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Independent Contractor Insurance: A Comprehensive Guide

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Independent Contractor Insurance: A Comprehensive Guide

Hiring independent contractors offers businesses a host of benefits. One major advantage is the ability to bring them on board for short-term projects without full-time employment obligations. This means you can also sidestep providing employee benefits such as health insurance or HRAs, not to mention avoiding the responsibility of payroll taxes and unemployment insurance that typically comes with hiring traditional employees.

What is Independent Contractor Insurance?

Independent contractor insurance is a type of general liability insurance policy designed to protect independent contractors and freelancers. Unlike regular employees, these individuals usually don’t have employer insurance coverage. Therefore, they must obtain their own insurance to reduce potential risks and liabilities associated with their work.

It shields 1099 employees from risks like bodily injury or property damage. (For the uninitiated, “1099 employees" is a term often used to refer to independent contractors or freelancers in the United States.) It covers different types of insurance plans for small businesses, such as general liability coverage and errors and omissions coverage.

Also Read: How to Fill Out a 1099 Form for Independent Contractors

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How Does Independent Contractor Insurance Work?

Independent contractor insurance offers financial protection to individuals working as freelancers. Unlike traditional employees, independent contractors need to get their own insurance. This coverage can vary depending on their work and the risks involved. 

Here are a few of its significant aspects: 

Premiums and Payment Structure

Independent contractor insurance is based on a premium payment structure. It means contractors pay the insurance provider a regular premium (often monthly or annually). The premium amount varies depending on factors like the type of coverage, the contractor's industry, the level of risk associated with their work, and the chosen coverage limits. 

These premiums collectively form a pool of funds that the insurance company uses to cover claims made by contractors.

Filing Claims

Contractors can file a claim to their insurance company in case, a covered incident happens. The procedure usually involves notifying the insurer of the incident, providing relevant information with supporting documentation, and filling out required forms. 

After receiving the claim submission, the insurance provider checks if it’s valid, investigates the situation, and figures out how much they'll pay to cover the costs mentioned in the policy if everything matches the policy's terms. 

Coverage and Limits

Different policies have different coverage options and limits. 

Coverage defines what the policy protects against, such as general liability, professional liability, or property damage. 

On the other hand, Coverage limits indicate the maximum amount the insurance company will pay for a valid claim. It's crucial for contractors to think carefully about their requirements and possible risks when picking coverage and limits.

Renewals and Updates

This business insurance is an ongoing expense, not a one-time buy. Typically, policies last for a specific period, like a year, after which they must be renewed. Contractors must review their insurance needs, update coverage for business changes, and, if necessary, change coverage limits during renewal. Renewal premiums may change based on claims history, market trends, and inflation.

Why Does an Independent Contractor Need General Liability Insurance?

General liability insurance is a safety net for independent contractors. It offers financial protection if there are injuries, property damage, or legal claims related to their work. This insurance helps contractors handle potential and legal challenges so they concentrate on their work with confidence and peace of mind. 

Physical Injuries

General liability insurance for independent contractors is crucial because they can be held responsible for injuries to third parties. Unexpected accidents can happen while contractors are performing their services. For instance, a client might accidentally trip over equipment on the work site or sustain an injury due to hazardous conditions during the project.  

In such cases, general liability insurance steps in to cover various expenses, including medical bills, legal fees, and potential settlements. This coverage ensures that independent contractors can confidently focus on their work, knowing they have protection in place. Moreover, it offers reassurance to the companies that hire these contractors, as it helps mitigate the financial risks associated with unforeseen accidents and injuries that may occur during the course of the contractor's work.

Property Damage

When bringing a contractor on board, it's crucial to consider the potential for property damage that may arise during their work activities. Accidents, such as tools or equipment causing harm to a client's property, can unexpectedly occur. General liability insurance covers the costs of repairing or replacing the damaged property. 

This coverage is a vital safeguard against potential financial losses resulting from accidental property damage claims. It offers an extra layer of protection that ensures both the contractor and the client can proceed with confidence and reassurance, knowing they have a safety net in place.

Legal Costs

A third party may file a lawsuit against an individual or company if they claim that the work performed has caused damage or financial loss. Legal defense costs, which can be quite high even if the claim is unfounded, are covered by general liability insurance. This insurance includes attorney fees, court costs, and potential settlements. Without this insurance, these legal costs could seriously put a dent in the company’s financial stability.

What Does Independent Contractor Insurance Cover?

Independent contractor general liability insurance policy, often referred to as 1099 insurance, offers coverage for allegations like:

  • Harm to property or physical injuries caused by business.
  • Damage to reputation due to actions like slander, libel, or malicious prosecution.
  • Advertising-related claims, like accusations of copyright infringement in promotional materials.

Do All Independent Contractors Need Liability Insurance?

Liability insurance is a must-have for all independent contractors. Liability means being legally responsible for something. From customer injuries on the premises to the advice given to clients or patients, the potential for liability in business is broad. 

