The Hidden Risk of Ghost Policies in the Contracting Industry
If you hire a contractor that has a Ghost Insurance Policy, and someone is injured on your property, you could be held responsible for all medical costs.
Just because a contractor provides a certificate of insurance showing proof of coverage does not mean it actually has real protection for its employees.
Many companies purchase what is known as a Ghost Policy by claiming either they have no employees (and pay them off the books) or that their employees are sub-contractors, which may possibly be illegal given Federal and State definitions of who may be considered a sub-contractor.
By obtaining a Workers Compensation Ghost Policy, a contractor is able to produce a certificate of insurance while saving money by not purchasing a traditional Workers Compensation Insurance policy.
Purchasing a Workers Compensation Insurance Ghost policy allows a contractor to offer much lower prices than it would be able to offer if it had a traditional workers’ compensation insurance policy.
If you are shopping around for the right contractor to complete your project, chances are that you have encountered some major variation in price quotes.
More often than not, this variance is due to one differentiating factor: workers’ compensation insurance.
In all likelihood, you are a savvy consumer and you requested a certificate of insurance (COI) from each contractor as proof of proper insurance coverage.
But what you might not know is that there is a dangerous secret about workers’ compensation insurance called the Ghost Policy. If you hire a contractor that operates using a Ghost Policy, and an employee is injured on your property, you could be held responsible for all medical costs.
Understanding the Ghost Policy
To understand the Ghost Policy, it’s important to first understand some background information. The contracting industry can be hazardous—particularly in trades like roofing, electrical, and construction work—where the rate of injury and fatal accidents is significantly higher than average.
Insurance companies determine workers’ compensation rates based on the frequency and severity of accidents in each trade. As a result, contractor workers’ comp costs are very high.
Typically, a small contractor with two to three employees will pay around $120,000 in annual wages, translating to $30,000 to $60,000 in annual insurance premiums. A mid-size contractor with seven to sixteen employees may pay $250,000 to $600,000 in wages, resulting in $62,500 to $300,000 per year for workers’ comp coverage.
In comparison, a Ghost Policy costs around $1,500 to $4,000 per year. It’s designed to provide workers’ compensation insurance for a contractor or sub-contractor who has NO employees.
Why would someone do this? Because many jobs and contracts require proof of workers’ comp. This policy provides a cheap way for an individual to obtain a COI that shows proof of coverage—but in reality, it doesn’t provide any real benefits. It allows a company to pretend coverage exists when it really doesn’t.
The Loophole and Its Consequences
Though its original purpose may have been well intended, the Ghost Policy has opened an enormous loophole.
A contractor can apply for a Ghost Policy and hide the fact that it has employees by either:
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Paying them under the table (keeping payroll off the books), or
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Claiming that all employees are independent sub-contractors.
State and Federal law clearly outline when a worker may be considered a sub-contractor, based on how much control the company has over that worker. For example, if the company arranges the jobs, owns the equipment, and dictates work hours, then the worker is legally an employee, not a sub-contractor.
By using a Ghost Policy, a contractor can save $30,000 to $300,000 per year or more, and also avoid paying employer payroll taxes such as Social Security, Medicare, and unemployment—adding another 10% savings on total payroll.
These huge savings allow dishonest contractors to underbid competitors who are properly insured, win more jobs, and still make a profit—all while putting workers and clients at serious risk.
The Real-World Risk for Clients
Picture the following:
A contractor shows up to complete your project, and a worker falls from a roof, gets electrocuted, or suffers another serious injury.
If that contractor carries legitimate insurance, you have nothing to worry about—the insurance company covers the costs.
But if the contractor is operating under a Ghost Policy, the injured worker or their lawyer will come after you. Your homeowner’s or commercial insurance policy could be forced to pay, and if the court determines you knowingly hired an uninsured contractor, you could even face criminal charges.
Unfortunately, Ghost Policies are very common—especially in construction-related trades where insurance rates are high.
How to Protect Yourself
Because a COI for a Ghost Policy looks identical to one from a legitimate policy, it’s important to take precautions:
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Get Written Confirmation: Ask the contractor to provide written verification that all personnel on your jobsite are covered by workers’ comp insurance.
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Never Accept a COI Directly from the Contractor: It should always come from the insurance agency.
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Check the Dates: Make sure the certificate is recently issued and current.
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Verify with the Agency: Call the insurance agency listed on the COI to confirm active coverage.
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Ask How Many Employees Are Covered: The agency can legally disclose this. If they say zero employees, but a crew shows up to your job, that’s a red flag.
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Be Cautious of Low Bids: If a quote seems too good to be true, it probably is. A contractor operating with a Ghost Policy can drastically undercut prices because they’re not paying for real insurance.
The Bottom Line
Exploitation of employees and clients for profit is unacceptable. Understanding the truth about Ghost Policies helps protect both consumers and honest contractors who follow the law.
We hope this article sheds light on the price differences within the contracting industry and empowers you to make informed, safe hiring decisions.
If you’d like to learn more or get help verifying a contractor’s insurance coverage or if you are a contractor shopping for Affordable Workers Compensation, contact The Contractors Resource Center for guidance. For your free quote and consultation: CLICK HERE.
Questions? Contact Kevin at: 530.320.3617 or [email protected]