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Do Independent Contractors Need Insurance?

The short answer is 'yes.' Independent contractors do need insurance, and for a variety of reasons. Depending on the type of work you do, you may need liability insurance, errors and omissions insurance, or both. Learning more about different types of insurance, what it does, and the risks of going without can help you to protect your business and ensure that clients can hire you with confidence. In addition to liability insurance, an independent contractor may need other forms of insurance, including errors and omissions insurance, workers’ compensation, and possibly a business owners policy.

What Is General Liability Insurance?

General liability insurance, which can also be referred to as commercial general liability insurance, is a type of insurance policy for your business that would cover your legal expenses if you are sued by someone who is not your employee. While individual policies vary, a liability policy will usually cover the following types of situations:

  • Bodily injury caused to someone else (who is not your employee)
  • Slip and fall accidents
  • Copyright infringement
  • Product liability
  • Slander and libel
  • Property damage

General Liability Insurance in Action

Example 1: A carpenter puts down his tools for a moment to grab something from his truck. While he is doing this, the client wanders over to inspect the work and steps on a tool, damaging his foot. The client sues the contractor. The contractor’s insurance covers the damages and pays for the carpenter’s legal defense too.

Example 2: A painter is working for a business, redoing the conference room. A visitor steps in to see what is going on and slips on the drop cloth, falling and breaking her ankle. The visitor sues the contractor in court and is awarded damages, which are paid by the insurance company via the policy.

Example 3: A landscaper is working on a lawn and loses control of the mower. It bangs into a parked car, causing damage and requiring extensive repair. Liability insurance covers the damage and any legal costs the contractor experiences from the accident.

Example 4: A film maker is creating a movie in a residential area and a passerby is injured by special effects. Liability insurance covers the injuries and damages caused during the production.

What Is Errors and Omissions Insurance?

While general liability insurance offers comprehensive coverage for many situations, it does not offer coverage for alleged professional negligence. You will need errors and omissions insurance for that.

Just like the contractors who work with physical equipment and interact with clients in homes, work settings, and other locations, an independent contractor who provides advice could be held liable if something goes wrong. Errors and omissions insurance (E&O) is ideal for accountants, interior designers, financial planners, and other independent contractors who serve in an advisory or consultant capacity. If the client experiences damage or losses due to your advice and they sue you, this type of coverage will pay the damages and your legal expenses.

Errors and Omissions Insurance in Action

Example 1: An accountant is helping a business with their taxes and financial planning and makes an error or provides advice that harms that business. The business owner sues and the accountant is faced with hefty legal fees, a drawn-out defense, and eventually loses the lawsuit. Their E&O insurance covers both the cost of their legal defense and the damages awarded.

Example 2: A marketing consultant creates a strategic plan for a client. Despite completing the plan, the client is unhappy with the work or even ends up with negative publicity. The client sues the consultant, who is faced with both their legal defense and the eventual damages awarded. Their E&O insurance is able to step in and cover the costs.

Example 3: A copywriter makes an error on content that explains how to use a product. People are outraged or even injured and the writer is sued by the business to recoup their losses. Once again, E&O coverage comes to the rescue, covering legal fees and any damages that are awarded.

What Kinds of Independent Contractors Need Insurance?

Most independent contractors need some form of insurance. Some require additional specialty insurance in addition to liability and errors and omissions coverage. In general, the following types of contractors need some type of insurance to protect themselves, to work legally in some locations, and to give clients peace of mind:

  • Construction contractors of all types
  • Plumbers, electricians, carpenters, and painters
  • Handymen and repair contractors
  • Home, business, and carpet cleaners
  • Artists including graphic designers, product designers, writers, and more
  • Dog walkers, groomers, trainers, and sitters
  • Other animal trainers

What about a Business Owners Policy?

In some cases, your general liability coverage can be added to or bundled with other coverage to create a comprehensive business owners policy (BOP). This can benefit you in several ways such as reducing your risk and can lowering your costs. A business owners policy may be a good match if you have employees or own or lease property, storage facilities, or other property or commercial vehicles. Property damage, business income, and commercial vehicle coverage can be added in with your liability and E&O insurance to create a comprehensive business owners policy that truly protects all aspects of your business.

Do Independent Contractors Need Workers' Compensation?

Workers' compensation rules vary by location. Some states require independent contractors to carry this coverage. If you have employees or employ others, then you may have to have this type of insurance. Workers’ compensation is designed to protect your workers if they are injured on the job and reimburse them if they are unable to return to work. For you, the employing contractor, this type of coverage can prevent a costly lawsuit and hefty legal fees.

