on a 1099 does not, by itself, determine whether that person is an independent contractor. The actual working relationship matters.
The IRS looks at behavioral control, financial control, and the type of relationship between the parties when evaluating whether someone should be treated as an employee or independent contractor. The IRS also makes clear that a written contract calling someone an independent contractor is not, by itself, enough to determine their status.
Think about how the relationship actually works. Who determines when and where the person works? Who provides the tools? Who controls how the work is performed? Is the person operating an independent business and offering services to other customers, or are they essentially working as part of your company?
Those are not questions I am going to answer for you as your attorney, accountant, or tax professional. My concern as an insurance advisor is making sure we understand the relationship because classification can affect the insurance conversation too.
I do not want to find out how someone should have been classified after they have already been injured or caused a major loss.
A Certificate of Insurance Is a Starting Point, Not the Entire Strategy
Let’s say you hire a subcontractor to perform electrical work, roofing, HVAC work, landscaping, cleaning, construction, or another service on behalf of your company.
You ask for a Certificate of Insurance. They send it over. You see General Liability listed on the certificate, put it in the customer’s file, and move on.
That is better than asking for nothing, but I would not stop there.
What are the policy limits? What type of work does the subcontractor actually perform? Does their insurance contemplate that operation? Are there exclusions that could affect the work they are doing for you? Does the contract require Additional Insured status or another endorsement? When does the policy expire? What happens if they cancel it?
Most importantly, does the insurance actually align with the risk you hired them to perform?
A Certificate of Insurance can provide evidence that insurance exists, but it does not replace the underlying policy or endorsements. That distinction matters when a business assumes that collecting a certificate automatically transferred the risk.
What Happens When Your Subcontractor Causes the Damage?
Imagine you are a general contractor renovating a commercial property. You hire a subcontractor to perform part of the work, and during the project that subcontractor causes significant property damage.
The property owner is probably not interested in how you internally divided the work between your company and your subcontractors. They know they hired you.
Now we need to start looking at contracts, insurance policies, indemnification provisions, Additional Insured requirements, and the facts surrounding what happened.
This is why subcontractor risk cannot be treated as someone else’s problem simply because another company physically performed the work. Depending on the circumstances, a claim or lawsuit may involve multiple businesses.
On multi-employer worksites, even workplace safety responsibilities can extend beyond the employer whose workers are directly exposed. OSHA’s Multi-Employer Citation Policy recognizes circumstances in which creating, exposing, correcting, and controlling employers can have responsibilities for workplace hazards.
That does not mean a general contractor is automatically responsible for everything a subcontractor does. It means the relationship, contracts, control, and circumstances matter.
That is exactly why we need to understand them.
Your Subcontractor’s Insurance Matters
If you are transferring part of your work to another company, I generally want to know what insurance that company carries.
Depending on the operation, we may be looking at General Liability, Workers’ Compensation, Commercial Auto, Professional Liability, or other coverage appropriate to the work being performed.
If someone is driving on behalf of the project, we need to understand the auto exposure. If they are performing professional or technical services, Professional Liability may enter the conversation. If employees are performing physical work, Workers’ Compensation becomes another consideration.
The requirements should make sense for the actual exposure. Requiring the exact same insurance from a one-person consultant working remotely and a roofing subcontractor putting a crew on a commercial building would not necessarily make sense.
The goal is not to collect as many insurance documents as possible.
The goal is to understand the risk you are transferring and whether the subcontractor has insurance that reasonably corresponds with that risk.
Workers’ Compensation and Subcontractors in Texas Can Get Complicated
Texas is different from many states when it comes to Workers’ Compensation, and subcontractors add another layer to that conversation.
Texas Workers’ Compensation rules contain specific provisions addressing independent contractor relationships between hiring contractors and subcontractors. Importantly, the rules also contemplate situations in which a person described as an independent contractor is later found to be an employee of the hiring contractor.
That is one reason I do not like relying solely on the words “1099” or “subcontractor.”
We need to understand the actual relationship.
If you regularly use subcontractors, talk with your insurance advisor about how your Workers’ Compensation carrier handles them, what documentation the carrier expects, and how uninsured subcontractors could affect your insurance program. For classification, employment, tax, and legal questions, your attorney, CPA, or other appropriate professional should also be involved.
The goal is to address those questions before an injury occurs.
The Contract Matters Just as Much as the Certificate
If subcontractors are an important part of your business model, written agreements become another important part of risk management.
What does your subcontractor agreement actually require? Does it establish insurance requirements? Does it address indemnification? Does it require Additional Insured status where appropriate? Are there requirements involving Workers’ Compensation or Commercial Auto? Does your contract with the customer require you to impose certain insurance requirements on your subcontractors?
This is where I often see businesses create problems for themselves.
