Summary: In order to protect employees of small operations (such as many small subcontractors), the workers compensation laws of a majority of states impose liability on principals for compensation benefits to employees of contractors or subcontractors. These statutes vary from state to state, but usually are qualified by a provision imposing liability on the owner (principal) only in the absence of workers compensation insurance provided by the subcontractor. For example, the statute of Wisconsin reads, in part, “An employer shall be liable for compensation to an employee of a contractor or subcontractor who is not subject to this chapter, or who has not complied with the conditions of the statute in any case where such employer would have been liable for compensation if such employee had been working directly for him.”

Few people outside the insurance industry realize this and still fewer bother to find out whether contractors to whom they let or sublet work are properly insured. It has happened more than once that a person has suddenly found himself confronted with a compensation claim made by an employee of an uninsured or insolvent contractor—and had to pay it.

Since there are as many variations as there are laws, these pages discuss in a general way the operation and objectives of workers compensation statutes regarding the potential liability of principals or contractors to employees of contractors or subcontractors. For a discussion of general liability insurance and its relation to liability imposed upon a principal, see Owners and Contractors Protective Liability Coverage Form.