Cities and towns that hire uninsured contractors risk an increase in their workers’ compensation and liability insurance premiums.

 If an uninsured contractor is hired to repair a broken step at city hall for a total cost of $300, if that contractor is injured or killed, or causes injury, death or damages to the city or a resident’s property while doing the work, the city could be liable for the losses. 

For workers’ compensation coverage, if the contractor has no coverage, then by state law the city could be considered the contractor’s employer. The general rule is that coverage “rolls up” the hiring chain, so if the direct employer has no coverage, the SC Workers’ Compensation Commission follows the chain up until coverage is found.

When doing business with contractors, cities need proof that a contractor has insurance before being hired for a job and before completing the work. If it is a long project, the city should check with the contractor’s insurance agent periodically to verify coverage is still in force.

During the annual payroll audit, the auditor will ask the city for a certificate of insurance for each contractor. Without it, the city may be charged the workers’ compensation premium for that contractor. If that is all that happens, that is the least expensive potential outcome. What could be significantly more costly is if the contractor is injured or killed while working for the city and files a workers’ compensation claim. The claims costs could impact the city’s workers’ compensation premiums for several years.

A common response from sole proprietors who bid to work for cities and towns is that they are not required to carry workers’ compensation insurance. If they have fewer than four employees, including part-time employees and family members, they are not required to purchase insurance but they are still subject to the Workers’ Compensation Act. They can purchase coverage and the city can require that all contractors hired by the city provide the name of their insurance agent so the city can contact the agent directly and ask for written proof in the form of a certificate of insurance. This should be done during the bid process and again just before work begins.

If a sole proprietor who has no employees would like to formally reject workers’ compensation coverage, she can purchase from an insurance agent what has been called a ghost policy. Essentially, he is buying a policy but excluding himself from coverage and therefore, formally rejecting workers’ compensation coverage. Like other policies, they are usually in force for one year. The benefit to the contractor is that he can bid for jobs which require workers’ compensation insurance.
If injured, a contractor with a ghost policy still could file a claim, but the city can provide the adjuster with a copy of the ghost policy with the expectation that the claim could be denied. A contractor with employees cannot purchase a ghost policy, so take note of a contractor using subcontractors who may actually qualify as employees per IRS rules. For example, the subcontractors may qualify as employees if the contractor controls means and methods as well as the ability to hire and fire, or the subcontractors may qualify if they don’t work for anyone else.

For general liability, cities need to also be wary of contract language which limits a contractor’s liability to the cost of the job. In the original example of a $300 step repair, this amount would not likely be sufficient recovery for the city.

For more information about contractor insurance liability, contact Meredith Kaiser, underwriting manager, at or 803.933.1279.​