What kind of liability insurances should IT consultants prepare to have in USA?

Question

I work currently as an IT contractor through a placement agency in Massachusetts, as a sole proprietor. I do not have any sort of liability insurance, or "workers comp" insurance for that matter.

I recently applied for a consulting position with a company in Connecticut, and when they asked if I was looking for a permanent (salaried) position or contract position, I told them that I would like to work as a contractor. They told me that for that I would need to make sure that I have various insurances besides just workers comp:

• One million dollars ($1,000,000.00) in comprehensive general liability insurance (each occurrence) and a minimum of three million dollars ($3,000,000.00) in comprehensive general liability insurance (aggregate)
• Five million dollars ($5,000,000.00) professional liability/errors and omissions insurance
• One million dollars ($1,000,000.00) automobile liability insurance covering bodily injury and property damage liability
• One million dollars ($1,000,000.00) third party bond or employee dishonesty coverage indemnifying them for losses caused by dishonest acts committed by Vendor’s personnel.

So the questions I wanted to ask are:

A. Are these insurance requirements because my contract role with this new company would be more direct (as opposed to being through a placement agency)?

B. Is it common in USA to have to get insurances like this, or are there some states where insurances are not required? (some roles that I have applied for have been in places like Texas and Arizona).

C. Do US companies require insurances also from off shore companies (in other countries, like India) they hire to work remotely? (In my case here some of these insurances are probably because I am expected to work on-site, but some of them could apply to remote work as well.)

Answer 1

This is quite a strange request honestly. It is even stranger if you have a proper corporation/LLC that you have established.

As a 1099 (sole proprietor) contractor, some of this could be attempting to force you to have the same insurance as the employer.

There are a few things that I can think of as to why they require this level of insurance :

• They have been burned in the past and want to make sure that if they sue you they can receive some compensation (this is what the general liability and professional liability covers).
• They are operating in a regulated industry (think aircraft, other government contracts, bridge building, etc.) and require all contractors to meet the regulated standards.
• They are attempting to use this as a negotiating tool (but this would be strange).

The one that I find odd is the auto insurance requirement. Are you going to be driving a vehicle owned by them? Are you going to be be wearing a uniform provided by them? As a contractor, you are typically responsible for any liability from things like automobile accidents while on the job, so this requirement is particularly strange.

The answers to your questions

A. Are these insurance requirements because my contract role with this new company would be more direct (as opposed to being through a placement agency)?

B. Is it common in USA to have to get insurances like this, or are there some states where insurances are not required? (some roles that I have applied for have been in places like Texas and Arizona).

C. Do US companies require insurances also from off shore companies (in other countries, like India) they hire to work remotely? (In my case here some of these insurances are probably because I am expected to work on-site, but some of them could apply to remote work as well.)

are:

• I don't know, if you are acting as an actual employee they may be using it to try to make it look like you are really a contractor to the IRS.
• It is common for consultants, contractors, and small businesses to have general liability insurance, but the complete requirements and the coverage amounts are somewhat strange. In many states the insurances aren't required, however, as a sole proprietor you have no legal shield between your personal assets and your company which can result you losing all of your personal assets if successfully sued.
• No, depending on the size of the foreign company etc. This is all over the map, some large Indian companies have a US based corporation, which can be sued, and likely have liability insurance. Some guy on oDesk, probably not...

Answer 2

This is a complicated area and the answers vary from state to state in the US also the contracting firm paying you on the 1099 might have there own idiosyncrasies based on the state where they are incorporated, or the municipality where the contract client is located, or just stuff that happened to them in the past.

I don't know much about Connecticut I can only talk about my experience. I live in NJ and took my first 1099 contract position in the spring of 2015. The position was with a large foreign owned investment bank with offices in NYC and it paid a very good rate.

The contractor firm insisted I have general liability coverage for 1M and Workman's compensation coverage. I had to show proof of both insurances before I could collect my first paycheck. The GL coverage cost around 500 and the WC is about 700 per year, since I obtained IRS s-corp status I am able to expense all this insurance cost.

It turns out that the contracting firm I am dealing with is trying to make as much money as possible while doing as little as possible. Since they don't want to pay for workman's comp insurance, or worse yet have someone actually make a claim against said insurance, they simply push this requirement to each 1099 contractor. It's perfectly legal and it saves them a lot of headaches.

Now the idea of software developers having workman's comp claims might seem funny to some people, but I can tell you that NY State takes this very seriously.

As I found out the hard way after letting my coverage lapse. I received a threatening letter from NYS Workman's Compensation Board telling me that I could be fined up to $1000 per week for every week I operate without Workmen's Comp Insurance. After receiving letter I immediately got a new policy and notified them of the new coverage. I am still waiting to find out if there will be a fine, but my insurance agent thinks I can easily appeal since I am an SLLC (single member owner). I would suspect Connecticut has a similar bureaucracy that will hound you if you drop/decline the required coverage.

As for the GL coverage I think this is about the contracting firm covering it's ass in the litigious sense as others has said. In my case the LLC protects my personal assets so any lawsuit recovery would be limited to the cash in my business account that I don't already owe to the government, so I guess the GL policy helps them sleep at night, that and the big pile of cash I earned them!

Answer 3

I have not had a "company" ask me anything about my insurance before. But every time I've proposed work for a government agency (A city or county in California) they have required insurance. Sometimes they will waive it. Sometimes not. But it's not as high as what this company wants of you. (Are you driving a truck for them? The high automobile insurance requirements seem odd to me.)

I think it is common in the US for contractors to have general liability and errors & omissions insurance. But it's also common not to. I don't think it is required by law.

One reason a company might want you to get it is because if you damage something while on their property (accidentally burn the building down) General Liability would cover it. If you make a big mistake (accidentally wipe out all their data and backup.) I think Error and Omissions would cover it. I don't know if they are legally liable for your actions during your commute to/from the premises. Not sure how your auto liability would protect them.

When I dealt with the cities that required the insurance they were very used to independent contractors not having insurance. One waived the requirement and the other let me raise my rate to cover the cost since I had to get it just for them. You might ask them if they will consider waiving it. If they won't, you might find out the cost then add an "administrative fee" to your proposal that covers it.