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Insurance for people you shouldn't have to insure

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By Merilee Dannemann

The things that drive small businesses crazy don’t only come from government. This story involves the confusing interplay of insurance, regulation, and lawsuits.  
A friend who runs a small business called me to ask about this: Her business uses the services of professionals on a contract or consulting basis. Her insurance company has just informed her that she must pay workers’ compensation premiums for the consultants. The insurer is going to do her a favor and start the premium increase this year. It could have demanded premiums for last year also, on the theory that it was exposed to claim costs last year.
Wait a second, she says. Workers’ compensation is required only for our employees, isn’t it? These consultants are not our employees. We should not have to pay premium for them, right?
The insurance company does not have to explain. If my friend does not pay the premium, the insurer can refuse to renew the policy.
So you think she can switch to another insurer. Nope. If there is an allegation of unpaid premium, no other insurer will write the policy. Since her company is required by law to have coverage, this effectively would force it out of business.
The insurance company says her business does not have to pay a premium on these consultants if she can provide documentation that they have their own workers’ compensation insurance. But these consultants are self-employed individuals. By law they do not have to carry workers’ compensation on themselves, and it would not make sense for them to do so.  
The insurance company has a logical argument. In the simplest case, a small business could be in plain violation of employment law, having workers who are really employees fraudulently categorized as independent contractors. Some small businesses are tempted to do this to avoid paying that extra premium.  
If such a worker suffered an injury, the worker could make a claim for workers’ compensation benefits. The insurer would either pay the claim or deny it, in which case the worker could take the case to workers’ compensation court. The insurer pays the cost of the legal defense and might lose and have to pay the claim anyway.
A genuine independent contractor could also try to claim workers’ compensation benefits from the small business that hired him or her, and the insurer would have the same responsibility either to pay the claim or pay for the litigation.
Even though the claim was not justified, the insurer would bear that cost. So some insurers conduct audits of their client companies, looking for this kind of exposure and demanding that the small businesses pay premium to cover the risk – that is, pay for insurance for people who are not their employees.  
We don’t know what actually happens in the real world in terms of claims filed by independent contractors, because this is not tracked or reported. So it’s not possible to say with authority whether insurers are justifiably covering their risk or making unfair demands on clients who have little choice. We don’t know how much auditing is done, how many businesses are paying unjustified premiums, or how many businesses are trying to get away with illegally misclassifying employees. Maybe you or somebody you know is in one of these positions.
I tell my friend she has some options, but there is not much in the way of regulatory process to help the small business. Even though employment law attempts to draw a clear line between employees and independent contractors, when cases are individually litigated, the results are unpredictable.
It’s not that we shouldn’t be taking care of people who get hurt. It’s just that we can’t afford to continue to do that with convoluted, confusing, expensive systems like this.