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 What this guide covers

  • Who is an independent contractor
  • Why is the distinction important?
  • Insurance for independent contractors
  • What to do if you've lost your job
  • The business insurance policies to consider
  • The variables that affect business insurance cost

What is an Independent Contractor?

The rise in recent years of for-hire business models, like those used for driving services Uber and Lyft, and delivery services like Instacart and Postmate, have put the term “independent contractor” under the microscope.

High profile liability issues (like the class action lawsuit that former drivers are filing against Uber) are only one aspect of the confusion; not only do employers need to understand their obligations towards the different types of workers they hire, but aspiring entrepreneurs should have a handle on what kind of risks and rewards are associated with self-employment.

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 wages, future lost wages, etc, regardless of who has been paying their employment taxes. While the short term benefit of not having to pay employment taxes may sway business owners towards a preference for classifying workers as independent contractors, the potential for liability and associated costs should motivate the final decision about how to categorize the people they hire. 

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.

Do Independent Contractors Need Insurance?

Many Americans have found themselves laid off or cut back in the last several years. In addition to a regular paycheck, the biggest loss is often medical insurance. This scaling back of the economy has allowed many people to freelance or do consulting. While this helps in replacing the paycheck, benefits and insurance are a different story. 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.

Independent contractors who may need this insurance coverage include:

What To Do If You’ve Lost Your Job

First, was COBRA available? The Consolidated Omnibus Budget Reconciliation Act (COBRA) health provisions passed in 1986 allows continued group health coverage that otherwise would be terminated if you’ve lost your job. Health insurance is critical to managing risk.

A devastating medical issue could bring financial ruin to anyone. If COBRA isn’t available, can you go on a spouse’s group health plan? The Affordable Care Act now offers various plans/exchanges in every state, which offers another option. 

What Does An Independent Contractor Need For Insurance Coverage? 

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 include? First and foremost, it needs to include 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. It is a business insurance that provides coverage for third party bodily injury or property damage while a customer is in your business. General liability insurance will cover the cost of paying for injury 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 property you may want to consider a Business Owners Policy (BOP) to combine general liability insurance, commercial property insurance, and business interruption coverage.

How Do Contractors Obtain General Liability Coverage?

There are two ways contractors can obtain this business insurance coverage:

  1. Purchase the insurance policy yourself: The most affordable option is to obtain general liability coverage for yourself and personally manage coverage amounts and costs. 
  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 in. However, this can typically be costly and it may be difficult to convince the homeowner/business owner to go this route. 

Getting specifics about insurance coverage 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 forestall future financial disasters.

Other Business Insurance Policies to Consider

  • Business Interruption Insurance: This policy is an insurance for contractors 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 do not cover your auto when being used primarily for business purposes. 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.
  • 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, consider commercial van insurance in case of accidents. 
  • Professional Liability Insurance: Professional liability insurance—also referred to as Errors and Omissions insurance—is a sensible precaution for a freelancer to purchase independent contractor liability insurance in circumstances where they are giving advice and expressing professional opinions to clients. Where clients are likely to act on that advice and be influenced in their decision-making there is always the possibility that potential liability for the contractor could arise—thus the need for errors and omissions coverage.
  • Disability Insurance: Because you aren’t covered under an employer’s workers’ compensation policy, you need this protection in place in case you are injured or ill and cannot work. The cost of these policies varies and there is usually a waiting period after the incident before they payout. 
  • Performance Bond: 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.
  • Workers’ Compensation Insurance: Workers’ compensation insurance is something that you should consider if you hire subcontractors. As mentioned above, if a hired contractor is determined to be your ‘employee’ after an 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?

The cost of insurance for independent contractors depends on variables such as the risks of your business, where it’s located, whether or not you have property or vehicles to protect, the number of employees, etc. Insurance for a contractor can be affordable. Talk to an agent about the coverage you need to get an accurate and affordable quote on the right liability policy for you.

Get an Independent Contractor 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 and other options that may be available. Complete the form at the top of the page to connect with one of our agents, or give us a call at 1-877-907-5267.

Related Articles: Commercial Property Insurance, Commercial Auto Insurance,General Liability Insurance, Professional Liability Insurance, Business Owners Insurance Policy

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