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What Kinds of Insurance Does a Small Business Need for 1099 Independent Contractors?


The so-called “gig economy” has swelled the numbers of independent contractors ever since the Great Recession. While construction and other dangerous industries already address the question of insurance for their contractors, other industries may need to take a look at the potential insurance needs for their 1099 workers.

Accidents, injuries, and mistakes can happen in any field. Whether you need insurance depends on the amount of risk you feel comfortable taking and the type of work involved.

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Why You Should Obtain Insurance for 1099 Independent Contractors

If an independent contractor is not insured, the employer may be held liable for an independent contractor’s poor work, illegal conduct, or accidents.

In some states and industries, there are statutory requirements for insurance coverage for everyone involved, such as construction. Inherently dangerous work environments may result in these sorts of legal requirements between the employer-contractor relationship.

In this case, it is most appropriate for both contractors and employers to obtain general liability insurance.

Insurance coverage is also essential in case you or the independent contractor face a lawsuit. Insurance pays lawyers’ fees and damages if the suit is over work performed or injuries sustained. Contrary to popular opinion, independencontractors have the same legal obligations as big business. Clients and customers can sue for several reasons; general liability can provide funds for legal defense.

Types of Insurance

Depending on the nature of the work, there are several types of insurance you may need to cover a variety of issues.

1. Professional (General) Liability Insurance

Professional liability covers injuries on the jobsite and equipment breakage. It is something of an all-purpose product and protects both the 1099 independent contractor and the employer.

Example: 1099 contractor causes personal injury to someone else at the jobsite. Liability insurance pays for medical bills.

2. Errors and Omissions Insurance

E&O covers professional mistakes and overlooked items. Typically it pays for legal expenses if a suit is brought for work not performed or unacceptable work. Accusations include:

  • Professional mistakes
  • Failure to deliver promised goods
  • Professional negligence

E&O insurance is useful for the professional services industries such as engineering, medicine, law, and software development. Even if the lawsuit is frivolous or you think it is unwarranted, you need to defend yourself, so you do not risk a default judgment.

3. Commercial Auto Coverage

Does your contractor drive as part of the job? Commercial auto coverage protects both you and your independent contractor in the event of an accident that occurs in the course of performing work. The client is not required to pick up the costs.

Example: A contract landscaper causes an accident on the way to picking up supplies for a client project. Commercial Auto coverage pays for accident costs.

4. Workers Compensation Insurance

Legally required for almost all employers, workers comp pays for work injuries and lost wages as well as funeral costs and benefits for the worker’s family if needed. Workers comp also pays for legal expenses when a worker sues because their personal policy does not cover the work injury.

5. Disability Insurance

Disability insurance pays a pre-selected weekly benefit in the event the independent contractor is unable to work due to disability. This insurance is typically held by the contractor rather than the employer and is useful regardless of activity.

Disability usually requires a waiting period after the incident for the contractor to receive compensation. Premiums are based on:

  • The selected waiting period
  • The percentage of salary to be paid each week
  • The general risk involved in the contractor’s occupation

 Even an innocuous-sounding occupation can be affected by disability and injury.

6. Performance Bond

A performance bond is a guarantee the work will be completed satisfactorily, or the bond money will be used to repair or complete the job. It protects the employer or hiring entity from issues due to shoddy workmanship or if the contractor cannot complete the project due to disability.

Cash performance bonds offer all-around protection by guaranteeing the project will be completed as scheduled. They eliminate the risk of being sued personally and having your assets seized to pay for any damages.

Getting Coverage

If you already have general liability, you can ask your insurer to add one or more independent contractors to it as "additional insured." They can be covered for the duration of the project or longer; it is up to you. This is a more expensive option than this next one.

You can make it a contractual requirement for contractors to obtain their own general liability insurance. Small business owners often take this route to save on insurance costs.  Check the independent contractors’ certificate of liability insurance to find out if they are covered.

Considering the cost of court fees, medical expenses, and other costs incurred through negligence, accident, or other issues, obtaining the appropriate insurance coverage is less expensive than risking financial strain from a large liability.

Employers and contractors need to determine the types of risks inherent in their projects and get the appropriate coverage. It can save you from losing your business or your livelihood.

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