Understanding Your Independent Contractor Agreement
Dan Levenson July 09, 2015
If you have either worked as an independent contractor or have subcontracted work out, it’s best to get a solid understanding about the contract requirements. For the most part, these are all self-explanatory and make sense, however, the insurance aspects of an independent contractor agreement can still be challenging. The terminology and ultimate reasons behind these requirements can be a mystery to you if your training is in another industry that isn’t insurance or law, but ultimately this part of your contract is as vital as any other.
Whether someone is an employee or a subcontracted hire, their presence creates a liability situation. While workman’s compensation insurance may not strictly be required of the company for an independent contractor, they may still lawfully sue the company if they are injured. As well, if they make a mistake or omit something that results in data loss, physical damage to the property, or injury to someone hired by the company, the company has the right to take action against them.
When you are working for a company, you are known as the vendor. Vendors must maintain a level of liability coverage that is either set forth in the independent contractor agreement, or what makes sense. You need to use insurance from a company that has an excellent level of financial strength as measured by the A.M. Best Company. This way, if underwriting requirements under the law change or the economy undergoes a substantial issue such as a deep recession, the insurance company will still have a high likelihood of meeting its policy requirements. After all, if the insurance company goes broke, your policy stops being useful.
Contracted employees waive what’s called the right of subrogation, meaning they cannot make up for losses due to their own errors or mistakes from the company they are working with. Their insurance policy does not provide them with protection from their own errors and mistakes, which is much of the reason why the independent contractor agreement stipulates having insurance in the first place. Your contract should also say that the vendor is prohibited from attempting to file an insurance claim against the company for any issues that they (the vendor) caused.
One important aspect of any effective insurance policy is that it needs to have at least a 30-day notice if the policy needs to be cancelled or renewed. If a contractor attempts to obtain a policy to start work and allow the policy to lapse, the insurance company is required to issue notice to the company they are working with so the company will know to warn them of the consequences of not having a policy in effect. If the policy lapses, the company will have carte blanche to terminate the agreement, and may even have the right to stop the vendor from entering the premises. Naturally, this part of the independent contractor agreement could stop them from performing your duties and be a quick de facto termination of your agreement.
On some occasions, the independent contractor may require assistance in their operations. This is naturally up to the business and may involve other parts of your contract. However, one constant you need to be aware of is that subcontractors, employees, and anyone else a company brings in to work must also have insurance equal to what the vendor has. If they do not, this can result in stopping work because everyone brought in can create equal liability.
Potential Causes Of Civil Liability
There are numerous ways independent contractors can cause civil liability when they work with a company. That’s why it’s beneficial to have worker’s compensation, general liability coverage, automobile liability coverage, and errors and omissions coverage all ironed out.
Particularly in the IT industry, an independent contractor may be in charge of handling billions of dollars worth of information, so the business should invest in cyber liability coverage. Additionally, an umbrella or excess liability policy is useful for occasions when your standard policies do not cover the full amount of damages wrought. A catastrophic situation can literally make or break a mid-size business, and you could be responsible for such an occurrence.
Insurance is vital to working as, as well as hiring, an independent contractor. You present serious potential risks to a company that can be properly mitigated this way.