The contract they signed with their customer may require one thing, the subcontractor agreement may say something different, and the insurance policies may say something else entirely.
That is why Contract & Insurance Alignment is such an important part of what we do at The Koch Insurance Group. I want to see what you promised the customer and compare those requirements with the insurance program you actually have in place.
If you are required to transfer certain requirements to your subcontractors, we need to know that too.
What About Additional Insured Status?
This is another term business owners see constantly in commercial contracts.
A customer may require your company to add them as an Additional Insured, and your company may require certain subcontractors to add you as an Additional Insured on applicable policies.
But simply asking someone, “Can you add me as Additional Insured?” is not the entire conversation.
Which policy? Which endorsement? For what operations? Does it apply to ongoing work, completed work, or both where required and available? Does the subcontract agreement support the requirement?
The answers depend on the policy, endorsement, contract, and circumstances.
This is why I keep coming back to the same principle: read the documents.
Do not assume the words on a Certificate of Insurance tell the entire story.
What If the Subcontractor Does Not Have Insurance?
This is where the business owner has a decision to make.
Maybe you have found a subcontractor who does excellent work, but they do not carry the insurance your company normally requires.
That does not automatically tell us what you should do. It tells us we need to understand the exposure.
What work are they performing? What could go wrong? What does your customer contract require? What does your own insurance policy require or contemplate? Could using an uninsured subcontractor affect your insurance costs, audit, contractual obligations, or potential liability?
There may be situations where the business decides the risk is acceptable. There may be situations where the contract does not allow it. There may also be situations where the potential exposure is simply too significant to ignore.
My job is not to make that business decision for you.
My job is to make sure you understand the risk before you make it.
Your Insurance Company Needs to Understand How You Actually Operate
If subcontracting is part of your business model, tell your insurance advisor.
Do not tell the insurance company that all work is performed by employees if a significant portion is actually subcontracted. Do not wait until there is a claim to explain that another company performed the work. And do not assume that because a subcontractor carries their own insurance, your insurance company does not care about the relationship.
Underwriters want to understand the risk they are being asked to insure. The amount of work you subcontract, the type of work being subcontracted, the insurance carried by those subcontractors, and the contractual controls you have in place can all be relevant to that evaluation.
This is one of those areas where trying to make the business look simpler on an insurance application can create a much bigger problem later.
I would rather explain the operation correctly from the beginning.
Your Subcontractor Process Should Grow With Your Business
A business owner using one subcontractor occasionally may be able to manage everything manually. Once you have five, ten, twenty, or fifty subcontractors working across different projects, you need a process.
You need to know who is working for you, what they are doing, whether required agreements have been signed, what insurance documentation has been collected, and when those policies expire.
The process does not have to be complicated, but it does need to be consistent.
You should not discover six months into a project that a subcontractor’s insurance expired three months ago or that nobody ever collected the endorsement required by your customer contract.
As your company grows, your subcontractor risk management needs to grow with it.
Questions to Ask Before Hiring a Subcontractor
Before allowing another company or independent contractor to perform work on behalf of your business, these are some of the questions worth asking:
- What exactly are we hiring this person or company to do?
- Are they truly operating as an independent business?
- Do we have a written subcontractor agreement?
- What insurance should they carry for the work being performed?
- Have we verified the required insurance?
- Do our contracts require Additional Insured status or specific endorsements?
- Does our customer contract require us to pass insurance requirements down to subcontractors?
- Who owns and insures the vehicles or equipment being used?
- Are employees of the subcontractor performing the work?
- How are Workers’ Compensation responsibilities being handled?
- What happens if this subcontractor causes property damage, bodily injury, or financial loss?
- Does our own insurance company know we subcontract this type of work?
You do not need to become an insurance expert to hire a subcontractor. You do need a process that helps you understand who you are putting on the job and what happens if something goes wrong.
Subcontractor and 1099 Risk Structuring for Texas Businesses
At The Koch Insurance Group, we work with small to mid-sized businesses to understand how subcontractors and independent contractors fit into their operations.
That means looking beyond the Certificate of Insurance. We want to understand the work being subcontracted, the contracts involved, the insurance requirements, the company’s own policies, and where potential gaps may exist.
We work with businesses throughout Houston, Spring, The Woodlands, Conroe, Magnolia, Tomball, Montgomery County, and across Texas, including contractors and other companies that rely heavily on subcontracted labor.
If your company uses subcontractors or 1099 workers and you are not sure how those relationships affect your commercial insurance, contact The Koch Insurance Group. We can review your current insurance structure, discuss how subcontractors are being used, look at the insurance requirements in your contracts, and help you understand where additional questions need to be asked.
Because calling someone a subcontractor does not make the risk disappear.
The important question is whether your business is structured for what happens when that subcontractor becomes part of a claim.
