Do Independent Contractors Need Workers Compensation Insurance?

If you are a sole-proprietor on a job that requires a certificate of insurance, chances are it requires a workers compensation policy to be in place. We get questions every month asking whether an owner of a company needs to purchase insurance on themselves and if not, how they can opt out.

The answer to this question depends on the state that you live in and can often change based on the different legislative agendas. For information about your specific state, you can contact one of our Risk Advisors, but here we will provide you with a couple of options generally available.

Affidavit of Exempt Status

An affidavit of exempt status (often referred by a different name) is a registration with a government administration that declares that you are an independent contractor with no employees and are electing to be without any workers compensation coverage.

In many states, this is the lowest cost option and will fulfill most certificate needs. This certificate will not come with any coverage if you are injured.

No Payroll Policy (Ghost Policy)

Another low-cost solution is a no-payroll policy. A ghost policy is a workers compensation policy that excludes the owner but is an in-force workers compensation policy in the event of an employee getting injured. This workers comp policy is a safer option than the affidavit but still does not provide coverage for an owner. If you are hiring any 1099 independent contractors or you are not confident that you will have zero employees in the upcoming year, this would be our recommendation. The ghost policy is subject to an audit each year verifying that you did not have any employee payroll or uninsured subcontractors.

Capped Payroll Policy

If you want coverage on yourself in the event of an injury, this is a great option. Each state outlines a flat, minimum, or maximum payroll cap for owners of a business. The payroll capped policy is the best value of all three options since a business owner can get coverage on themselves without being charged for the entire pay, unlike employee labor.