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Can Independent Contractors Sue Your Insurance Agency?

Many employers, including insurance agencies, see independent contractors as a get-out-of-liability-free card. The reality is different. Independent contractors also have rights, and failing to recognize that can place your agency at legal risk.

If you hire independent contractors, you need a solid process for ensuring their fair treatment and timely payment. While this route is often beneficial to both you and your 1099 workers, it can also be replete with pitfalls. Here are the causes of action independent contractors may file against you and how to avoid them.


Independent Contractors in Insurance Agencies

An independent contractor is an individual, business, or corporation that provides goods and services to your agency under a contract. They are considered self-employed. While your employees have set schedules and job descriptions, independent contractors have separate offices and provide services and goods when you order them.

There is no doubt independent contractors play a significant role in the insurance industry. Common 1099 positions in agencies may include:

  • Independent insurance agents
  • Consultants
  • Actuaries
  • Accountants
  • IT professionals
  • Janitorial and housekeeping professionals

Your independent contractor arrangement may take many forms. You may only have your IT professional in the office when you upgrade technology but never has a permanent office in your agency. Accountants and actuaries may help with a claim or guidance on specialized insurance. These individuals are highly-skilled and typically work on a project basis. But that does not relieve you entirely of responsibility.


Possible Causes of Action

Independent contracts have rights. They include:

  • Right to contract
  • Right of control
  • Right to decision-making authority
  • Right to set their own work schedule
  • Right to choose their work location
  • Right to advertise and solicit other business
  • Right to payment
  • Right to work with other contractors
  • Right to challenge their employment status with you
  • Right to manage their own business

When you interfere with these rights, you risk lawsuits. The following are possible causes of action independent contractors may file against you or your agency.


Breach of Contract

Independent contractors may sue you for breach of contract if you violate any provision of a written or verbal agreement. The violation must cause damages to the contractor to be actionable.

Commonly violated contract provisions include timely payments, project scope, or failure to follow through on contractual duties. For example, if the contract states that you will provide specific documents and cooperate with inquiries, your contractor may sue for breach of contract if you do not follow through. Their damages may be the business they lose while waiting for you to cooperate.

The best way to avoid a breach of contract situation is to review all contracts thoroughly. Consult an attorney if you need assistance interpreting provisions or seeing if they’re fair. In some cases, you may need to renegotiate the contract with the independent contractor.


Unpaid Invoices

Unpaid invoices fall under breach of contract claims, although they call this cause of action as monies owed in some states. It is self-explanatory: A contractor issues an invoice, you never pay it, and they pursue you for the invoice amount plus interest, attorney fees, and court fees.

Independent contractors have a right to timely payment, whether invoiced fees or commissions. You avoid this lawsuit by paying your independent contractors on time. If there are payment issues, communicate them.


Intentional or Negligent Interference with Contractual Relations

Some independent contractors’ rights have to do with them continuing their business. Decision-making, business location, control, schedules, and the ability to work with other contractors are just a few ways independent contractors maintain and grow their business.

When you interfere with these activities, you may be reducing your contractor’s ability to make a living. For example, if you insist on a specific schedule, you risk misclassification (discussed later) or taking that contractor away from another client. If that client dumps them, you could be liable for potential income.

You can avoid this pitfall by treating the contractor like a business that helps you rather than an employee. This mindset is difficult when you rely on the contractor heavily, as you may do with IT professionals and independent agents. However, you need to trust them to finish the work you hired them for and do your best not to over-supervise. (Although, calling them to check project status is OK.)


Premises Liability

As a business owner, you are responsible for keeping your premises safe. You risk injuring other people if you have hazards like cracked sidewalks, broken stairs, rotted patios, or flimsy ceilings or shelves. It doesn’t matter if those people are your employees, clients, or independent contractors–you are liable.

Your contractor likely has insurance for workplace accidents, but that does not get you off the hook. If a ceiling bulge collapses and injures a contractor, they can still pursue you for damages on a premises liability theory. They need to prove that you knew or should have known of the hazard, yet you failed to address it.

You do not want anyone to file a premises liability lawsuit. You can avoid that possibility by maintaining your business property and taking safety complaints seriously. Repair stairs and porches, and replace flimsy office furniture that may fall and hurt someone. Address trip hazards, like a carpet, coming up from the floor, tree roots, or fallen objects.



Employee misclassification is a common error that becomes expensive. It arises most commonly when companies want all the benefits of an independent contractor relationship without relinquishing control over the contractor. So, they create an independent contractor relationship on paper while still controlling the worker’s resources.

Hire employees if you want control over pay, hours, equipment, and location. Do not use independent contractor status to get out of overtime and benefits. That course of action only causes trouble.  Use independent contractor status to hire self-employed individuals with specialized skills and knowledge. If you need clerical staff, hire temporary help through an agency or find employees.

Regarding insurance agents, the courts set guidance that can help you navigate those relationships. If you use independent insurance agents, be sure to:

  • Sign an explicit contract: The contract should reference the independent contractor relationship. However, you need to follow up on that reference with conduct.
  • Define the specifics: The contract should establish that the insurance agent is responsible for their license, office space, and equipment.
  • Do not interfere with staffing: Courts are more likely to see an independent contractor relationship if the agent hires and fires their own staff. If you interfere with that, they may see a misclassification.
  • Watch financial procedures: You can pay insurance agents commission, but state that they are responsible for self-employment taxes and do not receive benefits like health insurance or paid vacation time.

However, courts allow restrictions on independent insurance agents that do not apply to other independent contractors. You can require:

  • Compliance with company policy, guidelines, and instructions
  • Authorization before they discharge any insurance contract
  • Noncompete, nonsolicitation, and confidentiality agreements.

If you are concerned about a decision affecting an agent’s independent contractor status, consult with an attorney. Although, generally, you can avoid trouble if you follow one rule: when in doubt, don’t.


Protecting Your Insurance Agency

Legal liability is a terrible prospect for all small businesses, including insurance agencies. Fortunately, it is also avoidable if you take precautions. To avoid liability to independent contracts, start by:

  • Classifying your workers correctly: If you have any doubts on whether an employee should be an independent contractor, establish them as an employee. Do not take the risk.
  • Use written agreements: It is tempting to rely on verbal agreements, especially with someone you’ve trusted for years. But written contracts with explicit provisions protect all parties. You can find agreement templates online or hire an attorney to draft them for you.
  • Carry worker’s compensation insurance: You should do this for your employees and independent contractors you unintentionally misclassified.
  • Monitor the relationship: See how it evolves and change it when necessary. If you demand regular services from an independent contractor or wish to keep them on staff, do not sneak them in. Make an employment offer and change their status. Even if you intend to maintain the independent contractor arrangement, check in to ensure you do not treat them like employees.

Handling independent contractors is an agency management skill that keeps you out of legal trouble. The American Agents Alliance can connect you with consultants and insurers to help you make good decisions regarding your employees and independent contractors. Become a member to learn more.

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