In the TechInsurance Market Index, an analysis of practices at more than 10,000 small IT companies that applied for insurance with us, we found that 26 percent of small IT businesses subcontract work to others. This is hardly surprising, considering that subcontractors…
- Offer specialized expertise you might not have in-house.
- Can help you finish work when you’re in a pinch.
- Cost a lot less than hiring a new employee.
But do your subcontractors need IT liability insurance?
The short answer is yes if you want to protect your business from potential lawsuits. After all, you can be liable for your contractors' work. When they have their own insurance, their policy can foot the bill so their mistake doesn't hurt your bottom line.
Requiring contractors to have coverage is a risk management staple. However, a lot of IT businesses skip this step. Read on to see why it’s such an important practice.
The Importance of IT Liability Insurance
Liability insurance offers a financial cushion for businesses when they need it most.
Nina Kaufman (@NinaKaufman), founder of
Ask the Business Lawyer
, explains: “IT professionals often carry (and need to carry) liability insurance because the damage that can be caused from something going wrong (e.g., you mistakenly wipe someone’s server, introduce a virus, etc.) can far exceed the amount of your contract.”
When that happens, liability insurance can provide the funds to cover the damage and the lawsuit costs.
There are different kinds of liability insurance, but for IT professionals and their contractors, Errors and Omissions Insurance is key. This policy can help pay for damage your professional mistakes or errors cause.
That's why your subcontractors should have coverage: they might make a mistake.
You’re Responsible for Your Contractors’ Work
When you hire subcontractors, you rely on their work. If they mess up, guess who gets blamed?
“With liability, there’s a chain of responsibility,” says Kaufman. “An IT provider contracts with the client. The client has no control over the subs – they may not even know who they are – so they’ll hold responsible whomever they contracted with.”
That means you.
If you don’t want to shoulder the financial burden of your subcontractor's mistake, you need a way to recoup your losses. That may mean suing your subcontractor to cover the cost.
“That’s why IT providers will want to hold their subs to the same standards and will want them to have the same levels of insurance,” says Kaufman. “Otherwise, you as the IT provider could get a judgment against your sub who doesn’t have the money to pay and goes out of business.”
If your subcontractor has E&O Insurance, great! Their policy can pay for the damage and life goes on. If they don’t, their business folds, you don’t get any money, and the original claim is now back on your shoulders.
Make Sure Subcontractors Have Technology E&O Insurance
In a recent survey of our customers, we found that just over half of them (57 percent), require proof of technology E&O Insurance from their subcontractors. That’s not a comforting statistic.
Even if you know and trust the person you're working with, make sure they have the means to make amends for work mistakes. Your best bet is usually requiring them to have E&O coverage. Learn more about that in "The Importance of Requesting Proof of E&O Insurance."
Kaufman also advises these other risk management precautions when working with subcontractors:
- Include a clear scope of work and responsibility in the written subcontract.
- Ask for (and receive) copies of the sub’s certificate of insurance.
- Check the sub's references before hiring.
With the right safeguards, you get the benefit of working with subcontractors without the worry.
For more information on other types of insurance you might want subs to have, check out “Employees, Subcontractors, and General Liability Insurance: Who Needs a Policy?”