By Noelle McCall, CIC, CRM, CCIP, ACRA, CISR

Requiring Workers' Compensation (WC) insurance is a best practice when hiring companies to perform work under a contract. WC provides coverage for workplace injuries, protecting both the hiring company from liability and ensuring injured workers receive necessary medical care and wage replacement.

However, when hiring sole proprietors or small businesses that don’t carry WC insurance, companies may face potential liability for workplace injuries. Many states allow sole proprietors and businesses with only a few employees to opt out of carrying WC, creating potential coverage gaps. To manage this risk, businesses can include specific contract provisions that address workplace injury liabilities and provide protection through alternative means.

Alternate Contract Requirements to Consider When Workers' Compensation is Not Required

1. Independent Contractor Status Clause

Purpose: Establishes that the provider is an independent contractor, not an employee.

Key Terms:

• No employer-employee relationship.
• Provider assumes all liability for their workers.

2. Occupational Accident Insurance

Purpose: Provides coverage for work-related injuries, offering some protection similar to WC.

Key Terms:

• Minimum coverage limits.
• Medical, disability, and death benefits.

3. Hold Harmless and Indemnification Agreement

Purpose: Transfers liability for workplace injuries to the service provider.

Key Terms:

• Provider indemnifies the hiring company for injury-related claims.
• Clear language on injury-related costs.

4. Proof of Health Insurance

Purpose: Ensures the provider has some medical coverage.

Key Terms:

• Require evidence of active health insurance.
• Consider minimum coverage thresholds.

5. Waiver of Subrogation

Purpose: Prevents the service provider's insurer from seeking reimbursement from the hiring company.

Key Terms:

• Require service provider to have all their insurance policies endorsed to require their insurers to waive their subrogation rights against hiring company.

6. Personal Guarantee or Certification of No Employees

Purpose: Holds the individual personally responsible for claims.

Key Terms:

• Written certification confirming service provider has no employees (if none).
• Personal responsibility for injuries and damages to employees.

7. Contractual Risk Transfer with Commercial General Liability Insurance

Purpose: Covers third-party bodily injury claims related to service providers through their commercial general liability policy.

Key Terms:

• Require minimum limits for bodily injury coverage.
• Include the hiring company as an additional insured.
• Require contractual liability coverage for "Insured Contracts".
• Require severability of interests (aka separation of insureds) coverage and no cross-suit exclusions for suits brought by additional insureds.

These contract provisions can help balance risk management while meeting the unique needs of small service providers. Including them in your agreements can protect your company from claims when service providers don’t have Workers’ Compensation insurance. Be sure to consult legal counsel to ensure contract language is clear and enforceable.

DISCLAIMER: Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state jurisdiction. These instructional materials provided by Contract Risk Academy ("CRA") are intended as a general guideline and any interpretations provided by the instructor or the creator(s) of these materials do not modify or revise insurance policy language. In providing these materials, the authors assume neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional materials provided. Any statements concerning legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as legal advice, for which you should consult your own professional legal advisors. 

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