Are Plumbing Subcontractors Covered by Your Insurance?

The short version

Plumbing companies sub out work constantly: a trenching crew for a sewer lateral, an excavation outfit for a slab leak reroute, a one-man drain operator who covers overflow calls, a second plumbing shop on a large repipe. Each of those relationships raises the same question the day something goes wrong. Whose insurance pays?

The answer the policies give is simple on paper. Your workers' compensation covers your employees. Your general liability covers your company's liability for injury and damage to others. A subcontractor is a separate business that is supposed to carry both for itself. The complication is that California law, your carriers' audit rules and the endorsements on contractor policies all treat a subcontractor who cannot prove separate status and separate insurance as if it were part of your company. In practice, the subcontractor question is less about what your policy says and more about what is in your subcontractor file.

A realistic scenario

This is a hypothetical. A plumbing company in Riverside County with eight field employees takes on a sewer lateral replacement that requires an open trench across a front yard and under a sidewalk. The owner hires an excavation operator he has used before. The operator gives a verbal price, shows up with a mini-excavator and two helpers, and starts digging. Nobody asks for a license number or a certificate.

On the second day, one of the helpers is in the trench hand-digging around a gas line when a section of the wall slumps and pins his leg. He is hospitalized with a fractured tibia and a crushed ankle. The treatment and wage-loss exposure runs well into six figures.

Three facts come out in the first week. The excavation operator has no contractor's license. He has no workers' compensation policy. And the helper, who has worked for him on and off for a year, has never been paid as an employee of anyone. The injured helper's attorney tenders the claim to the plumbing company, which is the only insured business on the job.

Here is how it sorts out:

• Workers' compensation. Because the excavation operator was unlicensed, California law generally treats his workers as employees of the licensed contractor who hired him for workers' compensation purposes. The plumbing company's carrier accepts the claim. It is paid under the plumbing company's policy and, if the company is experience rated, will count in its experience modification for the three rating years whose experience period includes that policy year.
• The audit. At the end of the policy year, the auditor asks for certificates for every subcontractor paid during the term. There is none for the excavation operator, so the amount paid to him is added to the plumbing company's payroll in the plumbing classification and additional premium is charged. The general liability auditor does the same thing.
• General liability. The homeowner's sidewalk and the neighbor's irrigation line were also damaged by the excavation. Whether the plumbing company's general liability responds depends on whether its policy carries an exclusion for work by uninsured or independent contractors. Many contractor policies do.

None of this would have happened if the sub had been licensed and insured. All of it was knowable in ten minutes before the first shovel went in.

How California treats an unlicensed subcontractor

For workers' compensation, the critical distinction is not between "employee" and "subcontractor" as you understand those words; it is between a licensed contractor and everyone else. Labor Code section 2750.5 creates a rebuttable presumption that a worker performing services for which a contractor's license is required is an employee rather than an independent contractor, and it makes holding a valid contractor's license a condition of independent contractor status. California decisions apply it so that the licensed contractor who hires an unlicensed sub is treated as the employer of the sub and of the people the sub brings to the job. The consequence is that an unlicensed sub, and the people who work for him, are generally treated as your employees for workers' compensation purposes.

That has three practical effects:

1. Their injuries are your claims. The claim is handled under your policy, counted in your loss history and reflected in your X-Mod. See how workers' compensation claims affect future insurance costs.
2. Their cost is your payroll. What you paid the unlicensed sub is generally treated as remuneration to your employees and charged premium at audit.
3. You can be the employer for other purposes too. The Cal/OSHA Appeals Board has applied the same rule to treat the licensed contractor as the employer of an unlicensed sub's workers for workplace-safety citations, and if your own coverage lapses, the uninsured-employer penalties described in the C-36 requirements guide come into play.

A sub whose license is suspended, often for failing to maintain workers' compensation, is treated the same as a sub who never had one.

What happens at audit with a licensed but uninsured sub

A licensed subcontractor is a separate business in the eyes of the law. But your workers' compensation and general liability policies are both audited at the end of the term, and both auditors apply the same working rule: a subcontractor who cannot be shown to carry its own insurance is charged to you.

For workers' compensation, the auditor asks for the sub's license number and a certificate of insurance covering the dates the sub worked for you; State Fund's construction audit guide, for example, asks for a certificate from subcontractors who have their own employees. If one is produced, the sub's cost is removed from your premium basis. If one is not, the cost is generally added to your payroll in the classification that fits the work performed, and premium is charged on it. Audit rules for a licensed sub with no employees vary by carrier, so ask yours what documentation it accepts. For general liability, the same logic applies to the cost of subcontracted work: insured subs are typically rated at a low "insured subcontractor" basis or excluded from the premium basis entirely, and uninsured subs are charged as if the work were your own.

