Using independent contractors (IC) can have quite a few advantages, but it’s important to understand that there is a significant difference in how an IC is treated for tax purposes versus how they are treated for insurance purposes.
Take a moment to think about these scenarios:
An IC who has been used for years is clerking the live auction and makes a mistake with recording the winning bid for a piece of farm equipment resulting in a difference of $10,000 to the seller. The seller is unhappy and sues. Whose E&O insurance would cover this loss – the IC or the auction house?
An IC is used to specifically help with set-up for an auction and they didn’t notice that one of the auction house’s owned chairs used for the audience to sit in during the auction had a cracked leg. A bidder sits on the chair, it breaks, and they sustain a costly injury. Whose General Liability insurance would cover this claim – the IC or the auction house?
An IC is used to help with the pick-up after an online auction. While getting a pick-up order ready for the bidder, he doesn’t look where he is going and falls, injuring himself enough that he misses two weeks from his normal (day) job and has incurred medical expenses. Whose insurance would cover this claim – the IC or the auction house?
In the first scenario, the loss should be covered if the Auction House’s E&O policy covers their IC as insureds. However, if the policy does not cover IC, then the IC is left holding the bag.
In the second scenario, this claim is going to fall to the Auction House because the IC was working on their behalf AND the chair was the property of the Auction House and provided to the bidders for seating during the auction.
For workers compensation insurance, a claim is judged based on whether the person was injured while in the “course and scope of employment”. If you are paying the IC for their work, and they are doing what you have asked them to do, then it is considered that the injury occurred during the “course and scope of employment” and the claim would have merit.
By not carrying WC insurance for these IC workers, you risk significant out-of-pocket expenses in the event of a claim. With WC insurance, not only will you avoid the out-of-pocket expenses, but the IC cannot sue you. They have to accept the workers comp settlement.
Just remember*, if you expect your General Liability, Errors & Omissions or Workers Compensation insurance to cover ICs like an employee, then you need to make sure that your policies have independent contractors (IC) named and defined in the policy as insureds.
*Each claim is evaluated on its own merit at the time of the claim. The above scenarios are broad examples to help with understanding the relationship between the business and the IC. Please read your policy for full coverage details.
