Demystifying insurance: The three-legged stool

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Nothing should be mystifying about the concept of a three-legged stool. A stool is a simple piece of furniture, and its balance depends on all three legs; if you take any one of those away, the stool falls over. It’s useless to sit on, even though it still has most of its legs left.

But insurance—to some an even more mystifying subject—also has its version of this three-legged concept. This metaphorical stool is made up of three types of coverage:

  1. Workers’ compensation.
  2. Occupational accident.
  3. Contingent liability.

These three insurance policies combine to support companies who rely on independent contractors (ICs), protecting them from a variety of risks. Without all three “legs,” you may run the risk of tipping over legally, resulting in having to pay not only for the current claim but any additional time when you did not have coverage.

Before we get into all the risks, let’s discuss the individual legs and how each one helps support the weight of a business.

Leg 1: Workers’ Compensation Insurance
Any company with employees is likely to have a workers’ compensation policy. With rare exceptions, some form of this coverage is required by law everywhere in the United States. These policies are often designed to pay the costs accrued by employees’ on-the-job injuries ad infinitum, and are therefore pretty costly—especially for drivers, warehouse workers and any other professions with a high risk exposure.

The costs associated with workers’ compensation insurance are often the impetus for building an IC workforce in the first place. This enables you to cut out the hefty cost of covering risk for huge swaths of your workforce, right? No, not quite.

Leg 2: Occupational Accident Insurance
A company that relies on any number of ICs should probably have occupational accident insurance. Usually referred to as “OccAcc,” this type of policy acts as the frontline defense when it comes to managing the financial fallout of a work-related accident for both the involved IC and the contracting company. While it is similar to workers’ compensation insurance on the surface, this policy is specifically designed to cover an independent contractor who has an accident while on the job.

Two dangerous assumptions are often made when deciding whether to acquire occupational accident insurance: First, that only companies who work with contractors for high-risk or industrial jobs need this sort of coverage; second, that since the IC is not an employee of the contracting company, said company has no liability for the injury.

A contractor may sign a contract that says they recognize the company is not their employer, but someone who has been injured on the job is likely to find themselves racking up medical bills and other expenses while they are unable to work, so finding any route to compensation becomes their paramount concern. There are attorneys who are sensitive to this, and who may advise a contractor that a big payout could be in their future if they can present a compelling case that they were actually an employee who was misclassified as a contractor and, thus, is eligible for workers’ compensation (plus back pay and any other benefits they may have been excluded from). Anecdotal evidence suggests that judges will sometimes side with the worker who has sustained an injury and is unable to provide for their family, let alone pay medical and legal bills. If this happens, a company may be held liable despite doing nothing wrong—except deciding not to get an occupational accident plan, which is specifically designed to provide this avenue of relief for ICs.

What’s more, the legal process for such a claim involves an enormous amount of costly back and forth for both the IC—who may not see a payout for years, if at all—and you, who may end up having to pay costs associated with the claim as well as backdated workers’ compensation premiums to your insurance carrier. This is because carriers are required to defend claims, and if they have to pay out on a claim for one contractor, it’s in their best interest to retroactively cover any other ICs the company has worked with for up to three years (when the statute of limitations runs out).

Leg 3: Contingent Liability Insurance
Contingent liability is a bit simpler than the other two, but no less important, operating as a vital coverage bridge between workers’ compensation and occupational accident policies.

This policy’s purpose is twofold: First, to retain an attorney who can defend against any claim made by an IC who is covered by an occupational accident policy; second, to pay out benefits in the event a covered contractor is found by a judge to be misclassified and entitled to the same benefits as an actual employee, due to an injury. Basically, this policy fills in the monetary gaps between the other two insurances in case of an erroneous claim.

The Stability of the Three-Legged Stool
Now you hopefully have a better understanding of how the three legs of workers’ compensation, occupational accident and contingent liability come together to support your business.

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