Most well informed nonprofit managers know they need various insurance policies to protect themselves and their organization from a variety of lawsuits and claims. Some of the most common policies nonprofit's purchase are general liability insurance, directors & officers liability, and workers' compensation insurance. Yet many fail to realize how these do and do not apply to independent contractors.
General Liability Insurance
Nonprofit and for-profit businesses alike often view insurance through the lens of protecting their employees and their assets. However, failing to address the limitations of insurance in regards to independent contractors can leave gaping holes in an organization's overall protection. For example, if an employee accidentally injures someone or does damage to someone's property while performing his or her job, that organization's general liability policy would respond to any resulting claim or lawsuit.
Most, if not all, general liability policies exclude coverage for independent contractors. If the contractor causes injury or damage, the nonprofit's insurance company will likely deny the claim. That is why it is vital to discuss policy exclusions as well as risk management with your broker to avoid coverage gaps.
From a cost standpoint, hiring contractors has advantages. These advantages include less payroll taxes, less workers compensation premium, and less expensive employee benefits. However, the savings may not adequately offset the increased risk to the organization.
Workers' Compensation Insurance
If an independent contractor meets the state and federal definitions then it is not a requirement to include them in the payroll reported to your workers comp company. As a result, many organizations try to declare various employees as contractors. This move can save an organization money on workers' comp, however, in the final audit (performed annually on all workers comp policies) it may be determined that these workers do not meet the established guidelines. As …