When you hire a contractor to complete work for your small business, it’s crucial to ensure they carry their own coverage. Generally, the best practice is to verify their certificate of insurance and require that your business is listed on their policy as an additional insured.
Sometimes your business needs outside help. That’s when hiring an independent contractor for the job makes sense! Before you whip up the contract, however, it’s crucial to ensure both you and your contractor are adequately covered. The best way to do this is to require proof of insurance and additional insured status before working with others.
What Is a Contractor?
A contractor is a person or business you hire to complete a specific service for your business. The key word is “contract,” meaning there is a legal agreement between you and the contractor for the work they perform. They can be independent contractors or freelancers in any industry (not just construction).
Does Business Insurance Cover Independent Contractors?
In most cases, no, your small business insurance policy does not automatically cover independent contractors. That’s because it’s intended to protect your business and employees, not outside professionals you hire.
Contractors are typically considered separate businesses, which means:
- If they cause damage, their insurance is expected to respond first
- If they don’t have coverage, your business may be exposed to a liability claim
- Some business policies may offer limited protection to contractors, but only in rare, specific situations
Hiring a contractor can mean that your business is primed for growth! But these milestones often come with additional risk, and it’s crucial to understand the limitations of your business insurance coverage.
If you need a simple way to remember how your policy works, think of it like this:
Does Business Insurance Cover Contractors?
Your insurance = Designed to cover your business
Independent contractor insurance = Built to cover the contractor’s business
Separate coverages for separate businesses, even though you’re working together
Why Hiring Contractors Still Creates Risk for Your Small Business
While hiring contractors helps you achieve goals, it also exposes your small business to additional risk. If a contractor causes harm to others while doing work for you, your business may still be pulled into a claim because of your involvement, however minimal.
According to a 2023 study, lawsuits cost small businesses $160 million in a single year, accounting for almost half of total litigation expenses across the entire business sector. The truth is, small businesses face lawsuits every day, and working with contractors can increase your chances of being sued.
Because of a concept called shared liability, a harmed third party can name everyone in a lawsuit — the property owner, the small business, and the contractor responsible for damage. Yes, just because you contracted someone to perform work, you can be dragged into a claim!
It’s a harsh reality of business ownership in the U.S., but one you can proactively prepare for by requiring proof of insurance from every contractor.
Real-World Scenarios: Business Owners and Contractors
Here’s how lawsuits with businesses and contractors can play out in real life.
- A landscaper brings in an irrigation specialist to handle a sprinkler installation for a commercial property job, but the specialist accidentally punctures a water line and floods part of the property; the client sues both the landscaper and the irrigation contractor over the property damage
- A fitness trainer rents out studio space and hires a guest instructor to lead a specialty class; however, a student gets injured while following the exercises; if the guest instructor doesn’t have liability coverage, the trainer who booked them may be pulled into a resulting claim
- A DJ books a corporate event and contracts a lighting technician to help with setup, but during the event, a lighting fixture falls and injures an attendee; the venue and party-goer may hold the DJ responsible, even though the contractor was mainly at fault
- A private tutor contracts other independent tutors to cover subjects outside of their expertise; later, a family claims one of the hired tutors gave advice that harmed their child’s academic performance, and, because there was a liability coverage gap, the original tutor is blamed for the alleged mistake
Employee vs Independent Contractor vs Subcontractor: How Insurance Needs Change
| Category | Employee | Contractor | Subcontractor |
|---|---|---|---|
|
Who hires them |
You |
You |
Your contractor |
|
Relationship to you |
Works for your business |
Separate business you hire |
Works for your contractor |
|
Who provides insurance |
You, the employer |
They provide their own contractor liability insurance |
They provide their own subcontractor liability insurance |
|
Automatically covered under your policy? |
Usually yes |
No |
No |
|
Risk to your business |
You’re responsible for their actions |
You may still be named in claims |
You may still be named in claims |
|
What you should verify |
Employment agreement and your business’ workers comp coverage |
The contract, their certificate of insurance (COI), coverage limits, and possibly additional insured status |
Ensure the contractor requires a COI and coverage from their subcontractors |
What Insurance Should You Require From Contractors?
The insurance you require from contractors depends on the type of work they perform. Here’s a starting list of coverages to ask for before anyone starts a contract job.
- General liability insurance: Designed to cover third-party bodily injury and property damage; essential if the job requires them to be on location physically and has the potential for them to cause an injury
- Professional liability insurance: Built to cover third-party claims related to their professional services; crucial for knowledge-based or advisory work
- Commercial auto insurance: Intended to cover accidents related to the vehicle used for work; necessary if driving or vehicles are involved
- Product liability insurance: Designed to cover third-party injuries or property damage related to products sold; essential if products are served or sold
- Liquor liability insurance: Can cover third-party injuries or property damage related to alcohol served or sold; necessary if the service involves alcohol
- Workers comp insurance: Can pay for state-mandated benefits for employee work-related injuries; usually required for businesses with employees
Remember: coverage requirements can vary by state, industry, or contract terms.
What Insurance Should a Contractor Have?
