You Wouldn't Think That Independent Contractors Need Workers Compensation Insurance - But They Do

You've got pen in hand, ready to sign a new client contract, and then you glance at the fine print. It says that to get the work, your IT business needs to carry five different kinds of insurance. That can't be right! Or can it?If you've already got E&O, general liability and small business property insurance, aren't you insured for just about everything? Why would you need to get workers' comp and employers' liability, too?Besides the fact that many states have laws that require companies with W2 employees to carry workers' compensation coverage, these policies simply provide coverage that other types of business insurance don't. To protect their own interests, your clients want to be sure that you're protecting yours.Liability vs. other types of insuranceFirst, it's helpful to understand the difference between a liability policy and other types of insurance coverage:• Liability policies are designed to protect your business from the high cost of covered lawsuits or similar insurance claims, and any settlements that a court orders you to pay as a result.• Other types of commercial policies, such as small business property or workman's comp insurance, reimburse your business for all or part of actual costs on covered claims, such as the replacement of a damaged piece of hardware or medical bills.So depending on what situation you may end up dealing with - a lawsuit, injury or physical damage to property - you'll need different kinds of insurance to be fully covered. Different types of insurance policies address situations involving different people, too: Some respond to claims from clients and others outside your business, while others are designed for claims from your own employees or subcontractors.How each policy respondsLet's talk about how the various types of insurance policies would respond in the event of an on-the-job injury. Suppose one of your employees is working at a client's site and suffers a serious back injury while moving a heavy piece of equipment:• Not covered under general liability. Your general liability insurance policy covers claims of bodily injury or other physical injury or property damage. It is designed to protect your business against the high cost of lawsuits stemming from incidents that occur on your premises or at other covered locations where you normally conduct business. If it were a client that were to sue you over an injury caused by you or one of your employees, your general liability policy would respond. But a lawsuit from one of your own employees, claiming that your business is responsible for his on-the-job back injury, wouldn't be covered.• Not covered under property insurance. Your small business property insurance policy covers only property damages, not bodily injury. So if your employee drops that heavy piece of equipment after suffering the injury, this policy would pay for any damages caused to the equipment or the building -- but it wouldn't help pay your employee's medical bills.• Not covered under professional liability. Your professional liability or E&O insurance policy protects you only against lawsuits in which a client alleges that your business's negligent acts, errors or omissions caused them a financial loss. Again, no coverage for bodily injury to an employee.• Covered! Your workers' comp policy covers your employee's medical and disability expenses in the event of an illness or injury, such as this case. So, if your employee is going to miss work for a few weeks while he recovers, it will pay him a portion of the income he'll lose. It will also pay any bills for doctor's visits, medication, diagnostic tests, therapy or hospital stays directly related to the on-the-job injury. So, if your employee is hurt on the job and you have workman's comp coverage, you won't have to pay those costs out of pocket.• Your employer's liability policy, typically included as part of a workers' comp policy, protects your company should an employee claim that his or her injury or illness was caused by your company's negligence or failure to provide a safe workplace. So if the employee in this case sues you, this policy pays legal fees and any settlement the court may order you to pay, up to stated policy limits.But I'm just a one-person operation!What if you don't even have employees? Can your client still insist that you carry workers' comp? In short, yes.In many states, unless your client can show that you, its subcontractor, carry your own workers' compensation insurance, you will be automatically covered under the hiring company's policy, at the hiring company's expense. And of course, your client doesn't want that. So even if your state doesn't require it for one-person companies, you may have to buy coverage just to meet your client's requirements.If you use subcontractors, they may be exempt from your state's workman's comp insurance requirements -- but on the other hand, some states do require companies to cover 1099 contractors. That's why so many small IT companies do what their clients do: Require their own independent contractors to carry their own workers' comp insurance policy, so that they don't have to pay for their coverage themselves.