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May 16, 2009

Subcontractors - What Is The Ladder Of Insurance?

Question from one of the blog readers - We use many subcontractors. Can our company be held responsible for Workers Compensation coverage if one of their employees is injured on the job?

The Ladder of Insurance is a term that I coined and copyrighted a few years ago. The Ladder is how a main contractor can be responsible for a Workers Comp injury from a subcontractor with no insurance. In fact, the injured employee may be a 5th or 6th level subcontractor that you may never know even existed until they are injured on the job and wish to file a Workers Compensation claim. We have seen the main contractor have to pay a death benefits claim. The complicating factor in all of this is that the Workers Comp insurance carrier may deny the claim in some cases as this employee was not even on their books.

There was a recent Supreme Court case ruling in South Carolina where the main contractor was held liable as they had a high level of control over one of the subcontractor's employees. The employee was considered to be a statutory employee of the main contractor. This was not a wholly terrible decision as the employee of the subcontractor was trying to bring suit under an unlimited liability policy. At least the Workers Comp policy provided for some limits to the lawsuit.

The courts have almost always started with the primary contractor and moved up the Ladder of Insurance by moving up the chain of contractor and subcontractor until a valid Workers Comp policy was in place. If the employee was a sub-sub-sub-sub-sub-sub contractor of the main contractor and no company except the main contractor has a Workers Comp policy in place, then the main contractor will be held responsible. There are hundreds upon hundreds of court decisions that use this logic.

How do main contractors protect themselves from such a situation? One solution is to always require certificates of insurance from all subcontractors. If this is not feasible, then it may be best to actually build the cost of the insurance into the subcontract and then provide the insurance coverage.

There are states such as California where you can access the Contractor's Licenses to see if they truly have Workers Comp coverage. A phone call to the insurance carrier is also a good idea if you receive a certificate of insurance. Checking with the subcontractor's insurance carrier is always a good idea.