The fix is administrative: collect the certificate before the sub starts, not after the auditor asks.

How your general liability responds to a sub's damage

The "your work" exclusion and its subcontractor exception

A standard commercial general liability form excludes property damage to "your work" arising out of it and included in the products-completed operations hazard. That is the exclusion that stops the policy from acting as a warranty on your own installations. The standard form then generally adds an exception: the exclusion does not apply if the damaged work, or the work out of which the damage arises, was performed on your behalf by a subcontractor.

For a plumbing contractor who subs out part of a job, that exception matters. Two cautions, though. First, this is a description of the standard form; many contractor policies attach an endorsement that removes the subcontractor exception outright. Second, the exception helps with the "your work" exclusion only; the other exclusions, including the damage-to-property exclusions discussed in Does general liability cover water damage caused by a plumber?, still apply.

Uninsured and independent contractor exclusions

The endorsements that most often surprise plumbing contractors after a subcontractor loss are the ones that remove coverage for injury or damage arising out of work performed by subcontractors who did not carry their own insurance, did not name you as additional insured, or did not sign a written indemnity agreement. Some versions apply only to uninsured subs; others, often called subcontractor warranty endorsements, make your coverage for any sub's work conditional on your having collected specific documents before the work began. If your policy has one, the certificate file is not just an audit convenience. It is a condition of coverage.

Additional insured status and indemnity

The cleanest way to handle a sub's liability is to make sure the sub's own policy responds first. That takes two documents working together:

• A written subcontract with an indemnity clause, under which the sub agrees to defend and indemnify you for claims arising out of the sub's work. California limits how far a contractor can shift liability for its own negligence onto a subcontractor: for most commercial subcontracts entered into on or after January 1, 2013, Civil Code §2782.05 voids defense and indemnity obligations to the extent a claim arises from the hiring contractor's active negligence or willful misconduct, or falls outside the sub's scope of work, and residential work has its own rules. Have your attorney draft the clause rather than copying one.
• An additional insured endorsement on the sub's general liability naming your company, ideally covering both ongoing and completed operations, with primary and non-contributory wording so the sub's policy pays before yours and does not ask yours to share.

The certificate of insurance is how you confirm these exist. It is not the coverage itself. Ask for a copy of the endorsement, and understand that a certificate issued in March says nothing about whether the sub's policy was still in force in September. More on the mechanics is in Certificates of insurance and additional insured requirements for plumbers.

What your policy does and does not do for a sub

To put it in one place, when a subcontractor is injured or causes damage on your job:

Your workers' compensation generally does not cover the employees of a properly licensed and insured sub. It generally does cover the workers of an unlicensed sub, and it may end up covering the workers of a licensed but uninsured sub after a dispute over their status. It never covers a sub's own property damage.

Your general liability covers your company's liability to third parties, which can include liability for damage a sub's work causes if your policy does not exclude it. Whether it also covers injury to the sub's own workers who sue you is a separate question; many contractor policies limit or exclude claims by employees of subcontractors, and it is worth asking about specifically.

Your general liability does not insure the subcontractor. A sub who causes damage and has no policy of its own has no coverage, and the homeowner's only insured target is you. Your commercial auto and tools coverage do not extend to a sub's vehicles or equipment either.

Practical takeaway

Build a subcontractor file and refuse to let anyone start work until it is complete. In order:

1. Verify the license on the CSLB website, including the classification for the work being subcontracted and the status of the sub's own workers' compensation record. Save a dated copy.
2. Collect certificates for workers' compensation and general liability, with coverage dates that span the planned work, and calendar the expiration dates.
3. Collect the additional insured endorsement itself, not just the box on the certificate, and confirm it covers completed operations.
4. Sign a written subcontract with an indemnity clause your attorney has reviewed.
5. Read your own policy for subcontractor warranty, uninsured contractor and independent contractor endorsements, and ask your broker in writing what the policy requires you to collect.
6. Keep the file for the audit. Workers' comp and general liability auditors both want it, and both will charge you without it.

The Riverside company in our scenario would have learned in the first minute of that process that its excavation operator had no license. It could have hired a licensed, insured excavator for a modest difference in price, and the helper's injury would have been his employer's claim rather than a six-figure entry on a plumbing company's loss runs.

If you are unsure what your current policy requires you to collect from subcontractors, or whether it excludes their work, ask a licensed producer to review the endorsements with you before the next job starts.