Subcontractors are essential to the delivery of most construction projects. However, appointing them also introduces additional risks that the main contractor must manage.
Many construction contracts require the main contractor to confirm that every bona fide subcontractor holds suitable insurance before starting work. This may include public liability insurance, employers’ liability insurance and, where design work is involved, professional indemnity insurance.
Despite this, insurance checks can sometimes become little more than a box-ticking exercise or be overlooked altogether.
The consequences may not become clear until something goes wrong. By then, the main contractor could be facing substantial claims, contractual disputes and costs that cannot be recovered from the subcontractor.
What Could Happen If a Subcontractor Is Uninsured?
Consider a principal contractor working on a new-build housing development.
A groundworks subcontractor is appointed to carry out excavation work. They provide a quotation, agree on the scope and begin work on site. However, nobody requests a copy of their insurance documents before the work starts.
During the excavation, the subcontractor damages a major water main. The resulting flooding affects neighbouring properties and causes extensive damage.
Claims are made for:
- Repairs to the damaged properties
- Work required to repair the water main
- Alternative accommodation for affected residents
- Associated professional and legal costs
The total value of the claim exceeds £750,000.
When the incident is reported, it becomes apparent that the groundworks contractor’s public liability insurance expired several months earlier. There was no valid policy in place at the time of the damage.
The principal contractor had also agreed under the construction contract to check that subcontractors held appropriate insurance before allowing them to begin work.
Who Pays When the Subcontractor Has No Insurance?
An uninsured subcontractor remains legally responsible for the damage they cause. In practice, however, recovering hundreds of thousands of pounds from a small contractor may be extremely difficult.
Attention may therefore turn to the principal contractor and the processes they had in place.
The principal contractor could face:
- Recovery action from the client or its insurers
- Allegations that it breached the terms of the contract
- Difficulty recovering the loss from the subcontractor
- Damage to its reputation and client relationships
- Potential exposure to costs that are not covered elsewhere
The issue is no longer limited to the subcontractor’s failure to maintain insurance. Questions may also be raised about why the subcontractor was permitted to start work without the required checks being completed.
Checking an insurance certificate is therefore not simply an administrative formality. It is an important part of controlling the risks created by subcontracted work.
What If the Subcontractor Has Insurance, but Not Enough Cover?
Obtaining an insurance certificate is only the first step. The main contractor must also check whether the policy meets the requirements of the project.
For example, a roofing subcontractor is appointed to work on a large residential development. Under the contract, the subcontractor must carry £10 million of public liability insurance.
The subcontractor does have a policy, but its indemnity limit is only £2 million. No formal verification takes place, so the difference is not identified before work begins.
A serious incident later results in a combination of injury and property damage claims worth £4 million.
The subcontractor’s policy may respond, but only up to its £2 million limit. That leaves a further £2 million to be recovered elsewhere.
This could lead to questions about:
- Why the contractual insurance requirement was not enforced
- Whether the subcontractor was suitable for the scale of the project
- Whether adequate due diligence was completed
- Whether poor contractor management contributed to the exposure
- Who is responsible for the amount above the subcontractor’s policy limit
The subcontractor was not technically uninsured, but the protection they carried was inadequate for the work they had been appointed to complete.
Common Subcontractor Insurance-Checking Mistakes
Insurance verification does not need to be complicated, but the process must be consistent.
Common problems include:
- Relying on a verbal assurance that insurance is in place
- Failing to request current insurance certificates
- Overlooking policy expiry dates
- Not checking indemnity limits against the contract
- Failing to confirm that the insured business name matches the contracting entity
- Not reviewing important policy restrictions or exclusions
- Failing to monitor renewals during long-term projects
- Keeping incomplete records of the checks that were carried out
A certificate may show that a policy existed on the date it was issued, but it does not automatically confirm that the cover remains valid throughout the project.
What Insurance Should Main Contractors Check?
The necessary cover will depend on the subcontractor’s work, the contract and the risks involved. As a starting point, the verification process may need to include:
Public Liability Insurance
Public liability insurance can cover claims involving injury to third parties or damage to third-party property.
Main contractors should check that the policy is current, that the indemnity limit meets the contract and that the subcontractor’s activities are accurately described.
This is particularly important for higher-risk trades such as roofing, scaffolding, demolition, groundworks and work involving heat.
Employers’ Liability Insurance
Most businesses that employ staff are legally required to hold employers’ liability insurance of at least £5 million.
Main contractors should confirm whether the subcontractor employs workers, including whether labour-only subcontractors may be treated as employees for insurance purposes.
Professional Indemnity Insurance
Professional indemnity insurance may be required where a subcontractor has responsibility for design, specification, advice or other professional services.
This may apply to design-and-build contractors, consultants and specialist subcontractors carrying out an element of design work.
Contract Works and Contractors’ All Risks Cover
Depending on the contractual arrangements, checks may also be required around contract works insurance, hired-in plant, owned plant, tools and other project-specific risks.
The party responsible for arranging this cover should be clearly established before work starts.
A More Reliable Insurance-Checking Process
A robust checking process should begin before the subcontractor arrives on site.
Main contractors should:
- Define the minimum insurance requirements within the subcontract agreement.
- Request current certificates and supporting policy information.
- Confirm that the insured name matches the company or individual entering the contract.
- Check that the policy covers the work being undertaken.
- Review the indemnity limits against the contractual requirements.
- Look for exclusions or restrictions relevant to the trade.
- Record policy expiry dates and request renewal documents when required.
- Retain evidence of each check for contractual and audit purposes.
The process should also reflect the scale of the work. A subcontractor undertaking high-risk activity on a major development may require considerably more scrutiny than a contractor completing a small, low-risk package.
Insurance Checks Should Continue Throughout the Project
Insurance verification should not end once the subcontractor has been approved.
Policies can expire while a project is still underway. A subcontractor may also take on additional responsibilities or begin carrying out work that was not included in the original scope.
For longer projects, main contractors should have a system for monitoring renewal dates and obtaining updated documents. Insurance requirements should also be reviewed when the subcontractor’s work changes.
This helps prevent a situation where valid cover was in place at the start of the project but had expired or become unsuitable by the time an incident occurred.
Protecting the Main Contractor
Where a contract requires subcontractor insurance to be checked, failing to do so can create risks far beyond the original value of the subcontract.
A relatively small package of work can lead to a substantial injury, property damage or financial loss claim. If the subcontractor is uninsured or underinsured, recovering that loss may prove difficult.
A clear and properly documented verification process helps main contractors identify gaps before work begins. It also provides evidence that reasonable steps were taken to manage subcontractor risk and meet contractual responsibilities.
Insurance certificates should never be treated as paperwork to collect and file away. They should be checked carefully, monitored throughout the project and considered alongside the actual work the subcontractor has been appointed to carry out.
Speak to CHAS Insurance About Construction Insurance
CHAS Insurance helps contractors and construction businesses review their insurance arrangements and understand the cover required for their work.
Whether you are appointing subcontractors, reviewing contractual requirements or checking that your own business has suitable protection, our team can help you explore the options available.
Contact CHAS Insurance to discuss construction insurance with an experienced broker.
