Our premium auditors often get the question, “Why do we charge for subcontractors?” The answer is simple: contractors who hire subcontractors are exposed to vicarious liability and could have claims brought against them as a result. The premium charged for adequately insured subcontractors helps offset the costs of defense and judgments that may be brought against the hiring contractor. These could include subcontractors’ torts, negligence or inadequate limits of insurance.

The basis of premium charged for adequately insured subcontractors is “total cost.” By definition, total cost includes all labor, materials and equipment furnished, used or delivered for use in the execution of the work. However, it does not include the cost of furnished equipment installed but not furnished by the subcontractor, if the subcontractor does no other work on or in connection with such equipment. Total cost also includes all fees, bonuses or commissions made, paid or due.

By definition alone, this is a more complicated topic than it would appear on the surface. Many insureds are confused by the inclusion of materials in their premium charge. However, it is important that your clients include the proper costs at the time the policy is written to help avoid problems at time of audit.