Independent Contractor – A Self-Employed Professional
In plain language: An independent contractor is someone who provides services under a contract but is not controlled by an employer in the way they complete their work. They make their own hours, carry their own tools, and choose how to do their tasks.
Technical definition: In insurance terms, an independent contractor is a self-employed person who performs services under a contract, maintains control over the execution of their work, and typically offers services in their trade to various parties. They are generally not entitled to workers' compensation insurance from hiring entities and must obtain their insurance coverages.
Working as an independent contractor might offer flexibility, but it brings unique insurance and tax considerations. Incorrect contractor classification can lead to significant repercussions.
TL;DR
What Is an Independent Contractor in Insurance?
An independent contractor, as the name would suggest, operates independently of the organizations they serve. They are typically skilled professionals who perform a specific task or set of tasks under a contract. They are not, in the traditional sense, employees of the companies they work with, though their services may be essential to their clients' businesses.
Independent contractors have unique insurance considerations. The risk of being an independent contractor is often shouldered solely by the individual, without the buffer of an employer's insurance coverage. They may need their liability insurance or other specialized coverages depending on the nature of their work.
It is not uncommon, for instance, for an independent contractor to carry professional liability insurance, general liability insurance, or commercial auto insurance, depending on the type of work they perform.
Key Related Terms to Know
Common Questions About Independent Contractor
What makes someone an independent contractor?
An independent contractor is someone who has independence in their work. They are not under the direct control of an employer, they control the manner in which work is performed, and they usually offer their services to multiple clients or markets.
Can independent contractors be covered by employers' insurance?
Generally, no. Because independent contractors are considered self-employed, they typically need their own business insurance to cover their risks.
How is the relationship between a company and an independent contractor defined?
The relationship is set out in a contract that outlines the nature of the work, the payment for the work, and the terms of the work completion. The company does not withhold taxes, and it does not control how the contractor performs the work outlined in the contract.
How can an individual become an independent contractor?
Becoming an independent contractor often involves setting up your business (if applicable), marketing your services, and being hired based on contracts to perform specific tasks.
Independent Contractor vs. Employee
The primary difference between an independent contractor and an employee is the degree of control the hiring entity has over the worker's tasks and how they are performed.
Comparison Area | Independent Contractor | Employee
|
Primary use case | Hired to do a specific task or project, variety of clients. | Ongoing relationship, one employer. |
Coverage/concept type | Self-insured. Might need General Liability, Professional Liability, etc. | Workers' Compensation, Health/Life Insurance by employer. |
Typical exclusions | Health benefits, unemployment insurance, workers' compensation. | None. |
Who is most affected by errors | Independent Contractor themselves. | The employer. |
Common mistakes | Not getting appropriate coverage for their works. | Misclassifying employees as independent contractors. |
Real Claim Examples Involving Independent Contractor
Scenario 1: A construction independent contractor was injured at a job site and filed a workers' compensation claim. Because of their independent contractor status, the claim was denied.
Scenario 2: An IT consultant, an independent contractor, mistakenly caused data loss at a client's site. Her professional liability insurance covered the claim, which would not have been paid if she were seen as an employee.
Scenario 3: A graphic designer independently contracted used copyrighted images without permission, leading to a lawsuit. His professional liability insurance kicked in and covered related costs.
Limitations and Common Mistakes
How to Explain Independent Contractor to Clients
For a Personal Lines client: Think of an independent contractor like your hair stylist. They might work at a salon, but they set their own hours, bring their own tools, and handle their own clients.
For a Small Business owner: As a small business owner, when you hire an independent contractor, they’re essentially their own small business. They control how they do the work and aren’t covered under your workers’ compensation insurance.
For a CFO or Risk Manager: In the eyes of risk management, independent contractors carry their own risks and their own insurance, separate from the protections you provide to regular employees. If they incur liability in the course of their work, it's generally their responsibility to cover it.