Does Your Insurance Policy Cover Independent Contractors?
Do you know how you’ll you be affected by policy limitations if your hired contractor does not have adequate coverage in place? You might be thinking, “how does this apply to me, especially if I’m insuring my business” or “exactly what is my risk?”
The bottom line as an employer of an independent contractor is that you could be held liable for the acts of that contractor. Laws vary by state, but you should be mindful that you could be faced with a third-party lawsuit as a result of either bodily injury or property damage, whether you are liable or not.
Insurance policies typically are written offering one of the following options:
- Exclude all work performed by independent contractors
- Limit coverage if the independent contractor is not adequately insured
- Provide full coverage when proper risk transfer is in place
How can you protect your company?
First, know what coverage your insurance policy is providing you. What coverage are your insurance dollars paying for? Lower premiums often result in exclusions or lessor coverage, limiting what you are covered for. For example, option A excludes all work performed by any subcontractor you hire. Meaning you stand direct to pay out–of–pocket expenses to defend yourself regardless of who was negligent. Option B offers coverage for subcontractors. However, if the appropriate risk transfer is not in place, or policy limits or conditions are not met, it could result in your participation in a high deductible/SIR. That means the carrier will look for you to participate in the payment of the claim, or even worse, your liability limits could be reduced, resulting in additional out of pocket expenses. A double whammy! For option C, you will pay a higher premium, but you will also be able to sleep better at night knowing your insurance dollars are well spent. Proper protection when you need it most, at the time of loss.
What does proper risk transfer mean?
When hiring a subcontractor or independent contractor to work for others on your behalf, it is crucial that you obtain an indemnification agreement from them to protect yourself from their negligence. When working with a subcontractor, there are certain practices you should take:
- Have an indemnification agreement approved and reviewed by a law firm that specializes in contract language
- Include state–appropriate indemnification and hold harmless language
- Include an insurance section setting the coverage and limits required, such as: $1,000,000 Each Occurrence/$2,000,000 Products Completed Operations/$2,000,000 General Aggregate
- Require that they name you as an Additional Insured specifying coverage endorsements, such as CG2010 and CG 2037 on a primary and non-contributory basis
- Have an approved subcontractor list or contractors who meet your best business practices requirements
- Hire a risk manager or third party service to review and keep up–to–date indemnification agreements, confirm coverage requirements are in place, and obtain Certificates of Insurance. Some insurance companies offer this service as part of risk management.
- Review Certificates of Insurance and require that you are notified 30 days prior to cancellation in the event the subcontractor’s insurance policy is cancelled.
- Require a copy of the subcontractor’s insurance policy so that you can verify their insurance coverage is adequate. Not all coverage is the same.
- Never allow a subcontractor on the job site to start work before the subcontractor indemnification agreement is signed and dated and a satisfactory review of the insurance requirements has been completed.
Putting these essential steps into action will not only protect your company, but also save you valuable dollars in the event a claim does occur.
We encourage you to talk with an insurance professional so they can help you identify your risk and make sure your policy is adequately covering your operations.