Does My Business Insurance Cover Independent Contractors?
An independent contractor is a worker hired on a temporary basis to complete a task for a business. These self-employed workers provide services for a business, but their methods and activities are not under the direct control of that business.
A business needs to determine whether a worker is an employee or independent contractor for tax purposes. However, the answer can also affect how insurance responds if an incident occurs.
Does a business’s workers’ compensation insurance cover independent contractors?
Businesses are not required to extend their workers’ compensation to cover independent contractors. Independent contractors should carry their own workers’ comp insurance. When hiring an independent contractor, a business owner should confirm that the contractor has the appropriate insurance coverage.
Does a business’s liability insurance cover independent contractors?
A small business can be held liable for damages cause by an independent contractor they use. Liability coverage under a commercial package policy (CPP), businessowners policy (BOP), or commercial general liability (CGL) policy may not automatically provide coverage for independent contractors. However, endorsements can provide the coverage a business needs to protect itself from its contractors’ liability.
When hiring an independent contractor, confirm that they have sufficient liability coverage. If a claim is reported, the contractor’s coverage may provide primary coverage, making the small business insurance a secondary source of payment.
What insurance products should an independent contractor consider?
It is important for an independent contractor to have protection for the risks they might face in the course of their work. Depending on the nature of the job, insurance needs can vary. These coverages are the basis for a strong financial safety net:
Provides protection for lost net income; mortgage, rent, and lease payments; loan payments; taxes; and employee payroll. It requires that the damages be caused by a covered loss resulting in physical damage to the property.
Businessowners policy (BOP)
Combines property, liability, and business interruption coverages for small- to medium-sized businesses. Coverage is generally less expensive than if purchased through separate insurance policies. A BOP may also provide coverage for your merchandise, tools, and small equipment.
You may need a vehicle to transport your product to customers. Commercial auto insurance covers the cost to repair or replace vehicles (less depreciation) in the event of an accident, as well as the cost to rent a replacement auto so that your business can continue operating. It also covers your liability arising from an accident in your business vehicle (which may also be covered under your personal automobile insurance policy).
Commercial general liability (CGL)
Insures against the liability exposures of many businesses. Coverage includes product liability, completed operations, premises and operations, and independent contractors.
Commercial excess and umbrella
Provides greater financial protection by increasing the liability limits of certain underlying policies and, in some instances, provides coverage for certain risks not covered under your underlying policies.
Provides protection from a range of cyber risks associated with your business data and the use of computers in your operations.
Employment practices liability
Coverage for wrongful termination, discrimination, and other violations of employees’ legal rights.
Errors and omissions
A professional liability policy protecting the policyholder against negligent acts and omissions that may harm their clients.
Pays for medical care and physical rehabilitation of injured workers and helps to replace a portion of lost wages while they are unable to work. Your insurance company may also provide resources designed to assist retailers in developing safe working habits to help control insurance costs.
If you’re working for another business, you will likely be required to have additional coverage. The two most common are additional insured and waiver of subrogation endorsements.
What insurance products should a business that hires independent contractors have?
Independent contractor extensions are available under businessowners policies and commercial package policies. When speaking with an insurance agent about the business’s risk management needs, ask about additional insured coverage options.
A Businessowners Policy (BOP) is a combined policy that includes coverage for property and liability risks. A BOP can also provide business income insurance and industry-specific coverages.
A Commercial Package Policy (CPP) is a combined policy that is designed for mid-sized to large companies. It includes property, liability, business income, inland marine, crime, and industry-specific coverages.
It is important that a small business execute a written contract with all independent contractors. That contract should be executed prior to any work beginning on the project and should be reviewed by the business’ attorney and signed by both a business representative and the independent contractor. It should include:
- An indemnification agreement favoring the business,
- A hold harmless agreement favoring the business, and
- Additional insured status required on behalf of the business on a primary and noncontributory basis, with coverage limits specified in the contract.
In addition, the business should require production of a certificate of insurance prior to any work beginning on the project showing that the independent contractor has in effect at the time of the project, full workers’ compensation, general liability, and umbrella coverage, as well as any additional insured coverage in favor of the business as required by contract.
Before deciding which policies are best for your business, be sure to contact a licensed business insurance broker or agent, who can provide more detailed information, help solicit quotes from insurers, and answer any questions you have.
An independent agent can help business owners understand which products can best meet their needs.
Independent Contractor (Self-Employed) or Employee? (n.d.) IRS.