Risks Faced by Independent Contractors without Insurance

What happens if you do not have insurance?

Your risk of incurring huge losses as the result of a lawsuit increases if you do not carry insurance. You can still be sued, but if you lose you will be responsible for any damages you are held liable for, and for your legal fees as well.

Not having insurance causes other issues too. Clients may be reluctant to hire you if they learn that you are not insured. They may also take your business less seriously if you do not carry insurance. A contractor that does not have insurance is often perceived as not being very business savvy or experienced, or as someone who cuts corners. You may not be able to legally work in some locations if you are not insured.

Benefits of Insurance for Independent Contractors

Since insurance reduces your risk, having it can provide peace of mind. You will know that even if something goes wrong, you will be covered. In addition to that important peace of mind, insurance coverage provides the following benefits to independent contractors:

  • Financial security – One accident or lawsuit will not take away your business and years of hard work. The cost of a lawsuit can quickly make it impossible for you to continue buying inventory or performing work. Insurance allows you to continue working even during a lawsuit.
  • Covers the costs of your legal defense – Even if you win a lawsuit you will still have to pay legal fees, unless you have insurance to cover them. You may be faced with extensive legal fees when you are called to defend yourself in court. If you lose, you will also have to pay for any damages, unless you have insurance.
  • Allows you to avoid bankruptcy if you are sued – Whether you are at fault or not, a lawsuit could derail your business. You may end up facing bankruptcy after a single lawsuit, leaving you with no way to continue running your business. Liability insurance helps you to avoid bankruptcy and continue operating as usual.
  • Ensures you meet requirements – Having insurance means you are able to work in states that call for mandatory insurance for contractors or for those working on job sites. In some locations, you may not be able to legally work if you do not have the proper insurance coverage.
  • Makes it easy for a client to hire you with confidence – When you are insured, your clients not only know that they are protected in the event of an accident, but they also know you care enough about your work and business to truly be prepared for any eventuality.
  • Makes it easy for another business or contractor to hire you, worry free – If you are a subcontractor and wish to get projects or jobs from a general contractor or other business, you need to be able to demonstrate that hiring you will not expose them to additional risk. While you can be covered under their policy, arriving with your own policy saves them time, money, and hassle.

Can an Independent Contractor Really be Sued?

You can sue anyone for just about any reason. You do not have to be at fault to be sued. If you are sued by a client, then you will have to take the time to deal with the lawsuit and spend the money for a lawyer, even if you have done nothing wrong. Independent contractors can and do get sued all the time. Insurance protects you if you do cause harm or have an unhappy client.

Consider All Options

While your odds of being sued could vary, it can happen. For example, a freelance writer who works remotely is not as likely to be sued as a plumber, painter, or construction contractor who works on site simply because they do not have as much access or opportunity to do harm.

However, insurance for your independent contracting business is not expensive and will be very useful if you do end up involved in a costly and drawn-out lawsuit, so consider all of your options.

Employee vs. Independent Contractor

You need to determine if you are an independent contractor or employee before getting insurance. If you are an employee, different needs and protections are offered already by your employer. An independent contractor may perform many of the same tasks, but they need to bring their own insurance to mitigate any risk. According to the IRS, independent contractors are:

  • not covered by a client’s workers’ compensation benefits;
  • paid only for work performed;
  • not covered under your client’s health insurance or benefits plan;
  • not eligible for Equal Employment Opportunity protections; and
  • not paid a net amount as taxes are not withheld from checks and your client does not take care of FICA, unemployment, and other taxes and fees.

It is important to clarify your role, particularly if you work for the same clients again and again. Your legal standing will determine what insurance you need. An employee does not need to carry their own liability insurance, but a true independent contractor does.

Other Insurance Coverage for Independent Contractors

While general liability and E&O insurance offer coverage for many situations, some contractors may need additional insurance products. Some typical insurance coverage options for independent contractors are as follows:

  • Commercial auto insurance to cover the fleet, vehicles, and any accidents that happen while a contractor is driving (as part of the job they are completing).
  • Disability insurance to protect the contractor from disabilities arising from accidents and other events that prevent the contractor from doing their job.
  • Performance bonds, which guarantee that work will be done correctly. This protects clients from contractors who fail to complete jobs or who do a shoddy or poor job. A bond protects all parties and can provide peace of mind for both clients and independent contractors.

While every independent contractor will not need every type of insurance listed here, learning more about the different types of coverage and what they do can help you make the best possible decisions for your business. Your needs may also change over time, so having a good idea of what is available and what kind of risks you could face can help you to protect your business as it grows.