Employers who hire 1099 independent workers should thoroughly check policy forms in order to avoid claims issues

By Mike Freeman

When the construction labor market tightens, employers fill the gap with independent contractors. While hiring 1099 contract workers helps keep projects on track, it can potentially create an entirely separate problem if their employment classification isn’t made clear for insurance purposes.
If an insurer doesn’t know about 1099 workers from the onset, they are unable to fully account for what they are underwriting. This can cause issues down the road, whether related to coverage when claims arise or when it’s time for policy renewal. Brokers can do several things to help mitigate these issues.

Identify worker status
Using a 1099 form is not enough to settle the status of a worker. The two questions at issue: Does the individual essentially perform as an employee? And does the company manage and otherwise treat that person in the same way it would an employee? If yes, the 1099 worker may fall under the employee classification of the hiring company’s insurance policy – in which case, the best strategy for the company could be to hire that individual as a W-2 employee instead.

Be aware of potential claim issues

If an insured construction company is using 1099 workers, policy forms can be written to clearly address coverages and exclusions – such as bodily injury – as related to those individuals. Brokers can help ensure these specifications are in place by asking their policyholders to identify the employment status of workers.
Without this clarity, unintended claims issues can arise. For example (again, depending on the company, state, forms and circumstances):

      • A general liability policy excludes workers’ compensation for employees. But if a 1099 worker is injured on the job site, that GL policy might pick up the claim because the worker does not fall under the definition of “employee.”
      • Some carriers may consider 1099 workers to be uninsured subcontractors, and they could be charged a penalty deductible at the time of loss. Similarly, if 1099 workers are determined to be uninsured subcontractors during an audit, carriers may add an additional premium charge.
      • Carriers provide general liability coverage for damage but not for the actual work done by an employee. The policy could cover damage caused by a plumbing leak, but not the leak itself. However, if an identified 1099 worker performed the work, the employee work exclusion might not apply, and the policy could possibly have to cover both the leak itself and the subsequent damage.

Review account for correct forms
To be able to confirm audits and to help avoid problems when renewal time comes around, brokers should review each account and compare forms on each policy. In particular, the forms should specify what is covered at the time of claim and clarify whether 1099 workers will be considered the same as W-2 employees (which can be done via endorsement).

Construction has been affected by COVID-19, but as work begins to pick up, brokers will likely notice an increase in 1099 workers hired by their policyholders. Extra diligence and attention to policy forms will be particularly important to ensure coverage and exclusions are appropriate and well crafted.

Learn more about Argo Construction’s middle-market coverage.

Mike Freeman is a construction underwriting supervisor for Argo Construction

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