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Do Independent Contractors Need Insurance?

Working as an independent contractor or freelancer opens you up to certain risk exposures you may not be aware of working for yourself. You want to mitigate the risks and protect your business with the right insurance. Why else do you need insurance? Many potential clients require you to provide proof of insurance before starting a project. Government projects require you to provide a certificate of insurance to even bid on the project.

Independent contractors who may need this insurance are:

What is an Independent Contractor?

The IRS has suggestions for defining characteristics that determine whether or not a worker is an employee or an independent contractor:

  • Who controls details of how the work is done?
  • Who is responsible for negotiating the business aspects of the worker’s job?
  • Who provides the worker’s benefits? (Vacation, insurance, pension, etc.)

The most basic distinction, tax-wise, between an employee and an independent contractor is that an employer is generally held responsible for withholding income taxes from an employee’s wages, but not for those of an independent contractor. Workers who are hired as independent contractors are often called “1099s”, a reference to the year-end tax form they receive. (As opposed to “W2 employees”, who fill out a W2 for their employers and have taxes withheld by them).

Why Does the Distinction Matter For Business Insurance?

NOTE: If you do not work with subcontractors the following distinction may not be of concern. However, if you hire subcontractors, this is important to consider carefully:

The IRS may accept your choice to classify a worker as a subcontractor who receives a 1099 from you at the end of the year. However, if that same worker is injured on the job, or the subject of a lawsuit—the Department of Labor determines if the individual is an employee or a subcontractor. It doesn’t matter which tax form they’ve been receiving from you.

If the Department of Labor decides that your subcontractor is an employee, you will be held responsible for all medical costs, lost income, future lost wages, etc, regardless of who has been paying their employment taxes.

Insurance costs for standard employees may actually be lower than those for subcontractors in some cases, although rates will vary from business to business and state to state. While the freedom to regulate the amount and type of work taken is a great benefit, independent contractors should also remember that they will shoulder the responsibility for damages or personal injury, and weigh out those costs against the perks of self-employment.

The Types of Insurance Coverage Independent Contractors Need

Struggling to make ends meet while doing freelance work and trying to manage risk is a difficult but not impossible undertaking. Allowing your home and family’s assets to be at risk is unacceptable. Many contractors that utilize a home office and/or work out of their homes make the unfortunate assumption that their homeowner’s or renter’s policy will provide coverage for any losses.

However, those policies don’t cover businesses. They are not business insurance policies. An independent contractor insurance policy can give your customers peace of mind—plus it shows you are a credible professional. So what should a comprehensive liability policy cover? First and foremost, it needs to start with a general liability insurance policy.

General Liability Insurance

If you perform any work as a freelancer/contractor, it only makes sense to put a general liability insurance policy in place. General liability insurance provides coverage for third-party bodily injury or property damage while a customer is in your business. General liability insurance will also cover the cost of paying for the injured guest's medical bills or property damage up to the level of coverage you purchase. This business insurance will also cover legal and court costs.

Property damage and third-party bodily injury aren't uncommon, and not having liability insurance could leave you facing financial ruin. It is also legally required for licensed contractors in some states to hold general liability insurance.

NOTE: If you operate your business out of an office space or business property you may want to consider a Business Owners Policy (BOP) to combine general liability insurance, commercial property insurance, and business interruption coverage. Many insurance companies in your industry may include other related policies as well.

How Do Contractors Obtain General Liability Insurance?

There are two ways contractors can obtain liability insurance:

  1. Purchase the business insurance policy yourself: The most affordable option is to obtain general liability insurance for yourself and personally manage coverage amounts and costs. Make sure you get a certificate of insurance to provide to potential clients.
  2. Have your clients add you to their policy: A client can add you to their policy as an additional insured for the duration of the project you’re working on. Being added as an additional insured affords the protection of their insurance policy to you. However, this can typically be costly and it may be difficult to convince the homeowner/business owner to go this route. 

Getting specifics about business insurance from anyone hiring independent contractors is highly advised, and keeping a policy in place for yourself that covers you in case of injury or damages could help mitigate the risk of future financial disasters.

Other Types of Business Insurance Policies to Consider

What other insurance policies should a contractor business consider?

Business Interruption Insurance

Business Interruption Insurance is insurance that will protect you in case your business sustains property damage (or other incidents that arise) that keeps your business from operating. It can cover lost profits, operating expenses, payroll, etc.

Commercial Auto Insurance

Personal auto policies generally exclude coverage for your auto when being used primarily for business purposes. That's why you need commercial auto insurance. In addition, many policies have exclusion provisions for ‘illegal’ acts which could include ‘business being conducted in a residential area’ so it’s important to check your town’s specific ordinances and business permitting.

Contractors will want to consider a specific type of commercial auto called Commercial Van Insurance if you own a cargo van, box van, mini-van, etc. used solely to transport tools used in the course of business.

If you transport tools and materials, consider getting inland marine insurance to protect your equipment if you're in an auto accident. These things usually aren't covered if they aren't permanently attached to your vehicle.

Professional Liability Insurance

Professional Liability Insurance—also referred to as Errors and Omissions insurance—is sensible liability coverage for a freelancer to purchase. You would get professional liability insurance in circumstances where you are giving advice and expressing professional opinions to clients. If they are likely to act on that advice and be influenced in their decision-making there is always the possibility that claims will be filed against you—thus the need for professional liability insurance.

Disability Insurance

Because contractors aren’t covered under an employer’s workers’ compensation policy, disability insurance protects you in case you get injured or become ill because of a job-related exposure and cannot work. The cost of these policies varies and there is usually a waiting period after the incident before they payout. 

Performance Bonds

A performance bond—a category of a construction bond—is a type of surety bond that you can purchase. It gives the homeowner or business owner compensation if the project was not completed to their satisfaction. If the project is incomplete, the bond will provide the financial means to hire another contractor to complete the job. This is something a construction contractor or carpenter would need to consider for any commercial projects. Please note that you are responsible for paying back the amount of the bond if a claim is lodged against you.

Workers' Compensation Insurance

Workers’ compensation insurance is something that you should consider if you hire subcontractors. Workers' compensation insurance helps cover medical bills and lost wages if one of your contractors is injured on the job.

As mentioned above, if a hired contractor is determined to be your ‘employee’ after an work-related accident, you may be held liable for medical expenses, in which case this coverage could save your business. 

How Much Does Independent Contractor Insurance Cost?

Independent contractor liability insurance cost depends on numerous variables. An insurance company will look at risks such as:

  • The location of your business
  • Whether or not you have property or vehicles to protect
  • The number of employees or sub-contractors you hire
  • The services that you provide
  • The policy limits and deductibles you choose
  • The insurance company you obtain coverage through

Insurance for contractors can be affordable. Talk to an agent about the types of coverage you need to get an accurate and affordable quote on the right commercial liability policy for you.

Get a Free Insurance Quote Today

Talk to a licensed insurance professional to see if independent contractor liability insurance makes sense for you. They can help you determine coverage limits you need, the insurance company to look at, and help determine the best options available. Complete the form at the top of the page to connect with one of our representatives, or give us a call at 1-877-907-5267. The process is quick, free, and easy!

Reviewed By: Andrea McKinney, MBA, Licensed Agent

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