This applies equally to independent contractors who are not exempt from such liabilities. So, liability insurance is crucial for them to protect against unexpected and potentially expensive legal responsibilities from their work. It's a smart and necessary safeguard. 

Also Read: Benefits and Challenges of Utilizing Independent Contractors

What Types of Independent Contractors Need Business Liability Insurance?

Independent contractors in several fields require business liability insurance to ensure financial protection against potential risks. Some categories of independent contractors typically need this insurance: 

SEO Specialists

Search engine optimization, or SEO specialists often work as freelancers with multiple clients simultaneously. As they deal with a lot of data, this insurance can be a crucial safeguard against potential liabilities that may arise from data breaches or unexpected disruptions in delivery. This ensures that they have a secure work relationship while instilling client confidence. 

Accountants 

Accountants who work on independent contracts to provide financial services also need general liability coverage. While working as an independent contractor provides autonomy, it also comes with financial risks. If a client reports financial harm, this insurance can cover the legal costs and settlements. 

IT Specialists

Independent contractors offering IT services are often required to have insurance. It provides a safety net against potential risks in their field including data breaches, system failures, cybersecurity incidents, or other technical errors. If any mishap occurs, the independent contractor is liable for damages.

Graphic Designers

Independent contractor insurance is also essential for graphic designers because of their involvement in various projects across multiple companies. If any issues arise during project execution like copyright infringement or client disputes, the contractor assumes liability and, therefore, must possess adequate coverage.

What is Not Covered by General Liability Insurance Costs?

While general liability insurance provides essential coverage for various risks, certain situations and liabilities are typically not covered by this type of policy.

Professional Errors: General liability insurance doesn't usually cover errors or mistakes made in professional services provided by the contractor. For instance, if an accountant gives incorrect financial advice to a client, resulting in financial losses for the client, this may not be covered under general liability but might require separate professional liability insurance.

Contractual Liabilities: Liabilities that arise from contractual agreements or breaches may not be covered. When a contractor fails to fulfill the terms of a contract, general liability insurance may not cover the resulting legal disputes or financial losses suffered by the other party.

Intentional Acts: Deliberate acts or intentional harm caused by the contractor are typically not covered. In situations where harm is intentionally inflicted upon a person or property, coverage may not apply.

Employee Injuries: It's important to note that general liability insurance does not extend to injuries sustained by a company's employees. Separate workers' compensation insurance is necessary to address employee injuries and work-related illnesses.

Automobile Accidents: If a company employs vehicles for business purposes, general liability insurance does not cover damages or injuries resulting from accidents involving those vehicles. To address such scenarios, commercial auto insurance is required.

Professional Advice: Claims arising from professional advice or recommendations the contractor provides, particularly in areas like finance, law, or medicine, typically fall outside the scope of general liability insurance. Professional liability insurance may be necessary to address these specific claims.

Property Damage to Own Assets: General liability insurance generally does not cover damage to a company's own property or equipment. Companies may need separate property insurance to safeguard their assets adequately.

Product Liability: When a company sells products, it's important to note that general liability insurance may not cover injuries or damages caused by those products. Product liability insurance is specifically designed to address and mitigate potential claims for such situations.

Manage Independent Contractors Seamlessly With Skuad

Organizations are increasingly relying on contractors to contribute to various projects – their effective management is important. At the same time, it is also essential for independent contractors to ensure that their services are valued and that they are accurately compensated for their work.  

To ensure accurate compliance and compensation as an employer of independent contractors, partner with Skuad. Skuad is a reputed EOR (employer of record) platform that lets you hire, onboard, and pay independent contractors or employees in more than 160 countries and in 100+ currencies. Moreover, Skuad ensures 100% compliance with local taxes and employment laws while you expand your workforce across borders. Book a demo today to see how Skuad can help your business.

FAQs

1. How much does independent contractor liability insurance cost?

Independent contractor liability insurance costs can vary significantly due to several factors. These factors encompass the type of coverage necessary, the contractor's industry, the desired coverage amount, the geographic location, and the contractor's claims history. To obtain a precise estimate, it is advisable to engage with insurance providers who can furnish personalized quotes tailored to the contractor's unique circumstances.

2. What’s a general liability insurance certificate?

A General Liability Insurance Certificate, commonly called a Certificate of Insurance (COI), is a document the insurance company provides. It contains essential information about general liability insurance coverage, such as policy limits, coverage duration, and the specific types of liabilities covered. Clients or business partners frequently request this certificate as evidence of insurance coverage.

3. What factors influence the cost of independent contractor liability insurance?

Several factors influence the cost of independent contractor liability insurance. These may include the type of work, the risk associated with the profession, annual revenue, coverage limits, claims history, and location. High-risk industries might have higher insurance premiums due to the increased likelihood of claims.

About the author

Catalina Wang is a Human Resource Consultant. She manages recruitment, onboarding, and contract administration staffing for many organizations and remote teams. She’s passionate about efficient HR management and the impact of tech on hiring practices.

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