Workers’ Compensation Safety Records Can Affect Your Bond Capacity

workers compensationOnce an owner or developer selects your company for a construction project, one of your many tasks is to ensure that your workers’ compensation program meets all contractual requirements.

On larger projects, construction contracts normally detail which contractor is responsible for ensuring all workers have workers’ comp coverage. Not all contracts are as clear as they should be, however. Many smaller construction projects occur with a simple handshake. Relying on your subcontractors to furnish their own workers’ compensation coverage can lead to problems for your construction company, including difficulty in obtaining the surety bonds you need.

When general contractors and subcontractors work together

In the construction industry, states highly regulate the relationship between the contractor and the subcontractor, says Chris Boggs, the executive director of the Independent Agents and Brokers of America. As quoted in My New Markets, Boggs states that almost all states and the District of Columbia require workers’ compensation benefits when general contractors and subcontractors work together. Subcontractors must provide workers’ compensation benefits to their employees in these states. General contractors, by statute, must supply benefits to the subcontractor’s injured employees if the subcontractor is uninsured. Additionally, the general contractor’s insurer will charge a premium for uninsured subcontractor’s employees, even if no injury occurs to those sub’s employees. Your workers’ compensation insurer will bill you for this additional premium at your annual audit.

That’s why it’s critically important that any contractor hiring subcontractors ensures that all subcontractors it hires carry workers’ compensation coverage for their employees.

What about the small contractor with no employees who does not carry workers’ compensation insurance? Your insurer may allow you to provide a signed affirmation from your subcontractor that declares that the sub understands they are not an employee of you, the contractor.

A lot can go wrong here. What if that subcontractor picks up a casual laborer for the day, as often happens in many trades? Now assume that laborer falls off a roof or hurts his back digging. Who pays then? That jurisdiction’s administrative law judge could find you, as the contractor, statutorily responsible for the injury. If that happens, your workers’ compensation policy may have to pay that injury.

Remember, your commercial general liability policy does not cover injuries to employees. If you’re hiring subcontractors, it’s vital to obtain a valid certificate of insurance from all subcontractors. Work with your independent agent if you have any questions about any certificate’s validity.

Your safety record is important in surety bonding

Surety bonding, such as bid bonds and performance bonds, depends on several factors. These include your past job performance, your capacity to complete the proposed job and your financial strength. The surety company’s underwriters will also evaluate your safety record.

The underwriter will want to know more about your management team and its commitment to safety. A serious on-the-job injury could delay or halt production. If your organization has a history of safety problems, the underwriter will want to determine the specific steps implemented by management to mitigate those safety issues.

In today’s highly competitive employment market, your safety record can be an important component in your ability to hire the best candidates. If workers don’t feel safe on the job and a company’s lack of a strong safety mindset spreads in your industry, you may not attract the most highly qualified workers.

Workers’ compensation insurance and hiring challenges are just two of the issues faced by today’s contractors. Surety underwriters keep their fingers on the pulse of the construction industry. Your agent should have strong relationships with these underwriters and turn to them for answers when you have questions.

Nancy Germond, MA, ARM, AIC, ITP, SPHR, SHRM-SCP

Nancy is a second-generation risk management professional and the author of "Workers’ Compensation in Two Hours: The Business Owner’s Guide to an Exceptional Worker’s Compensation Program".