Avoid Surprise Premium Increases by Collecting Subcontractor Insurance Certificates

Author, Jack Marrs, Associate Account Executive, Rancho Mesa Insurance Services, Inc.

In the nonprofit world, every dollar matters. Whether you are running community programs, providing housing, or supporting individuals with disabilities, it is important to keep operating costs predictable and under control.

There is one area where we are seeing many nonprofits get blindsided during workers’ compensation audits and it often leads to unexpected premium increases.

If your organization pays independent contractors or subcontractors like drivers, program instructors, consultants, and maintenance workers and you do not collect certificates of insurance (COI) showing they have active workers’ compensation coverage, your insurance carrier may treat them like your employees during the annual audit.

The consequences of not collecting proof of workers’ compensation coverage means:

• The amounts you paid those individuals will be added to your payroll,

• Your final premium could increase significantly,

• You will be paying more for coverage you did not intend to buy.

We have recently seen multiple nonprofits hit with unexpected audit bills, not because they did anything wrong, but because they were not aware of this requirement.

Examples:

• A nonprofit that hired a part-time yoga instructor for their afterschool program did not request a COI. At audit, the instructor’s pay was included as payroll, adding over $3,000 to the final premium.

• Another organization paid an IT consultant $15,000 for a short-term project. The organization assumed since the consultant was not an employee, they didn’t need to worry about workers’ compensation. At audit, the amount paid to the consultant was included in the payroll calculation and the organization had to pay an extra $2,500 in premium.

Carriers are tightening their audit practices. If you cannot provide proper documentation that a subcontractor had their own workers’ compensation coverage, the carrier assumes your organization will be responsible if they get injured. Even if you never intended to cover them, they will count that payment towards your audited payroll and charge you accordingly.

To prevent an unexpected increase in premium at audit, always collect and keep on file a valid COI for any subcontractor or independent contractor you pay. The COI must show active workers’ compensation coverage for the time they performed work for you. If someone says they are exempt or does not have coverage, demand that they provide some form of documentation showing proof they do not need it. When in doubt, consult with your insurance broker and/or your workers’ compensation auditor to understand the potential issues.

If your organization is paying subcontractors or independent contractors, do not risk a surprise audit bill. Collect and retain COIs that prove they are covered. It is a small administrative step that protects your mission and your budget.

For questions about avoiding surprise workers’ compensation increases at audit, contact me at (619) 486-6569 or jmarrs@ranchomesa.com.

3 Topics to Discuss with Vendors, Independent Contractors, and Partner Agencies Prior to Working Together

Recently, a non-profit client of mine asked the question: What are the steps I should take with vendors, contracted professionals and partner agencies to make sure my organization is protected should a claim arise as a result of their work?  This is a common exposure to many of our clients, and there are several steps that can be taken to protect your business.

1. Verify the Proper Insurance is in Place
Any person/organization that you consider working with should be fully insured and able to provide you with a Certificate of Insurance, which lists the coverages, carriers and limits of insurance they have in place.  Without their own insurance in place, your company is now assuming full responsibility for anything that may occur as a result of their negligence. Depending on the nature and scope of the work being performed, different types of insurance will be required.  An insurance professional can help you determine the specific coverage needed.

Example: A charter school has hired a local animal shelter to bring animals to their students and teach about conservation.   One of the animals bites a student.  If the animal shelter does not have the proper insurance, the charter school’s insurance will be liable for any action taken against the school.

2. Name Your Business as Additional Insured
In addition to verifying that the correct coverages and limits are in place, you should also require they name your company as an additional insured on their policy.  By doing this, your organization will now be indemnified under their policy for claims arising as a result of their work, in which you are named. 

Example: In the example where a charter school has hired a local animal shelter to bring animals to their students and one of the animals bites a student, by requiring the animal shelter to name the charter school as an additional insured, the school is covered under the animal shelter’s insurance.

3. Provide a Waiver of Subrogation
A waiver of subrogation means an insured (and their insurance company) are waiving their right to subrogate against another party, should their employee suffer an injury on your premises.  Most independent contractors aren’t required to carry insurance, so this wouldn’t apply to them.  However, if employees of another company are performing work on your premises, it is wise to have them waive their right to subrogate against your workers’ compensation carrier. 

Example: A charter school has hired a local animal shelter to bring animals to their students and teach about conservation.   While presenting, an employee of the shelter trips and injures their knee.  A waiver of subrogation would void the animal shelter’s workers’ compensation provider from seeking subrogation against the charter school’s workers’ compensation policy. The employee will still be treated, but you won’t suffer the penalty for it.

I strongly recommend reviewing your processes regarding vendor, independent contractors and partner agencies to see what is currently in place.  Far too often steps are skipped and businesses are unaware of the liability they are assuming.  If you have any question about a specific circumstance, please don’t hesitate to give Rancho Mesa a call at (619) 937-0164, we are happy to assist.