Whether you have owned and operated your pet sitting business for a couple of months or for many years, you have likely had a few conversations regarding the use of independent contractors. Many of these conversations revolve around whether or not to bring on an independent contractor or hire an employee in your growing business, and which of these is the better way to go in terms of expenses. Sometimes overlooked is how insurance figures into the equation. So let's take a look at how general liability and workers compensation insurance policies respond to each, so that you can determine which way is best to grow your company.
Most all commercial insurance companies utilize the same primary coverage form under a commercial general liability policy or a business owner liability policy. This form is is titled Commercial General Liability (CGL) Coverage Form or Business Owners Liability Coverage Form and one of the two will likely be found in your policy, no matter which insurer you are insured with. This form is significant as it contains the insuring agreement by which your insurer is providing coverage for, and what is excluded. It also defines who is an insured under your policy. "Who is an insured" under your policy will vary depending on whether you are a sole proprietor, partnership, corporation or LLC, but for the most part if you are an owner, officer or manager you are covered for bodily injury or property damage to another so long as you are not specifically excluded under the form. Also under the form, it clearly defines your volunteer workers and employees as insureds - as long as they are performing duties related to the conduct of your business - but the form fails to specifically address independent contractors under the definition of "Who is an insured".
However, just because the policy does not specifically address ICs under the "who is an insured" clause does not necessarily negate coverage for independent contractors. Anyone who has been in business has likely signed a contract or two, and under the CGL form contractual liability is addressed. The form specifically excludes contractual liability, but then gives back several exceptions, such as liability that would be assumed in the absence of a contract. Since most sitters have contracts with their independent contractors, this can lead to disputes as to whether or not coverage would apply under the policy, especially if these contracts contain hold harmless agreements. Therefore, if you utilize independent contractors in your business there are a few options to make sure you/they are 100% covered. First, you can purchase a policy that contains an endorsement that agrees to pick up coverage for independent contractors working on your behalf (as is the case with the NAPPS Liability policy), or second, you can add them as an additional insured to your policy (as long as your insurer agrees to do so) or lastly, you can mandate that your ICs purchase their own policy and add you/your business as an additional insured under that policy, and provide your business with proof of that coverage via a valid certificate of insurance. If you are attempting to truly establish your independent contractors as their own businesess and not have the employer/employee relationship questioned, the last option is by far the best option. Most major insurers that know upfront you are utlizing independent contractors in your business will require that all of them carry their own liability policy with equal or higher limits of liability in place.
To further analyze how liability insurance works when utilizing independent contractors, let's examine the following case study: sitter A receives a call from a client to pet sit for their three pets next weekend. Sitter A realizes she is too busy to perform the work that weekend and therefore opts to subcontract the job to sitter B (independent contractor). Unfortunately while performing the job, Sitter B causes a small fire and damages the client's home and personal property/contents. Consider the following three different insurance scenarios:
- Client sues both sitter A & sitter B. Sitter A has a NAPPS liability policy while sitter B (the IC) has no insurance. Both Sitter A and Sitter B would be covered since the NAPPS liability policy includes coverage for independent contractors. Claim would be covered under sitter A's policy, as A acted as general contractor and maintained insurance on all ICs (subcontractors), including sitter B.
- Client sues both sitter A & sitter B. Sitter A has no insurance, while sitter B maintains a liability policy. Claim would be covered under sitter B's policy, but sitter A would not be covered. The only solution for sitter A in this situation is to have been added to sitter B's policy as an additional insured prior to the claim.
- Client sues both sitter A & sitter B. Both maintain a liability policy, but sitter A is also listed as an additional insured under sitter B's policy. Under this scenario sitter B's policy would be primary and cover both sitter A and sitter B. If the damage to the home is significant and exceeds sitter B's policy limit, sitter A's liability policy would then be excess over sitter B's coverage and provide additional protection for sitter A. By having sitter B add sitter A as an additional insured under her policy, sitter A benefits with an extra layer of protection, as sitter A would now have 2 policies for protection, with sitter B's being primary and sitter A's excess.
Now if we took the same scenario and sitter A utilized her own employee for the job, both sitter A and his/her employee would be covered under sitter A's policy, as both are an insured under the form.
Another claim scenario we often see is when an insured pet sitting business utilizes an IC, and the IC does such a wonderful job that the client now opts to work directly with the IC. The client contacts the IC directly, but does not contact the insured pet sitting business to make them aware of the job. The claim occurs, and the IC attempts to turn the claim in under the insured pet sitting business, as the IC does not carry insurance. The claim is denied, as the insured pet sitting business had no prior knowledge and no contract in place for the job.
Now let's turn our attention to workers compensation insurance and see how this coverage varies depending on whether you utilize employees or ICs. First, it is important to point out that unlike general liability policies, workers compensation policies all provide the same coverage regardless of which insurance company you are insured with. Second, it is also important to be aware that workers compensation laws and coverage are determined by the state your business is based in and/or performs work in. Each state has its own individual worker compensation statute/requirements when it comes to who must carry the coverage, what benefits are paid, and the definition of an employee and an independent contractor. Most states mandate your business to provide coverage for employees, but may or may not require coverage for your independent contractors.
If your ICs are truly independent, most states will not require your business to carry workers compensation coverage. However, most state workers compensation statutes examine the relationship you have with your independent contractors to determine if they are truly independent, or if an employee/employer relationship exists. Just because you pay via 1099 does not necessarily mean they are an IC under your state workers compensation law. A 1099 is an IRS federal tax form, and has nothing to do with the way states determine employee status under workers comp. Most states will typically look at the following when determining whether an employee/employer relationship exists:
- The right to control the work/set work schedule
- The right to hire and fire
- Can the IC make a profit as well as a loss?
- Freedom to select and hire helpers
- Furnishing of tools or equipment for the job
- Freedom to offer services to or work for others
Some state workers compensation laws even go so far as to set forth that if you (the pet sitting business) subcontract work to an uninsured IC, and that IC then hires a helper or employee, and does not maintain a workers compensation policy for them, then you as the primary contractor are then legally required to cover that IC's employee's injuries.
To best remedy the situation, if you utilize ICs, have them present you with a certificate of insurance showing they are covered for workers compensation. This will protect your business if you are not carrying your own workers compensation policy.
If you do have a workers compensation policy in place for your business, be sure to collect insurance certificates from all independent contractors that work on your behalf. Otherwise you may find an additional bill at the end of the policy term. All workers compensation policies are auditable by the insurance company you are insured through and the insurance company auditor will always request certificates from all independent contractors you paid over the last 12-month policy term. If you cannot produce one to show they carried their own insurance, then they will typically charge you for them, as they would have likely had to pay a claim if that person had been injured while working for you. So if you opt to use both employees and independent contractors in your business, always be sure to collect these certificates from your ICs.
Please note that my intention is not to point you in direction of hiring employees in lieu of utilizing independent contractors, nor requiring all your ICs to maintain their own insurance. As stated earlier, this blog is simply meant to provide you with some insight on how the general liability and workers compensation insurance policies respond so that you can determine what is best for your business. Whichever option you choose please use caution to protect yourself and your business by knowing the laws in your state when it comes to workers compensation, and by knowing how coverage works when it comes to both workers compensation and general liability coverage in the event of claims scenarios. Then make the choices that are best for you and your business.