Adding Independent Contractors
To Your Miscellaneous E & O Policy

Certain types of businesses regularly use independent contractors to help them perform the services they provide. Some use them only occasionally, while others use them on a much larger scale and most services offered are performed by independent contractors. When your client asks to have independent contractors added as insured’s on their E&O policy, it is important to make sure they understand the implications of doing so. In some cases, it may not be the most prudent move or may not be necessary. In other situations it will make perfect sense to include the independent contractors as insured’s on the policy.

Is adding independent contractors necessary?
The way most E&O policies are written, the insured will be covered for claims made against them alleging that they are liable due to negligence in the performance of the covered services, even if the services were performed by an independent contractor who is not listed as an insured on the policy. If the goal in adding independent contractors to the policy is to protect the independent contractors themselves, then it may make sense; but if the goal is just to ensure the insured will be covered for work performed by the independent contractors then it probably is not necessary.

What kind of contractors does the applicant utilize?
If the applicant uses highly skilled contractors such as attorneys or engineers to perform certain isolated tasks, the applicant should expect those contractors to have E&O coverage of their own. In fact, unless the applicant uses mostly unskilled individuals to provide basic unskilled services, they should expect their contractors to carry their own E&O, if possible. Why should the applicant suffer the burden of having a loss on its policy, if the loss is the result of negligence on the part of an independent contractor who was selected because of his or her expertise?

Does the policy form offered already cover independent contractors as insured’s?
Some carriers include coverage for independent contractors automatically when insuring certain types of service providers. Some of our markets add independent contractors to the definition of “insured” on any Real Estate Agent E&O policy it issues, because virtually all services provided by a traditional real estate agency are performed by independent contractors. In addition our markets include independent contractors in its definition of insured’s on its Technology and Internet E&O policy form, since so much of the work performed by certain tech companies is done by independent contractors. In these cases, not including the contractors as insured’s would mean not insuring the very people who are doing the bulk of the work that the policy covers.

Will the independent contractor be able to defend himself against a claim if your insurer does not defend him?
If a suit is filed against the insured and the independent contractor, or even just against the contractor, it may be critical to the insured that the contractor vigorously defends himself. The contractor may be the most important witness as far as the defense is concerned, and often the insured’s liability will depend on whether the contractor can defend or explain his actions or failures to act. If the contractor has no insurance of his own and is operating on a small scale, the insured and/or its insurer may end up defending the contractor if there is a claim, whether he is named as an insured or not. This may be more desirable than the alternatives, such as the contractor deciding not to present any defense at all, or to accept overtures by the plaintiffs, who may agree to let him out of the case in exchange for testimony in their favor. Thus with this kind of independent contractor it is probably prudent to add him as an insured so everyone is clear that your insurer will defend him if there is a claim.

Finally, as the broker what else can you do to protect the assets of your clients and your reputation as a professional insurance broker?
Fortunately the answer is simple. Talk to your client. Find out if they use independent contractors to perform some or all of the services they offer. If they do, ask about the skill level of the independent contractors they use. Are they trained professionals or unskilled laborers? Ask your client if they require their independent contractors to provide verification that they maintain all of the appropriate insurance policies they should, not just E&O. Ask them if they require their contractors to sign a contract that insulates them to at least some degree, by hold harmless or indemnification clauses. If they don’t, suggest they discuss with their attorney to determine if they should. Ask them if they have established criteria or standards in place to determine if a potential independent contractor has the necessary expertise to perform the service. Whether or not your client ultimately decides they need to add independent contractors as insured’s under their E&O policy, just making them think about how they select their independent contractors, how they protect themselves from the exposure the use of such contractors creates, and what they expect of their independent contractors, is adding value in providing a framework for risk management evaluation. Your clients will appreciate your insight and your demonstrated knowledge will ultimately increase their trust and reliance upon you.

This article has been reproduced with the permission of Specialty Global Insurance Services, an underwriting and claims manager offering specialized products and programs. Specialty Global is a division of MPP Company, Inc.