Why Does Subcontractors Liability Insurance Matter? (2023)

Bona-fide Vs Labour-Only Subcontractors Liability Insurance Needs

If your subcontractors are considered “labour-only”, you likely need employer’s liability insurance to cover them, even if they aren’t formal employees. This insures against subcontractor work illness or injury claims.

For “bona fide” subcontractors who supply their own tools and materials, employer’s liability insurance may not be mandatory, and it’s likely they’ll need their own insurance. But confirm their status carefully.

You also need public liability insurance to cover damages or injury caused to third parties by subcontractors. If an incident occurs, the injured party will often claim against you as the main contractor first.

To manage risks:

• Require all subcontractors have their own public liability insurance with adequate coverage limits.
• Check policy documents regularly and keep thorough records.
• Disclose all subcontractor use to your insurer, so contingent liability coverage applies if needed.

If you aren’t sure whether you’re using labour or bona-fide subcontractors, we’ve put together this simple guide to help!

Why Getting the Right Subcontractor Insurance Matters

As the main contractor, you can be held liable for subcontractor negligence and mistakes. Ensure you fully understand subcontractor liability insurance rules to protect your construction business.

Check that:

• Employer’s liability insurance covers any labour-only subcontractors.
• Your public liability insurance has contingent coverage for uninsured subcontractors.
• Subcontractors have their own adequate liability policies.

Employer’s liability insurance for a Contractor

Anyone who employs someone is legally required to have employer’s liability insurance. There is a grey area when it comes to the construction industry, though, in terms of whether a subcontractor is or isn’t an employee. This is because some subcontractors – labour-only subcontractors – are treated in law as though they are employees, even though they invoice for their time rather than being paid via your PAYE payroll scheme.

There are a number of tests that determine whether a subcontractor is a labour-only subcontractor or a bona fide subcontractor and each situation will be treated on its merits. However, as a general guide, a labour-only subcontractor will work directly under your supervision using your materials, equipment and tools, although they may use their own hand tools. If they fit this description, employer’s liability insurance will be required.

A bona fide insured subcontractor will be told what they are required to do rather than how they are expected to do it, and will generally supply their own materials and tools to complete the job. Employer’s liability insurance is not required for bona fide subcontractors.

To determine if a subcontractor qualifies as labor-only or bona fide, consider these factors:

1. Supervision: Do you dictate how they complete tasks, or just what tasks need doing? More supervision indicates a labour-only subcontractor.
2. Tools and materials: Do they use their own tools and materials, or rely on yours? More reliance on you indicates a labour-only subcontractor.
3. Control: Can they set their own hours and approach, or must they adhere to your demands? More control by you indicates a labour-only subcontractor.

Any contractor that uses labour-only subcontractors must have employers’ liability insurance, even if they don’t have any actual employees on their payroll for PAYE payroll scheme purposes. If all of the people working for the business are bona fide subcontractors, though, employer’s liability insurance is not required.

Public liability insurance

If a subcontractor injures a third party or damages their property, that third party will probably claim against you rather than the subcontractor that caused the accident, because you are in charge of the work site.

If a bona fide subcontractor caused the accident, your insurer will pass the claim on to that bona fide subcontractor’s insurer. But it’s important to check that your bona fide subcontractors have their own subcontractor’s public liability insurance with adequate indemnity limits to deal with these claims, and that their insurance covers the activities that they are engaged in.

In fact, it is often a condition in most contractors’ public liability insurance policies that bona fide subcontractors have public liability insurance of their own. You should have a system in place to check their insurance, either by checking the actual policies or by getting confirmation of cover from their insurance broker. You should keep records of their insurance. These records need to be held for several years because liability claims can be made against you several years after the accident that led to the injury or damage occurred.

A contractor’s public liability insurance will also provide what is known as “contingent liability” cover. This means that if a claim arises due to something that a subcontractor has done, the contractor is covered even if the subcontractor has no insurance of their own. To make sure that your insurer will cover these contingent liability claims, it’s important that you tell them that you are using subcontractors as part of your business. You should also declare all of your payments to labour-only and bona fide subcontractors.

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