Your Subs' Insurance Is Your Problem: How a Premium Audit Can Cost Contractors Thousands
If you're a contractor in Dallas-Fort Worth or anywhere in Texas who uses subcontractors, there's a bill that can show up months after your policy ends, and it catches a lot of good businesses off guard. It comes from your insurance company's premium audit, and the usual cause is simple: a sub you paid didn't have insurance, or you can't prove they did.
That bill can run thousands of dollars, sometimes tens of thousands. Here's how it happens and how to keep it from happening to you.
What is a premium audit?
Most contractor general liability and workers' compensation policies are priced on estimates. When you buy the policy, you estimate your payroll, your sales, and what you'll pay subcontractors. Once the policy year ends, the insurance company checks what actually happened. That check is the premium audit.
If your real numbers came in higher than the estimate, you owe more premium. If they came in lower, you may get money back. The audit is a normal part of the policy, not a sign you did anything wrong.
The auditor will usually ask for payroll records, tax filings, your general ledger, 1099s, and a list of every subcontractor you paid, along with a certificate of insurance for each one.
Why uninsured subs land on your bill
When a sub doesn't carry their own insurance, the insurance company sees risk landing on you. If that sub's worker gets hurt on your job, or their work damages someone's property, the claim can come back to your policy.
So at audit time, most insurers treat money paid to a sub with no proof of coverage as if it were paid to your own employees. That means:
General liability: what you paid an uninsured sub gets charged at the rate for the work itself, which is much higher than the rate for properly insured subs. Even insured subs usually carry a small charge on your audit; uninsured subs cost far more.
Workers' comp: if you carry a workers' comp policy, payments to subs without their own workers' comp can be added to your payroll and charged at your workers' comp rate.
The insurer charges this premium whether or not anyone actually got hurt. No claim is needed for the bill to arrive.
"But my sub does have insurance"
Having insurance and proving it are two different things. Here's where contractors get tripped up:
No certificate on file. If you can't produce the certificate of insurance at audit time, the auditor will typically treat the sub as uninsured.
The certificate had expired. The sub's coverage has to be active during the dates they worked for you. A certificate that lapsed halfway through the job leaves a gap.
Their limits are too low. Many insurers require your subs to carry liability limits that match yours, or at least a set minimum, often $1 million per occurrence. A sub with lower limits may be treated as uninsured. The exact rule depends on your carrier, so ask your agent what yours requires.
General liability only, no workers' comp. A sub with employees who carries liability but not workers' comp can still show up on your workers' comp audit.
What it can cost: an example
Here's a simplified example. The numbers are made up for illustration; real rates vary a lot by trade, state and insurance company.
Say you paid $150,000 to subs during the year who couldn't produce certificates. If your general liability rate for that kind of work is $8 per $100 of payroll, that's about $12,000 in added liability premium. If you also carry workers' comp at, say, $4 per $100, that's roughly $6,000 more.
That's around $18,000 due after the policy has already ended, for coverage you thought your subs were providing. Bigger jobs and higher-risk trades can push it much higher.
A note for Texas contractors
Texas lets most private employers choose whether to carry workers' comp. If you don't carry it, the workers' comp side of this doesn't apply to you the same way, but the general liability audit still does. And many general contractors and project owners require workers' comp from everyone on their jobs anyway, so it's worth knowing where you stand. If you carry workers' comp, collecting your subs' workers' comp certificates matters.
How to protect yourself
The good news is that this is one of the most preventable surprises in contracting. A few habits cover most of it:
Get the certificate before the sub starts work. Make it part of onboarding, the same as their W-9. No certificate, no start.
Check the dates. The coverage must be active for the entire time they work for you. Set a reminder to collect a new certificate when theirs renews.
Check the limits. Ask your agent what limits your insurance company requires for subs, and compare every certificate against that number.
Get both coverages when they apply. Collect general liability for every sub, and workers' comp for any sub who has employees.
Put it in writing. Your subcontract agreement should require the sub to carry insurance at set limits for the whole job. Your agent or attorney can also help you decide whether to require additional insured status and a waiver of subrogation.
Split labor and materials on invoices. When a sub's invoice clearly separates materials from labor, auditors can often base the charge on the labor portion. A single lump sum may be treated as all labor.
Keep one folder for audit season. Store every certificate, subcontract and invoice by sub, so you can hand the auditor a complete file.
Talk to your agent before the audit, not after. If your sub usage changed a lot this year, your agent can help you adjust your estimate and avoid a big swing.
Frequently asked questions
Do I need a certificate of insurance from every subcontractor?
For audit purposes, yes. Most insurers expect a current certificate for every sub you paid during the policy period. Without one, the sub is usually treated as uninsured.
What limits should my subs carry?
It depends on your insurance company. Many require subs to match your limits or meet a minimum such as $1 million per occurrence. Ask your agent for your carrier's requirement.
Can I dispute an audit charge for an uninsured sub?
If the sub actually had coverage during the job, you can usually send the certificate to the auditor and ask for a revised audit. Contact your agent right away; there's often a deadline.
Does this apply if I only use subcontractors and have no employees?
Yes. Contractors with no employees of their own are some of the most likely to see a large audit bill from uninsured subs.
How Guidepoint can help
Guidepoint Insurance is an independent agency in Plano that works with 25+ insurance companies. For contractors, that means we can compare general liability and workers' comp options, and we'll walk you through what your insurance company expects from your subs before audit time instead of after.
If you've been hit with an audit bill you didn't expect, or you want to make sure next year's audit goes smoothly, call us at 972-755-3969 or contact our office.
This article is general information, not legal advice. Audit rules and required subcontractor limits vary by insurance company, state and policy. Talk with your agent about your specific policy.