Every spring we get a certain kind of phone call. A contractor just got their workers' comp audit results back, and there's a bill attached that's thousands of dollars more than they expected. When we dig in, it's almost always the same story: they paid a few subcontractors on a 1099, didn't collect proof of insurance, and the insurance company added those subs' pay to the contractor's payroll.
If you hire subs in Indiana, Illinois, or Michigan, this is one of the most important insurance topics you can understand. Here's how it works and how to protect yourself.
If I pay someone on a 1099, aren't they responsible for their own insurance?
That's the most common assumption we hear, and it's where contractors get burned. A 1099 is a tax form. It doesn't settle the question of who's responsible if that worker gets hurt on your job.
In Indiana, Illinois, and Michigan, a hiring contractor can be held responsible for workers' comp benefits when an uninsured subcontractor (or one of that sub's employees) is injured on the job. In insurance terms, you can be treated as the statutory employer. If your sub doesn't carry coverage, the injury can land on your policy, or on you directly if you don't have one.
Why did my premium audit charge me for my subs?
Your workers' comp premium is based on payroll. At the end of your policy term, the insurer conducts a premium audit to compare your estimated payroll to what you actually paid out.
During that audit, the auditor will look at what you paid subcontractors. If you can't show a valid certificate of insurance for a sub covering the time they worked for you, most insurers will count that sub's pay as if they were your employee and charge premium on it. That's the surprise bill.
What should I collect from every subcontractor?
Before a sub steps onto your jobsite, get a certificate of insurance (COI) that shows:
Keep those COIs organized by job and date. Auditors want to see coverage that was in force during the work, not a certificate you chased down after the fact. And set a reminder, because a COI from last year doesn't prove anything about this year.
What if my sub is a one-person operation with no employees?
This is where it gets a little more nuanced, and the rules aren't identical across all three states.
Some sole proprietors and business owners can exclude themselves from workers' comp. In Indiana, for example, qualifying independent contractors can apply for a state-issued certificate of exemption. Other subs carry what's often called a "ghost policy," which is a minimum-premium workers' comp policy that shows active coverage but doesn't actually cover the owner.
A ghost policy can satisfy an auditor, but it has limits. If that one-person sub brings a helper to your job, the helper may be covered under the ghost policy only if the sub has reported payroll for employees. If not, you could be back on the hook. Ask questions when a sub shows up with extra hands.
Does general liability matter here too?
Absolutely. If your sub damages a customer's property or injures someone and doesn't have general liability, the claim is likely coming to you. Many GL insurers also charge extra premium at audit for uninsured subs, just like workers' comp. Some policies even exclude claims arising from uninsured subs entirely. Read your policy or ask us to, because that exclusion can be a very expensive surprise.
How can I avoid a big audit bill?
Here's the short list we give our contractor clients:
Protect your business before the audit does
Working with subs is how most contractors in Indiana, Illinois, and Michigan grow, and it's completely manageable when you have a system in place. At Shurr Insurance Agency, we help contractors set up workers' comp and general liability programs that fit how they actually operate, and we help them prepare for audits so there are no surprises. If you've been hit with an audit bill before, or you just want a second set of eyes on how you're handling subs, reach out to us. We're happy to walk through it with you.
Disclaimer: This article is provided by Shurr Insurance Agency for general informational purposes only and does not constitute legal or insurance advice. Coverage availability, terms, and requirements vary by insurer, policy, and state. Please contact a licensed Shurr Insurance agent to review your specific situation.