In the contracting world, proper insurance can mean the difference between reasonable risk management and a total loss. It’s important for independent contractors and those who hire them to know what kind and how much insurance protection is appropriate. Even though it’s sometimes overlooked, risk management should be a priority for every business and contractor. Risk management is only boring if nothing ever goes wrong. Without proper insurance, however, a disaster can cause immense difficulty for even the best operations. The right insurance gives owners, managers and contractors the peace of mind they need to get work done.
What kind of insurance does a 1099 independent contractor need? That depends on three key factors:
- The nature of the business
- State laws pertaining to a specific industry
- Contractor and contracting company standards
Here is a quick guide highlighting differences between types of insurance commonly held by independent contractors or the businesses that hire independent contractors.
Generally speaking, liability refers to who is responsible for damages and how much those damages will cost. Accidents, injuries, and property damage typically demand that neglectful parties take ownership and rectify the situation as quickly as possible. They can face legal, medical or added work costs.
Many people don’t understand the risk of working without insurance. This is especially important in fields with “exposures.” If you are working on an IT system as a contractor, you could make a computing or programming mistake that represents a professional liability. You need protection to avoid those risks whenever possible.
Most business owners or contractors have business liability insurance as protection in the event of a workplace accident that results in damage or injury. Any contractor that works in the construction, engineering, remodeling or any work that could result in injury should have general liability insurance. Some states even require business owners hold liability insurance. Things are often not so clear cut for independent contractors, though. Speak with an agent or a business attorney with questions on liability insurance requirements for independent contractors.
General commutes to and from work are not grounds for needing business automotive insurance. And while contractors don’t need a separate Automobiles policy, they do need to disclose to their automobile insurance provider that they, as a 1099 employee, are operating a motor vehicle.
Companies can be liable for damages from work that fails to meet expectations and adversely impacts clients. The potential for damages is why many independent contractors and freelancers carry errors and omissions insurance. Companies that rely on work from independent contractors should also consider inserting performance bonds into contractor agreements. A performance bond is typically underwritten by a bank or other financial institution that guarantees work to be completed from a contractor or other party. In the event that work is not completed, the bond pays out a certain amount of money. The hiring company can use the money in the bond to rectify an incomplete or poorly executed project.
Independent contractors often don’t have a payroll employer that provides benefits should something happen that interrupts work. Uninsured independent contractors often go without income due to natural disasters and other situations that prevent them from working. Business interruption insurance can cover income gaps after a disaster.
When injuries prevent contractors from working (often referred to as “incapacitated” in insurance policies), it can be difficult to pay the bills. For this reason, many independent contractors get disability insurance. Disability insurance covers contractors in the event of incapacitation. As it happens, many full-time employees on payroll also supplement their workers’ comp with disability insurance to guarantee most of their income until they are able to get back to work.
Many independent contractors are trade workers that require safe job sites and equipment. If natural disasters or accidents cut the tradesperson off from the job site, or if unforeseen circumstances disable critical equipment, contractors can experience partial or total loss. As a workaround, many independent contractors secure business income insurance that insures against the loss of business revenue.
It’s important to note that business income insurance is not all-encompassing. Typically, these insurance policies cover things like robberies, damaging winds or fires. It is important to know the risk of natural disasters in a given area of operation (including flooding) before choosing a business income policy. Employers and contractors should read the fine print of any policy to understand its requirements completely.
Contractors who work with recruiting firms should also know that they are not covered under the firm should something go wrong. At The Goodkind Group, we would not be able to collect from our insurance carrier should something go wrong with you at work. Because of this, contractors should always acquire their own insurance coverage.
For more information about how The Goodkind Group can help your business understand how independent contractor should approach risk management and insurance, contact a consultant today at (212) 378-0700 or visit our website.