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What insurance should I have for contractors I work with?

Q: What insurance should I have for contractors I work with?

A: Architect or engineer contractors need to carry their own insurance coverage, as they are technically separate business entities. In your work agreement, you can require that your contractors at least carry Professional Liability Insurance and General Liability Insurance. You can check for proof of coverage on their Certificate of Liability Insurance, which lists all their liability policies, scopes of coverage, and active dates. When your contractors carry their own coverage, it helps distinguish them from your business in terms of employee status and liability. Their separate coverage reinforces that they are not your employees — a distinction that can come in handy if your business is ever audited. And if your contractors make mistakes in their work — even when they work on your business's behalf — their coverage can address those liabilities.

Risks When Working with Contractors: Details

If a client or other third party feels they suffered an economic loss because of your work, they may sue every person or business involved in a project — even if the job was finished years ago. Moreover, the plaintiff may sue you even if the contractor is the one who made the mistake.

Your contracts can minimize some of these liabilities. For example, your client contract should allow you to hire independent contractors to help with the project. And your contract with the 1099 architect or engineer should have indemnification clauses that hold your business harmless for the work they do for your business. Their responsibilities should be clearly detailed in the project scope, which can help prevent your business from taking the blame for the contractor's negligence.

Even still, contracts may not be enough to keep a complaint from snowballing into a lawsuit. That's why every business that works on the project should have its own liability coverage, just in case.

To learn more about the risks of working with contractors, check out the following articles:

Are You Liable for Mistakes Your Contractors Make?

You can be liable for your contractor's mistakes if you don't take the proper precautions. When working with contractors, it's important to get in writing that you aren't liable for their work. This should be written in the contract you sign with the client as well as in the independent contractor agreement.

If you and your contractors are sued anyway, you'll both be glad to have your own Professional Liability Insurance to cover the cost of the lawsuit.

Lastly, if your contractor's worker status is challenged, that could be another avenue of liability for your business — and on many levels. If the contractor actually qualifies as an employee, you would be liable for their work and their occupational injuries. If your state requires you to carry Workers' Compensation Insurance for your employees, you could face noncompliance fines, too.

State and federal laws define a contractor's status. If the state Workers' Compensation board or IRS audits your business, it will determine the status of your worker by assessing reality of the work relationship — not what's written in your contracts.

That's why you should always make sure your contractors…

  • Work independently.
  • Use their own tools and resources.
  • Receive no benefits other than payment for the work they complete.
  • Are free to earn a living by working with other businesses and individuals.
  • Control the manner in which they complete their work (other than the deadline).

Check out the AIA's guide on determining contractor status for more information.

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