A contractor should have insurance built for the risks they face — the type of work they do determines the coverage they need. For example, independent contractor insurance for a cleaning professional might include coverage for general and professional liability, plus inland marine for their tools.
When to Require a Certificate of Insurance
When hiring a contractor, always ask for a certificate of insurance (COI). This document verifies that the contractor has active coverage. You can make proof of insurance a contract requirement so the job only starts once their COI is in your hands.
Many insurance companies now offer digital COIs, so it’s a simple process for your contractor to email or upload a copy of their COI for you to confirm their coverage.
Example: Hiring a Contractor for an Event
Say you’re an event planner and bring in a photographer (contractor) to manage a photo booth for an influencer gathering. That photographer then hires a floral designer (a subcontractor) to create the custom backdrop.
In this scenario, you would request a certificate of insurance from the photographer, while the photographer must verify the floral artists’ subcontractor general liability insurance.
When to Request Additional Insured Status
If your contractor’s work has the potential to cause harm to others, consider requiring additional insured status on their policy. When they list you as an additional insured, their liability coverage extends to your business in case you both get pulled into a claim arising from their work.
Requiring additional insured status for contracts is a common business practice that adds an extra layer of protection for both parties! With this endorsement (“policy edit”), you and the contractor can focus on the task at hand, rather than worrying about what-ifs.
It’s important to note that this status does not replace your own coverage. Instead, think of it as a buffer between the contractor’s work and your policy, limiting the need to draw from your insurance bucket.
Do I Need to Be Listed as an Additional Insured?
Generally, you should request additional insured status if a contractor’s work could result in a liability claim. Just as landlords or event hosts might ask to be included on your policy, when to add additional insureds depends on the specific nature of your business relationship.
Before You Hire a Contractor: Quick Checklist
Ready to hire a contractor and get stuff done? Check off these items first:
✔️ Confirm worker classification before work begins
✔️ Put a written contract in place (even for small jobs)
✔️ Request a current certificate of insurance
✔️ Verify policy dates, coverage types, and limits
✔️ Determine if you need additional insured status
✔️ Document responsibilities and expectations beforehand
What to Check For on a Certificate of Insurance
Here’s what to check for on your contractor’s COI. Don’t worry, the insurance lingo is not as scary as it seems!
Verify:
- The named insured (the name matches who you’re hiring)
- The coverage types (such as general liability insurance)
- The policy dates (valid during the work period)
- The coverage limits (how much coverage they have)
- Additional insured status (if you require it)
If you require additional insured status on their policy, double-check that your business name and address are written correctly. You can usually find this information in the “Certificate Holder” section (box 13 in the example below).
Pro Tip
A certificate of insurance is a snapshot of coverage, not the full policy document itself. Learn more: What Is a Certificate of Insurance?
Common Mistakes Business Owners Make When Hiring Contractors
| Category | Employee |
|---|---|
|
Assuming contractors are covered under your business policy |
Verify the contractor’s COI before work starts |
|
Skipping a contract because the work is “too small” |
Even a one-page agreement protects both parties |
|
Collecting a COI once and never checking dates or limits |
Set a reminder to re-verify if you’re working with contractors on a continuous basis |
|
Not confirming auto coverage when driving is involved |
Always ask if a vehicle is part of the job and verify proper coverage |
|
Relying on additional insured status to protect your business |
Carry your own business insurance policy and review coverage regularly as your business grows |
Protect Your Business at Every Stage
Hiring outside help means your business is building momentum! With the right coverage in place and a simple verification process before work begins, you can start hiring contractors confidently.
Insurance Canopy makes protecting your business easy. Get the coverage your business needs in minutes, so you can focus on your next big move. Now’s a great time to review your coverage to ensure you’re protecting all your hard work.
FAQs About Business Insurance When Hiring Contractors
Do Contractors Need Insurance?
Does General Liability Insurance Cover Subcontractors?
A subcontractor should have their own subcontractor general liability insurance to protect their business against third-party injury and property damage claims.
Any time a professional works around the public, there’s a risk of accidents or injuries, so it’s essential to secure coverage before the job begins.
What Happens if a Contractor Doesn’t Have Insurance?
If a contractor doesn’t have insurance and their work accidentally causes an injury or property damage to someone else, the injured party may hold both the contractor and the business that hired them liable.
Many businesses require proof of the contractor’s insurance to avoid bearing the brunt of liability.
JoAnne Hammer | Program Manager
JoAnne Hammer is the Program Manager for Insurance Canopy. She has held the prestigious Certified Insurance Counselor (CIC) designation since July 2004.
JoAnne understands that starting and operating a business takes a tremendous amount of time, dedication, and financial resources. She believes that insurance is the single best way to protect your investment, business, and personal assets.
JoAnne Hammer is the Program Manager for Insurance Canopy. She has held the prestigious Certified Insurance Counselor (CIC) designation since July 2004.
JoAnne understands that starting and operating a business takes a tremendous amount of time, dedication, and financial resources. She believes that insurance is the single best way to protect your investment, business, and personal assets.
