Independent contractors feel like separate businesses, so firms assume their risk stays separate too. The client sees it differently. The client hired your firm, signed with your firm, and paid your firm. When the work goes wrong, the demand letter carries your name, no matter whose hands actually did the job. That is the 1099 problem in one sentence, and it gets bigger as a firm grows and leans harder on outside help.
Why the claim lands on you
Clients generally pursue the party they contracted with. You are that party. Whether you delivered the work yourself or handed it to a 1099 specialist is usually your internal arrangement, and it rarely changes who the client blames. From the client’s side there is one firm responsible for the result, and it is the one on the agreement. So the claim comes to you first, and it comes as if your firm made the mistake, because as far as the contract is concerned, your firm is responsible for the work. Even if you eventually pursue the contractor, that is a second fight you have to run yourself, after you have already answered the client. The claim does not wait for you to sort out who was at fault internally.
The two questions most firms never ask
A firm building a bench of contractors usually skips two questions that decide the whole exposure. First, does my own E&O cover work performed by subcontractors on my behalf? Some policies extend to it, some do not, and some only under conditions. That is a policy specific answer, not a safe assumption. Second, do my contractors carry their own E&O, and does it name my firm where it should? If the contractor has no coverage of their own, there is nothing standing behind them when their mistake becomes a claim. When both answers are no, the contractor’s error is functionally yours, sitting on a policy you were not even sure would respond.
How the gap opens as you scale
This exposure grows quietly. A firm brings on one trusted contractor for overflow, then another, then a rotating group as demand rises. Each addition feels minor, so nobody stops to recheck the coverage. Meanwhile the share of client work flowing through people the firm does not directly insure keeps climbing. The gap does not announce itself. It widens one project at a time until a single subcontractor mistake reveals how much of the firm’s delivery was riding on coverage that was never confirmed.
Closing it before the claim
The fix is a standard you set and enforce, not a one time fix. Require your independent contractors to carry their own E&O appropriate to the work, and to name your firm where that fits the relationship. Collect a certificate of insurance before they start and keep it current, because the certificate is the proof the coverage actually exists rather than a promise it might. Put insurance and indemnity requirements in your contractor agreements, understanding that those terms are only as strong as the contractor’s real coverage and ability to pay behind them. And confirm with your advisor how your own E&O treats subcontracted work, so you know whether your policy is a backstop or another gap. The requirements that clients place on you, covered in contract requirement insurance requirements explained, are the same tools you can turn around and place on your contractors.
Questions to ask your advisor
- Does my E&O cover work performed by independent contractors on my behalf?
- Should I require my 1099 contractors to carry their own E&O, and at what level?
- When should a contractor name my firm as an additional insured?
- What certificates should I collect before a contractor starts, and how do I keep them current?
- How do indemnity terms in my contractor agreements interact with our insurance?
A 1099 is a separate business right up until their work becomes your claim. A firm that sets a coverage standard for its contractors, verifies it, and confirms its own policy behind them keeps a subcontractor’s mistake from becoming its own uninsured problem.
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