Overview
Many roles that were once treated as employee positions are now being engaged as independent contractors. Employers often make this change to limit direct payroll and operational liabilities, but shifting classification does not eliminate risk—insurance and legal exposure can still transfer to the hiring company.
To manage that exposure, companies should verify a contractor’s insurance and financial ability to cover claims before work begins. For guidance on documentation and audit concerns, see Certificates of insurance, independent contractor classification, and workers' compensation audits.
Key takeaways
- Reclassifying workers as independent contractors shifts many direct payroll obligations, but not all risk.
- Obtain verifiable proof of insurance and confirm coverage limits and effective dates.
- An uninsured or underinsured contractor can increase your company’s insurance costs and limit your ability to obtain coverage.
How it works
When an independent contractor is injured or causes property damage, the contractor’s insurance is expected to respond first. If the contractor has inadequate insurance or none at all, the hiring company can become financially responsible through legal claims or subrogation.
Claims tied to workplace injuries or vehicular incidents may affect your company’s insurance experience rating and premiums for several years. For a clear explanation of how workers' compensation relates to contractor arrangements, see Understanding Workers' Compensation and Independent Contractors.
What it may cover (and what it may not)
Common coverages you should require from contractors include workers' compensation (or proof that principals have opted in), general liability, and automobile liability when vehicles are used for work.
An umbrella or excess liability policy can broaden limits and provide primary coverage in unusual claim scenarios, but not every umbrella policy will protect the hiring company unless the contractor’s policy language and limits meet your contractual requirements. For help understanding audit exposure, classification and related risks, review Insurance risks: audits, environmental exposure, worker classification, design liability.
Common mistakes to avoid
- Accepting photocopies of expired certificates without verification of current coverage.
- Relying on a contractor’s word instead of calling the issuing agent or insurer to confirm policy status.
- Allowing contractors to begin work without meeting minimum limits for workers' compensation, general liability, and auto liability.
- Using a simple surcharge in lieu of proper insurance; short-term fees rarely cover long-term premium effects or other exposures.
Questions to ask an agent
Ask whether a contractor’s workers' compensation and liability limits meet your contractual requirements and whether the contractor’s claims could be charged to your experience modification.
Request the insurer’s contact and call to confirm effective dates, limits, and whether any endorsements (such as additional insured or primary/non-contributory language) have been added to protect your company.
Next steps
Create a written insurance verification policy for all contractors that specifies required coverages, limits, and proof procedures before work begins.
Include language in contracts that requires contractors to name your company as an additional insured where appropriate and to maintain coverage for the duration of the engagement.
If you need a formal review of your contracting practices or help obtaining the right coverages, talk to an agent who can advise on policy language and limits tailored to your operations.
Frequently Asked Questions
How can I confirm a contractor’s insurance is valid?
Request a certificate of insurance and call the issuing agent or insurer to verify effective dates, limits, and that the policy has not been cancelled or altered.
Should I accept a contractor’s own workers' compensation waiver?
Proceed cautiously: written waivers from contractors do not always prevent claims or premium impacts, so require proof of coverage or properly drafted contract language instead.
When should I require an additional insured endorsement?
Ask for additional insured status when a contractor’s operations could create liability exposures for your company, such as on-site work or services performed for your customers.
Can a contractor’s claim affect my insurance premiums?
Yes; depending on how policies are written and state rules, a contractor’s claim can influence your experience modification and increase your premiums.