Overview
Most businesses hire contractors or vendors for remodeling, repairs, or other projects at some point. While outsourcing can be efficient, it creates potential liability risks if the vendor is not properly licensed or insured.
This guide explains practical steps you can take to protect your company, what to check before work begins, and how to reduce the chance that a contractor’s loss becomes your company’s problem.
Key takeaways
- Always verify a contractor’s license and proof of insurance before hiring.
- Request appropriate insurance certificates and consider being added as an additional insured.
- Use written contracts, clear equipment rules, and a list of approved vendors to limit exposure.
How it works
Licensed contractors typically display their state license numbers in advertising and on vehicles, but licensing alone does not ensure protection from third-party claims or on-site injuries.
Commercial General Liability and Workers’ Compensation are the basic coverages to require; a certificate of insurance is the standard proof of coverage and should list policy effective and expiration dates.
For businesses with specialized exposures, consider reviewing related policy options such as Foreign Liability Insurance to ensure coverage matches the project scope.
What it may cover (and what it may not)
Commercial General Liability typically covers bodily injury to third parties, property damage, and certain advertising or personal injury claims arising from the contractor’s operations.
Workers’ Compensation covers on-the-job injuries to the contractor’s employees; if a contractor is uninsured for workers’ compensation, you may face direct claims in some circumstances.
Neither policy replaces a written contract that allocates responsibility; gaps can remain for professional errors, pollution, or property you loan to the vendor unless specifically addressed.
Common mistakes to avoid
- Hiring based solely on price without verifying licenses or insurance.
- Accepting verbal assurances instead of seeing a current certificate of insurance.
- Lending company tools or equipment to a contractor without written terms, which can create liability if equipment fails.
- Failing to require an additional insured endorsement or indemnity clause when appropriate.
Questions to ask an agent
Ask whether your current policy has gaps if contractors will work on your premises and whether you should be listed as an additional insured for the project period.
Request the minimum acceptable limits and coverage types for any contractor you hire and confirm how claims involving subcontractors would be handled under your policy.
Next steps
Create and maintain a short list of preapproved vendors who are both licensed and have provided current proof of insurance.
Ask contractors’ insurance agents to send certificates directly and require that your company be added as an additional insured until the project is complete.
For narrow or single-risk needs, you may want to evaluate policy structures such as Mono-Line Property or Liability Insurance to close coverage gaps, and then talk to an agent to review your specific situation.
Frequently Asked Questions
How do I verify a contractor’s insurance?
Request a current certificate of insurance showing Commercial General Liability and Workers’ Compensation, and confirm policy dates and limits directly with the insurer if needed.
What is an additional insured endorsement and why ask for it?
An additional insured endorsement extends the contractor’s liability coverage to your business for claims arising from the contractor’s work, reducing your direct exposure.
Can I require a contractor to indemnify my company?
Yes, a written indemnity clause in the contract can shift responsibility for certain claims, but it should be reviewed by counsel to ensure enforceability.
Should I ever lend tools or equipment to a contractor?
Generally no; lending tools can increase your liability if they fail, so keep equipment separate or document terms and inspect items before use.
What if a contractor shows no insurance after an accident?
If a contractor is uninsured, notify your insurer and legal counsel promptly; having required certificates and endorsements beforehand reduces this risk.