According to the Internal Revenue Service, there are more freelancers and independent contractors than ever before. Some people freelance because that was the path of their chosen career. Others are now becoming freelancers and ICs as companies cut back and outsource jobs.
Regardless of the reason why someone is working as a freelancer or independent contractor, there are generally two issues they’re confronted with: taxes and insurance. While some actually perform their work at a specified job site, others perform their work out of their home, rent an office, or set up shop in a cafe.
While the same basic rules of taxes apply to freelancers and ICs as they do to everyone else, insurance needs can be quite different. Freelancers and ICs often believe they don’t need to purchase a commercial insurance policy. They’re setting themselves up for a huge risk if they don’t purchase a policy.
Although the insurance industry is always changing, there are still basic insurance practices freelancers and ICs should adhere to. Here’s some information on what types of liability insurance policies there are for freelancers and ICs, who needs it why.
Who Needs It and When?
Quite simply, EVERY freelancer and independent contractor should carry at least some kind of professional liability policy. For those who operate as sole proprietors, professional liability and — possibly — commercial insurance are needed. As we live in a sue-happy world, it’s better to be safe than sorry, especially if you’re attempting to build a reputable business.
Just like any business launch, insurance should be purchased as soon as one starts performing freelance or IC work. As the workload or type of work changes over time, commercial policies can always be amended.
What Kind of Liability Insurance Do Freelancers or ICs Need?
There are several types of commercial liability policies available, although the type will differ with the kind of work you perform. Will your business have customers at your location? Will you be driving a car for work? Asking questions like these can help you determine what type of policy you’ll require. Work with your insurance agent to discover all your liabilities.
Professional Liability Insurance
One of the first and most important types of insurance is professional liability insurance. Often referred to as professional indemnity insurance, and sometimes independent contractor liability insurance, this type of policy would protect any possible claims from clients that the contractor may be liable for. This kind of insurance provides liability coverage in different amounts, and would help cover the costs of any claim should the claimant be able to prove the contractor was liable.
Product Liability Insurance
If you’re a freelancer or IC, and create a product or item that others will use in some way, then purchasing at least some amount of product liability insurance is a wise idea. For example, say you’re a freelance computer software consultant and you’ve been hired as an independent contractor by a company to design a software program for in-house use. Shortly thereafter the software crashes and deletes the information in the company’s database.
Cyber liability is still something slightly new to the insurance industry, and to consumers in general. However, this is an important one, especially since it provides protection for things not covered by most regular commercial liability policies. This coverage will protect you if one of your clients, and sometimes even the client’s customers, experienced a loss due to your unintentional or purposeful negligence. For example, if you’re a freelance computer software developer, and you build a database for a company that keeps sensitive, personal information in a database you build, and then that database is hacked into and a customer’s identity is stolen, not only can the customer come after your client, but you as well. Cyber liability essentially provides protection against any loss occurring from any electronic storage.
Why Freelancers and Independent Contractors Need Professional Liability Insurance
Many of the projects or assignments freelancers or independent contractors do often involve working on the needs of someone else or another business, meaning that if something were to cause a company or individual a loss as a result of the project or assignment the contractor completed, then the contractor would be completely liable for paying for that loss and any other damages that are also a result.
Let’s take a look at a hypothetical scenario. Mary is an independent freelance human resources consultant. She is hired by a large company to find solutions to some of the problems they’re having with their current payroll department. Mary finds that their payroll software needs to be updated, and she suggests to the company they purchase a particular program. They do, and after Mary has completed her assignment, she parts on great terms.
Over the course of a month, the recommended payroll software ends up making huge errors and costs the company $200,000 in losses and damages. They bring a claim against Mary, who has no insurance policy. They sue Mary for the loss, and she’s found liable for the loss and has to pay back the company the $200,000 plus legal costs, other costs including lost revenue, and the cost of having to re-hire a new consultant.
She doesn’t have the liquid assets to pay the judgment, so instead, her home, savings, and all of her other personal and business assets are seized to pay for the loss. Now Mary has no home, no money, no assets, and also can’t find work due to her damaged reputation. Had Mary had professional liability insurance, it would have covered what she was liable for, including legal costs.
Mary could sue the payroll software company that caused the error — if it was in fact their error. There are several angles this scenario could be examined from, but the big point here is that Mary needed insurance, and without any, she lost everything. This is an amazingly common scenario: the business assumes Mary is the expert and therefore takes her advice. Without her advice, the company wouldn’t have purchased the payroll software and the error wouldn’t have been made. The company could bring claim against Mary AND the software company. In this scenario, we do know that Mary was sued and that although she could bring a suit against the payroll software company, it would be a pretty tough case.
Regardless of whether the software company was sued, Mary could have avoided a lot by having insurance. Freelancers and ICs are often looked upon as “experts” so they’re often assuming potential liability when accepting the assignment or project.
According to a legal assistant who works at a law firm in Virginia, there are usually agreements signed by both parties when an independent contractor is hired. The paralegal (name withheld for confidentiality), stated that any contract should be reviewed to ensure it’s bi-lateral for example, among other things says the legal assistant. For instance, if the contract states that in the event of a lawsuit, the contractor would be responsible for all legal costs associated with the problem, but it doesn’t say that the company would be responsible for legal costs if a lawsuit happened due to an error of the company, the contract should be revised.
The contract should be bi-lateral and should give both parties equal rights, if not identical rights, then close to equal, says the legal assistant.
Since there’s usually a contract, once the contractor signs it, the IC is absolutely agreeing that if they’re responsible for a loss they’ll pay for it — with or without insurance. If the client won’t make the contract bi-lateral, that’s even more of a reason to have liability coverage to protect you.
If the contractor was found liable for a loss, and did have insurance, then the blow would certainly be softened. In this scenario, there are probably several types of insurance that could come into play here, but obviously the absence of the contractor’s insurance is what ended up costing the contractor.
Of course, there are a million other scenarios where professional liability insurance would have saved the day, but the major point is that freelancers and ICs need to carry liability coverage to protect themselves against any potential losses related to a job they perform.
Are freelancers and ICs required to carry insurance?
Yes and no. For certain professionals, liability insurance is not an option and is required by law. Sometimes, the law also says what types of professions are required to have it and what ones aren’t. If the freelancer or IC works in a field that has a regulating professional body, then the regulations of that governing body would determine if they needed it or not and also what kinds of professional indemnity insurance is needed.
There’s another time insurance may be required which some contractors may find more important than any law or regulation: if a client requires proof of liability insurance. There are many times a business or individual won’t even consider hiring a freelancer or IC to do work without first seeing proof of professional liability insurance. It’s important to remember too if you don’t have coverage and a client finds this out, it can look really unprofessional, as though you don’t take your job serious or have faith in it. This can quickly end up getting around and hurt the reputation of your business, which can often be a larger loss than those you may be responsible for if you don’t have insurance.
With the number of freelancers and ICs growing, and expected to continue growing, having professional liability insurance is incredibly important, especially considering the constant risks surrounding us every day. After all, we’re only human, we all make mistakes, and sometimes accidents happen.
Independent insurance agent, Asheley Keesee, says he has seen some large losses due to businesses not having coverage at all or having the wrong coverage.
“When trying to figure out if you need insurance or not when freelancing isn’t hard: you do need it. Trying to figure out what types and how much coverage you need is another, and that’s where we come in. We can look at your business from every angle and determine what you’ll need, as everyone’s needs are different. Being a contractor or freelancer basically shares the same risks as any small business, so freelancers have to learn to look at themselves as a type of small business,” Keesee said.
-Desiree Baughman, InsuranceQuotes.org
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