Q: I am looking at giving up my ARC appointment and using a host agency for all of my sales. One potential host agency has told me that independent contractors cannot be added onto the host's errors and omissions (E&O) insurance policy, as only employees can be covered. Another possible host has told me that I can be on the policy only if I do business as an individual and not as a corporation. A colleague has warned me that, if I am on the host's policy, then the Internal Revenue Service (IRS) may classify me as an employee, on the grounds that a real independent contractor (IC) must get his own insurance policy. Which of these statements is correct?
A: They are all probably wrong. You can be added to a host's E&O insurance under the standard policy that most agencies have, and it does not matter whether you do business through your corporation. Under the IRS' criteria for determining whether you should be reclassified as an employee, it does not matter whether you are listed under any insurance policy.
Under the standard E&O insurance policy issued by Berkely, which sells the most such policies, independent contractors are covered under the most typical industry circumstances. The policy covers independent contractors "who are individuals acting alone, whether or not incorporated, working under contract with the Named Insured to sell the Named Insured's travel services, but only when selling the Named Insured's travel services or conducting the Named Insured's Travel Agency Operations."
In other words, you can be covered if you: (a) act alone, which means that you must have no staff of your own; (b) have your own corporation or work as a sole proprietor; (c) have a contract with the host; and (d) sell the host's travel services.
Apparently, the policy does not cover you if you work through your own limited liability company (LLC), as an LLC is not mentioned as a covered entity. I don't know why the policy makes this distinction, but perhaps the wording is simply so old that it does not recognize LLCs, which became a legally recognized form of organization only in the 1990s.
Conversely, the policy would not cover you for claims related to sales of travel services not made through the host. So if you are going to work with suppliers directly using your own IATA, CLIA or ARC Verified Travel Consultant number, for example, you will not be covered for those transactions.
Therefore, if you are not going to work exclusively through the host, you would have to get your own E&O policy if you want coverage for all your transactions. You would have to weigh the cost of your own policy against the benefits of being covered.
Like the IRS, most state's workers' compensation, withholding tax, and unemployment tax agencies use criteria related to whether the IC is under the control of the host. I cannot see how being covered by E&O insurance would subject you to the host's control in any way.
About half the states use the so-called ABC test, which requires that the IC either work off the premises of the host or be engaged in a separate kind of business from that of the host. Being covered by the policy should not affect your IC status under the ABC test, either.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].