Managing General Liability & Workers' Compensation Risks
Hiring workers is more than filling roles—it’s managing risk. Every person on a job site represents potential exposure to your business. How that individual is classified—employee, insured subcontractor, or uninsured 1099 worker—affects your premiums, coverage, and liability if an accident occurs. Understanding these classifications can prevent costly audit surprises and legal claims.
Worker Classifications Explained
W-2 Employees
These are staff on your payroll under your supervision. Carriers automatically include them in your GL and WC policies.
- Workers’ Comp: You are fully responsible for injuries.
- General Liability: Property damage caused by employees is covered by your policy.
- Cost: Premiums are based on payroll; predictable but higher upfront.
Insured Subcontractors
Independent businesses carrying their own GL and WC. Proper documentation transfers liability away from your company.
- Subcontractor claims go to their own policies.
- Minimal premium impact for you.
- Ensure COI lists you as Additional Insured and includes a Waiver of Subrogation.
Uninsured 1099 Labor
Workers without GL or WC policies. Most carriers treat them as employees if a claim arises, increasing your exposure.
- WC claims are your responsibility.
- GL claims for property damage fall on your policy.
- Audit risk is high—every payment may be treated as payroll.
- Double payment risk: wages + insurance premiums.
Understanding Premium Audits
At the end of your insurance term, carriers conduct a detailed review of actual payments. Auditors require documentation for payroll, 1099 payments, and COIs to ensure premiums reflect true exposure.
- Form 941 payroll reports
- General ledger or check registers
- 1099 forms for contractors
- Certificates of Insurance for all subcontractors
Auditors evaluate each contractor:
- Valid COI: Treated as insured subcontractor, minimal charges.
- No or expired COI: Reclassified as employee, premiums applied to all dollars paid.
Example: A $50,000 roofing payment to an uninsured 1099. With a rate of $15 per $100 payroll, the audit could add a $7,500 bill.
Effective Risk Management Strategies
Insured Subcontractors
- Collect COI before work begins.
- Include hold-harmless and indemnification clauses.
- Require: GL $1M/$2M, WC statutory, Additional Insured, Waiver of Subrogation.
W-2 Employees
For core roles where oversight and quality control are essential. Payroll costs are higher but predictable, reducing audit risk.
Uninsured 1099s
- Adjust bids to account for GL/WC costs.
- Collect state-approved exemption forms where allowed.
- Document everything thoroughly—handwritten notes are insufficient.
Summary Table
| Action Item | W-2 Employee | Insured Subcontractor | Uninsured 1099 |
|---|---|---|---|
| Control Level | High | Low | Low |
| Audit Risk | Low | Low (with COI) | High |
| Liability | You pay | They pay | You pay |
| Required Documentation | W-2 / I-9 | COI with AI + WOS | State exemption form |
Proper worker classification and documentation help protect your company from financial loss and audit penalties. TWFG - Contractors Insurance can guide you through pre-qualification, COI verification, and contract review to keep your business secure. Call 855-201-8934 today to ensure your risk management is complete.