Your business insurance does not necessarily cover independent contractors you hire. In many cases, independent contractors are expected to carry their own insurance because they are separate businesses rather than employees of your company. Coverage ultimately depends on the type of insurance you carry, your policy language, the contractor's insurance, the nature of the claim, and applicable state law.
Should Independent Contractors Have Their Own Insurance?
Does Workers' Compensation Cover Independent Contractors?
What is a Certificate of Insurance for an Independent Contractor?
Should I Require Contractors to Name My Business as an Additional Insured?
Yes, independent contractors should have their own insurance. Independent contractors operate their own businesses and can face many of the same liability risks as larger companies. A contractor could accidentally damage property, injure someone, make a professional error or cause another type of loss while performing services. General liability insurance is one of the most common policies contractors carry because it can cover certain third-party bodily injury, property damage, and personal or advertising injury claims. The appropriate insurance depends heavily on what the contractor actually does. A freelance writer working remotely presents different risks than an electrician working at your facility, for example.
Workers' compensation requirements are more complicated because it is primarily governed by state law. Employees are generally covered by an employer's workers' compensation requirements, while legitimately independent businesses may be responsible for their own insurance obligations. But simply calling someone an independent contractor doesn't necessarily determine their legal classification. Some states, occupations and circumstances have additional requirements. California, for example, generally requires employers with one or more employees to provide workers' compensation coverage and has specific rules affecting contractors and worker classification. Businesses should therefore avoid assuming that paying someone as a 1099 contractor automatically removes all workers' compensation exposure.
A certificate of insurance, or COI, is a document showing that a contractor has insurance coverage in place. A COI commonly includes information such as the contractor's business name, insurance carrier, types of coverage, policy numbers, coverage limits, effective dates, expiration dates
It may be appropriate when the contractor's work could expose your company to third-party liability. Additional insured requirements are particularly common in relationships involving construction, property maintenance, events, facilities, transportation, installation, equipment, and onsite services. But additional insured status should not be treated as a universal solution. The appropriate insurance requirements depend on the contract and exposure. Your business's insurance broker and legal counsel can help determine which requirements make sense for different types of contractors.
If your independent contractor has no insurance, it can create additional financial risk for everyone involved. If a contractor damages a customer's building while performing work for your company, the customer files a lawsuit against both businesses. However, if the contractor has adequate liability insurance, there may be a policy available to respond to qualifying claims resulting from the contractor's work. If the contractor is uninsured, there is no contractor policy to turn to. Your company may still have coverage under its own insurance for certain allegations, but that depends entirely on your policy. General liability policies can contain contractor-related restrictions and exclusions, meaning businesses should never assume their own policy will pick up every loss caused by an uninsured contractor.