What happens if your Subcontractor goes Insolvent – or their Insurance has lapsed?

In many sectors, subcontractors are the lifeblood of projects, providing specialist skills, additional capacity and expertise when required. But with that reliance comes risk.

When appointing a subcontractor, it is natural to focus on their capabilities, quality of work, experience and reputation. However, due diligence needs to go further. Their financial stability, insurance arrangements and approach to risk management can all have implications for your own business.

What happens if a subcontractor becomes insolvent?

A subcontractor becoming insolvent midway through a project can create immediate operational and financial problems.

Work may be left unfinished, projects delayed and replacement contractors appointed at additional cost. There may also be deposits or advance payments that are difficult to recover.

The problems can continue after the work is complete. If defects subsequently emerge, recovering the cost of remedial work from a business that has ceased trading could prove extremely difficult.

Who picks up the liability?

Using a subcontractor does not automatically remove your own responsibilities.

Depending on the contractual arrangements and circumstances surrounding a claim, a customer may look to the main contractor to resolve an issue even where the work was completed by a subcontractor.

It is therefore important to establish responsibilities before work begins, with contracts clearly defining the scope of work, liabilities and insurance requirements.

Make insurance checks an ongoing process

Checking insurance when a subcontractor is first approved is important, but it shouldn’t be a one-off exercise.

A formal process should be established for requesting current insurance documentation, recording renewal dates and checking that appropriate limits of cover are maintained.

Crucially, consider whether the subcontractor has the right insurance for the work they are actually undertaking, rather than simply confirming that a policy exists.

Don’t rely on an expired insurance certificate

An insurance certificate held on file may demonstrate that cover existed at one point in time – it doesn’t necessarily demonstrate that appropriate cover remains in place today.

Policies can expire, be cancelled or change at renewal. Without a process for requesting updated documentation, you could unknowingly have subcontractors working on your behalf without the insurance protection you expect them to carry.

Keep the right records

Good record keeping can become particularly important if a claim arises months or years after work has been completed.

Insurance documentation, contracts, scopes of work, risk assessments, correspondence and evidence of renewal checks should be retained and easily accessible. This can help establish what was agreed, who was responsible and what insurance arrangements were in place at the relevant time.

Manage the risk before handing over the work

Effective subcontractor management starts before an appointment is made.

Assess subcontractors appropriately, establish contractual insurance requirements, periodically review financial and insurance information and maintain an up-to-date approved subcontractor register.

Your own insurance arrangements should also be considered. Speaking with your commercial insurance broker can help you understand how the use of subcontractors affects your insurance programme and identify potential gaps before they become a problem.