Liability when extending credit

Dear Thea,

As a supplier, is there any liability in extending credit to a contractor whose workers compensation insurance isn’t current/active? Asking for a friend.

Signed, Worried in Washington

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Dear Worried,

Does a frog bump his butt when he hops? Anything that has the potential to stand between you and your payment creates liability. Peril is everywhere when it comes to cash.

There is no direct liability, but there absolutely is indirect liability. If a contractor doesn’t have or never had workers compensation insurance, or had let the policy lapse and you are selling them product, there is no direct liability to your company. However, the indirect consequences, or liability, could have a severe impact to you.

Let’s say our contractor has an employee who is injured on the job. Then the employee files a claim and the claim gets denied. Why? Because the contractor does not have a valid policy. The employee then files a lawsuit against his employer (your customer, the contractor) and just like that, you may not be getting paid, because the payments that were meant for you are now going to an attorney to defend that lovely lawsuit, or to get a policy reinstated (or purchased), or paying off fines for not having the required credentials to begin with.

Does the contractor not having a valid workers compensation policy create liability for you? What do you think? Maybe liability is not the correct terminology or question. Perhaps the correct question is “what are the pitfalls in extending credit to a contractor whose workers comp policy isn’t current/active?” Those pitfalls are directly related to what is happening within the contractor’s company. How are his back-office systems working out? Who was responsible for making sure the policy (or payments or collections or any other functions in the company are working out) are in place?

The other challenge with this particular pitfall is that it only really comes to light by accident. As in “Oops. I can’t pay you, let me tell you a tale of insurance gone wrong.” Or it slips out in careless conversation.

So no, there’s no direct liability, but for sure there can be indirect liability and there’s no way to know for sure unless you add another line item to your credit application asking for that nugget of information. Keep in mind that people lie, so that line item may or may not help you.

To put a sweet little bow on your question, those customers are the reason this country has to put directions on shampoo bottles.


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