What Insurance Do Subcontractors Need?

In the dynamic world of construction and project management, subcontractors are often the unsung heroes, building the blocks that bring visions to life. Going under the radar does mean that insurance coverage can sometimes become little more than an afterthought. Whether you're a subcontractor looking to get covered or a construction contractor aiming to refine your risk management, this guide is for you.

Are Subcontractors Covered by the Contractor’s Insurance?

Not always. Subcontractors usually aren't included in the insurance of the contractors who enlist their help. However, there is an exception for labour-only subcontractors, who benefit from the insurance of their contractors.

Labour-only subcontractors typically use the tools and equipment provided by their contractor, working under close supervision in an arrangement similar to temporary contract work. Standard subcontractors, on the other hand, use their own kit, working autonomously and invoicing the contractor for their services. For this reason, they’re seen as independent businesses and are therefore accountable for organising their own insurance.

Understanding Insurance in Construction

Subcontracting enables primary contractors to bid for complex projects through the acquisition of distinct work packages. This strategy allows them to mitigate delivery risks by extending main contract terms into their domestic or nominated subcontracts, including penalties for delays or limits on liability.

A domestic subcontractor is chosen, hired and granted packages based entirely on the contractor's choice. Whereas nominated subcontractors are chosen by the client and then imposed in an agreement with the primary contractor.

Either way, almost all contractors and subcontractors in the UK construction industry are obliged to hold liability insurance. It’s often stipulated in agreements too. Aside from the legal requirements, there are several optional policies which are worth considering.

Public and Employer’s Liability Insurance

Public liability insurance safeguards businesses from accusations made by third parties, alleging personal injury or property damage caused during your work. For example, if your company carried out work on a client’s site that unintentionally led to damage to property, you'd be required to pay a set excess as per your policy agreement. You can usually choose the level of public liability insurance you need ranging from £1 million to £10 million.

Most insurers will give you the option of adding employer’s liability insurance to your policy. This covers your business for employee and ex-employee claims. In the event that an employee files a claim due to illness or injury incurred on-site, your insurer will provide compensation. For example, if an employee sustains a repetitive strain injury, they might initiate a claim against your company. Should your business be deemed responsible, a court might demand the payment of compensation to cover financial losses. In this scenario, your insurer would cover the compensation costs and legal fees.

Professional Indemnity Insurance

While not legally required of construction firms, investing in Professional Indemnity Insurance (PII) is a wise choice. Indemnity insurance serves any business offering professional advice or services by covering you against potential claims of negligence from clients.

Whenever a subcontractor takes on a project, there is a possibility of the contractor or client bringing a claim. This could happen if they incur losses due to your mistakes or negligent actions. While the chance of this happening is minimal for reputable companies, having this type of insurance cover provides a layer of protection.

A sector commonly associated with PII is the legal field. A report by City AM highlighted that the increase in premiums for indemnity insurance led to the shutdown of nine UK law firms in just the third quarter of 2022, indicating its steep pricing. In one of our recent articles, we explained why indemnity insurance is so expensive.

Business Protection Insurance

'Business Protection' essentially refers to any type of insurance policy that protects your business against the loss of essential employees, shareholders or partners caused by death, disability or ill health. While most companies in construction are well accustomed to policies that cover assets, the protection of owners and vital staff is something that often goes unnoticed.

If a subcontractor is heavily reliant on a director or pivotal team member, business protection insurance should be seriously considered. The right cover can serve as a financial lifeline for your business during challenging transitions. It can also add various tax advantages.

Cost Considerations

For SMEs across the UK, in every industry, insurance is a big cost consideration each year. Subcontractors are no exception and policies are generally becoming more expensive.

The primary contributor to rising premiums is the volume of filed claims. When the number of claims surges, insurers incur greater costs and usually pass these expenses onto policyholders. Additional factors include emerging risks, market dynamics, changes in regulations and economic factors. Insurance essentially revolves around risk versus reward for providers.

How to Find the Best Insurance Policies

If you’re searching for business insurance policies that offer the right level of coverage and affordability, our team at BusinessComparison is ready to help you. We have experience securing insurance coverage for small businesses and larger contractors.

Sam White