The Cost of Not Getting a Certificate of Insurance
Every year in Colorado, insurance companies perform an annual audit of your workers compensation policy. It is how they assess whether you paid the full amount of your premium and more importantly, the cost basis of that premium.
What is the cost basis? It’s your amount of risk that you are exposed to during the year. And that risk is summed up in the amount of work you paid to Subcontractors and Employees. So, the insurance company looks at your profit and loss statement and sees the amount of money you paid to those two categories. And that determines your premium amount.
Employee Coverage
This is typically why you got a workers compensation policy. By law, if you have employees, you have to carry coverage to protect those employees in the event their is a work place accident. As the owner your company, you can elect to opt out of coverage. And the end of the year audit determines if the amount your premium was based on, is the actual amount you paid in payroll totals. It could change. You could have hired a new project manager, or maybe an operations manager. Or the year could have been lean and you had to lay off several crews. Then your premium may go down.
But what if you don’t have any employees because everyone who works for you is a 1099 contractor?
1099 Contractor
Many contractors think that by hiring only 1099 contractors (framers, roofers, etc.) is saving them money. Well, it can. Employment taxes and insurance are expensive. But, did you know that if you do not get proof of coverage from EVERY subcontractor you could be on the hook for workers compensation coverage for them? So, let’s say, you hire a framer and pay them $220,000.00 for the year. The premium rate in Colorado could be as much as $8.00 / hundred dollars. So that means, an additional premium payment of $ 17,600.00! Just because you hire subcontractors does not mean that you are free from the obligation of carrying coverage.
Protect Yourself with a Subcontractor System
Proof of coverage is a formal document that proves a business (subcontractor) has workers’ comp coverage. Also known as a certificate of insurance, this document includes important policy details and proves coverage. Getting proof of coverage is a simple process. But if you wait until five days before your audit, it could be an impossible task. And, if you can not prove coverage going back to the time that year that you paid the subcontractor, then you are on the hook. So, it is best practice to have a system in place when you onboard a new subcontractor. Send them a welcome email and request the following information:
- Certificate of Insurance showing coverage of General Liability.
- Certificate of Insurance showing coverage of Workers Compensation.
- A signed w9, Request for Taxpayers Identification Number.
What if they are a sole proprietor? In the event your subcontractor is a sole proprietor and they perform all of the work themselves and they choose to waive coverage for themselves, you must ask them to fill out an Independent Contractor Form, waiving their right to coverage. This is a form provided by your insurance company. In Colorado, most contractors turn to Pinnacol Assurance to obtain a workers compensation policy. Pinnacol requires that their IC Form be used. Please check with your insurance company what their requirements are for proof of coverage.
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