CLASSIFYING RISK


COVERING CONTRACTORS--PART TWO

Defining scope of general and independent contractors
helps determine correct classification

By Linda D. Ferguson


29rn9 The porch through the dining room, mentioned in last month's column, caused a situation that had to be repaired. Because of the damages, it would be necessary to use five different contractors. It was up to my husband and me to either hire a general contractor to bring all of the work together, or we could be our own general contractors. Because the job was small, options for contractors willing to do the work were limited. We had the flexibility to be at home when the contractors could come, so we chose to be our own general contractor. Had the circumstances been different, a general contractor would have been the only logical choice.

There are two distinct types of general contractor. One type, sometimes called a paper contractor, never actually supplies any of the physical labor. His responsibility is to work with the customer to determine what is needed and then line up the people to finish the job to the satisfaction of that customer. His price includes the cost of the subcontractors and his fee for services. A good general contractor is worth every penny he is paid because he knows the abilities of the subcontractors with whom he works, as well as how to coordinate projects so that jobs can be finished in a timely manner.

The second type of general contractor actually does part of the work. Often, the "general" supplies the carpentry and then subs out all of the remaining work. This allows for more direct contact with the work, and the customer can see the person working at the site.

Both of these types of contractors start with the same classification--Contractors - Executive Supervisors or Executive Superintendents - 91580. The footnotes make it very clear that if there is day-to-day supervision or on-the-job-site supervision, the risk must be classified based on a more direct classification. Another note is that no one can have split payroll. Therefore, if you have Contractor - Executive Supervisor who also is performing physical labor, all payroll must go to the most applicable class. It may not be split between the two.

In addition, the general contractor must pay premium based on the cost of the work that is subcontracted. There are nine classifications from 91581 to 91589. Each code starts with the words "Contractors - subcontracted work" followed by a description of the type of work the subcontractors are doing for the general contractor. The premium charge is low in comparison to the exposure because the general contractor's policy operates under the assumption that the independent contractors all supply certificates of insurance and have valid policies.

In a perfect world, the independent contractor is truly independent, with his or her own insurance. Unfortunately, some general contractors are really full contractors because the "subcontractors" are actually employees operating in disguise. It is important to be able to take off the disguises BEFORE the policy is issued, rather than after the claim or premium audit.

Many court decisions have been rendered concerning when a person is a contractor and when he or she is an employee; yet confusion continues. The confusion, however, doesn't seem to take over until someone falls off a roof or causes an explosion. Suddenly that independent contractor amazingly remembers that he was actually an employee. Even the insured can have a change of heart, depending on the loss. Here are a few questions that might help point everyone in the same direction.

1. Who determines the starting time and ending time of the job? An employer dictates time and place of employment. An independent contractor sets his or her own hours.

2. Who determines the working conditions? An employer is the one who oversees the work environment and establishes policies on what is and is not permitted. An independent contractor establishes his or her own working conditions.

3. Who determines the dress code? An employer establishes an expectation of working dress even to the point of providing uniforms in some circumstances. An independent contractor chooses his or her own dress.

4. Who supplies the tools for the worker to use? Employers normally supply tools to the employee while independent contractors always supply their own tools.

As you read the above questions, think about the "paper contractor" who is coordinating jobs. He very well may be setting a starting time but only because one job must be completed before another can start. In many states, the paper contractor also is responsible for maintaining a safe work environment on a job site. Because of the need for many independent contractors to work at the same place, the paper contractor may dictate safety rules that all workers are expected to keep. The paper contractor may have a dress code for jobs for security purposes at certain job sites.

The biggest safety net a general contractor can have is a solid certificate of insurance program. If an independent contractor is working on a job and does not provide the necessary certificate, the premium audit is required to treat the contractor as an employee. Even more important, if the independent contractor causes a loss, the paper contractor will be picking up that loss with little chance of subrogation if the insurance is not in place. The discipline of keeping certificates current is vital for the general contractor. There never should be an independent contractor working without a current certificate.

If a general contractor uses an independent contractor on a fairly regular basis, a good contract will solve many problems. The contract should clearly outline their relationship and set the requirements for insurance including the requirement that the general contractors be named as an additional insured on the independent contractor's policy. The contract should state the type of insurance required, including the limits of insurance. Remember, the higher the limits, the less chance of the general contractor's policy being called into play.

In last month's column we discussed the need for proper classification and payroll determination. This month, we have reviewed the important Executive Supervisor code and the problems associated with the general contractor/independent contractor role. In next month's column we will look at the contractors classifications and footnotes as a guide to pick the correct class. *

The author

Linda D. Ferguson, CPCU, has 30 years of underwriting experience with national commercial lines carriers. She now operates a consulting business, Pleasant Street Consulting Company, in West Union, Ohio.