While the insurance needs of independent contractors and sole proprietors aren't as complex as larger businesses, a few types of policies may be needed.
A recent study conducted by the global consulting agency Accenture estimates that by the year 2020, 40% of America’s total workforce will consist of sole proprietor independent contractors. What this will equate to is more than one hundred million new “companies” with only one employee and each of one will be required to have the same type of business insurance as larger businesses do. So, if you’re thinking about leaving the grid of your day job to pursue a career as an independent contractor, if you’re already running a sole proprietorship, or if you own a company that ever hires independent contractors, then the information that follows will help you understand the types of insurance policies that sole proprietors should have in place to operate protected.
If you own a company that regularly hires and depends on 1099 contractors, it’s highly recommended that you require those contractors to have at least some of commercial insurance described below in place for any products or services they provide to or on behalf of your organization. If you’re an independent contractor yourself, the policies that follow will properly protect you in the event that your actions give rise to a claim.
The Ideal Coverages
The Rise of the Extended Workforce
In many cases, contractors provide professional services like consulting or software development so they should carry some level of professional liability insurance. Typically, a $1,000,000 policy would be sufficient providing a substantial buffer between any claim that traces back to work performed by the contractor the company that hired them’s own insurance. It is also an important to ensure that independent contractor’s purchase their own worker’s compensation insurance. This coverage will respond to pay any medical bills or disability payments injuries or illnesses they sustain while providing a client with their work and services. Because of the high costs associated with worker’s compensation claims, many companies opt to cover their contractors within their own worker’s compensation policy because the costs to the company are nominal. However, if you operate a business in an industry where the likelihood of injury to employees or contractors is high (construction, logistics, manufacturing), you likely want to avoid including contractors on your policy because their claims can adversely affect your rate for years. To round out a robust independent contractor insurance portfolio, consider carrying general liability insurance to protect against potential property damage or bodily injury and commercial automobile liability insurance if the contractor regularly uses their vehicle to perform services. Lastly, it’s never a bad idea to put in place an umbrella policy to provide additional limits over any underlying policies.
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Verifying Business Insurance Coverage
Properly validating and tracking the coverage for independent contractors is critical. Companies should always keep updated certificates of insurance, or proof of insurance, on file which confirm that the contractors not only have the above-mentioned coverage in place but that they haven’t fallen behind on payments which can cause the insurance to lapse. Also, companies should require that their entity’s name is added as an additional insured to guarantee the contractor’s insurance responds first. Finally, businesses should also make sure that contractor policies provide their entity with a waiver of subrogation which will prevent the insurance company from subrogating (coming after) the company for claims filed by its contractors.
Keep in mind that there are other insurance policies that may be required and the requirements will vary from industry to industry. At the end of the day, as long as contractors have the coverages discussed above, both the contractor and their clients will be sufficiently protected against any potential claims.
At Layr, we’ve made it simple, fast, and affordable for small businesses including independent contractors and sole proprietors to purchase and manage the commercial insurance they need to be effective. With tools like our certificate of insurance generator, contractors can produce proof of insurance instantly from any connected device and deliver the certificates directly to their customers. You can learn more about our certificate generator and all of the other great platform features that our customers benefit from by clicking here.