Liability Insurance for Employees and Contractors

by Ray

This article covers:
-What is liability insurance?
-What liability insurance coverage does an employee have?
-What liability insurance should a contractor have?

         Briefly stated, liability insurance covers the insured (be it an individual or a company) from lawsuits or other claims involving injuries and/or property damage brought about by (or on) the covered property / possessions / skills of the insured.  Exactly what specific services / products / etc. are covered varies among the various liability types.

           A liability insurance policy will have at minimum an injury coverage amount per individual, an injury coverage amount per incident, and property damage coverage per incident.  As an example, a single liability insurance policy could have injury coverage of $100,000 per individual, injury coverage of $300,000 per incident (regardless of the number of individuals involved), and property damage coverage of $50,000 per incident.  The aforementioned policy limits would be expressed as 100/300/50.  In any liability insurance claim, the insured person / entity will notify their insurance company of the claim being made and all information regarding the claim (what the claim is for, the claimant, any relevant statements or evidence).  The insurance company will then work directly with the claimant, legal representative, or medical provider – the insured person / entity does not act as a middle agent between them.

            In general, an employee is covered under an employer’s liability insurance policies.  Thus, employees typically don’t need to have their own specific business-related liability policies.  Individuals might have their own life insurance or death & dismemberment policies, but these are separate non-liability policies that cover specific policy holders.

            A self-employed contractor would need to provide their own insurance to have coverage, as they are not covered by an employer.  Thus, contractors would need to get their own policies if they wish to have liability coverage.  Some projects or businesses may require a contractor to have certain types of insurance with a specified minimum coverage before they will be allowed to work (or even bid) on a project.  The term “commercial insurance” is a broad term that includes the policies listed here (among others).  The two policies that are most relevant to individual contractors are:

—- Business liability (or general liability) insurance – coverage of the work environment. 
                It is meant to cover customer/client injuries and damages to their property & possessions.  For a retail store, it covers claims arising within the policy-covered physical building; it may also cover associated parking areas & unattached sheds, etc.  For a carpentry contractor, the coverage is for the area of the work setup.  This would not be limited to a formal workshop, but would also cover a on-the-job site which may consist solely of an electrical cord and a power tool.

               As an example, a contractor doing carpentry may have sawhorses, lumber, tools, and power extension cords set up at a location.  If a person walked through that work environment and tripped on a tool or cable, a resulting injury could result in a claim against the contractor’s general liability insurance.

—– Professional liability insurance (also know as E & O insurance) – coverage of errors and omissions.  
              This covers the actual work done by a contractor, and claims arising from allegedly shoddy or insufficient work.  For example, let’s say a contractor builds a custom electrical strobe cannon for a show. A fire breaks out and severely damages the cannon as well as the scenery, props, and the surrounding building.  If it is determined that the custom electrical apparatus was the cause of the fire, the producing entity (be it the company or individual) could file a claim against the professional liability insurance, contending that errors and/or negligence on the part of the contractor caused the fire and resulting damage.

           Whether this coverage is needed depends on the contractor’s tasks and obligation. Typically, the more autonomous and ‘in-charge’ a contractor is, the more likely it will be called for.  An insurance agent can help determine if professional liability insurance is warranted or not.

           If a contractor has employees (thus becoming an employer) two other liability insurance policies should be considered:

—- Workers’ Compensation insurance  coverage of medical costs and litigation costs due to a workplace injury.   
            This coverage is not limited by duration (whether treatments take a week or 10 years does not change the coverage) but is limited by the coverage dollar amount. If a claim exceeds the allowed individual or incident coverage, then coverage would be exhausted and medical / litigation costs would fall on the employer. Typically, if a business has any employees, this is an insurance policy that the business should have, and may be required by state law.  Some potential clients may require contractors to have this insurance even if the contractor doesn’t have any employees, because the client wants to be assured that any claims of injury would not fall to themselves.

         It’s worth pointing out that workers’ compensation does NOT cover subcontractors; subcontractors are responsible for their own insurance needs.  This is often one factor in why a company or organization will argue for using contractors instead having employees.

—- Employment Practices Liability insurance– coverage of claims arising from improper employment practices (wrongful termination, harassment, discrimination, etc.)  
       Any claims arising regarding employment practices would be covered and dealt with by the insurance company that issued the policy (up to the coverage limits, as described earlier). This insurance may sometimes be folded into a general liability policy.  

                  Some clients or venues will require contractors to provide proof of specific types of insurance, often with a specified minimum coverage amount.  The Wellstone Center in St. Paul requires anyone wanting to use their personal aerial lift to have liability insurance before they would be allowed to use the lift (though it appears this policy is never officially enforced).  The Lab Theater in Minneapolis requires companies to provide proof of general liability insurance and worker’s comp insurance before allowing those companies to use the Lab’s personal lift.

              Insurance agents will ask a number of questions to establish pricing and eligibility of theses business / commercial policies.  Some or all the above liability insurance policies may be restricted to the borders of the state in which the policy was granted, depending on state law and specific insurance conditions.  Getting any of these policies will likely require answering a number of questions about the type of work or specific project, the contractor’s work background, and any previous liability insurance coverage. Since the coverage is based on the specific contractor’s needs, and usually requires an insurance underwriter to assess the costs and risks, these policies may take longer to be granted than typical automobile insurance – two weeks to two months is fairly common.  Waiting until the last minute to seek coverage will likely work against you.

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