With independent contractors increasingly required to guarantee public and professional liability when working for governments and large corporates, liability insurance now is a critical component of basic business arrangements.
According to the Independent Contractors of Australia, about 1.8 million Australians are self-employed, with over half of those operating as independent contractors.
And as large organisations that engage contractors increasingly adopt a risk-shifting philosophy, the need for public and professional liability insurance is becoming an essential business tool for small operators.
Alex Green, Head of Casualty for Vero Insurance, says it’s been a noticeable rise.
“At Vero we have seen an increase of contractual insurance obligations for independent contractors, mainly driven by large companies and government bodies,” he says, adding that previously, the risk had been held in-house, leaving the large organisations exposed.
“This risk transfer through outsourcing has made insurance of small contractors more volatile, putting pressure on pricing,” he says. But for small contractors, there’s not a lot that can be done about it.
“The difficult thing with small businesses is that they really don’t have any negotiating power in the process whatsoever, if they are dealing with a large corporate entity or a government body, it really is a take it or leave it situation,” says John Davaine, Account Director at Finn Foster APB.
For that reason, many brokers are finding there’s a real need to take a good look at the contracts their clients are asked to sign before quoting liability cover.
“There are clauses such as a complete hold-harmless and waiving of the contractor’s rights of subrogation – no insurer is going to accept that,” he says.
Davaine says that larger entities tendering for contracts often get terms watered down so that there is proportional responsibility for risk. “But small contractors tendering to government departments are finding sometimes that they’re asked to sign a contract where they are in for the lot.”
It’s important to make sure there is sufficient indemnity cover, Davaine says. “$20 million is becoming very much thestandard cover required. Coverage for $10 million has become a thing of the past.”
Another important component of professional liability cover is “run- off” cover, which is becoming a more common requirement in contracts.
“For example, four years after a job has been completed, somebody may have a claim made against them, and they need to make sure that their policy is still in force in order for them to be covered for the work that was done at that time,” he says.
It’s also important to include a retroactive date that is unlimited – or at least, that extends from the date that work first commenced.
“Many insurers due to competition are now offering broader levels of retroactive cover and, for many insurers, the standard retroactive date is now unlimited."
One of the most important components of a professional indemnity policy is bodily injury cover, Davaine adds.
“If injury occurs as a result of a professional negligence, it’s not covered by Public Liability cover, and needs to be covered as a part of the Professional Indemnity Insurance and some insurers exclude this in their base wording. A simple mistake for a broker to make is to not see this in the list of exclusions and therefore thinking that it is covered, when it is actually excluded in the wording itself.”
Alex Green says that tailoring a Professional Indemnity policy begins with a clear statement of the professional services.
“This limits the nature of claims covered under the policy – so an accountant’s PI policy cannot pick up claims for an engineer. Then you need to apply appropriate endorsements and limits to ensure that the key risks are covered."
CASE STUDY 1: IS THE CONTRACT WORTH IT?
John Davaine, Account Director at Finn Foster APB, says that some clients will call to get a non-binding indicative estimate of the cost of Liability Insurance cover before quoting on a tender.
“If they have existing liability cover in place, we have a starting point to extrapolate a calculation based on higher limits of indemnity, without having to go to the insurer,” he says.
Making that assessment up-front allows the contractor to work out whether the job is worthwhile – and prevents them from under quoting.
“If there’s going to be a requirement for seven-year run-off cover, that will increase the contractor’s costs significantly before they even start the job,” he says.
Davaine says that run-off cover can add significantly to the contractor’s cost, with seven years of run-off cover typically increasing a one-year premium by three to four times.
“I had a client recently who would have needed $4,000 of insurance cover for a 12-month contract worth just $20,000. The seven-year run-off made it prohibitive. Knowing that up-front allowed him to determine whether it is worth even tendering a quote for that contract.”
CASE STUDY 2: BUILDING RENOVATIONS
Don Hutton, owner of The Builders Insurance Brokers, says that having a good understanding of what’s involved in your clients’ work helps brokers draft the right policy.
Hutton has an inside track as he is also a licensed builder – but says that asking lots of questions is the best way to identify needs.
For example, building trade contractors need to be aware that there are additional responsibilities that can crop up with renovations.
“If a builder is working on a major renovation, it’s often the case that the owners will move out.” In that case, Hutton says, their building insurance and contents insurance usually becomes void after around 60 days. The owner’s existing insurance may also lapse under various other conditions – such as the roof being removed.
“It doesn’t matter what condition the existing structure is in, if the owner’s insurance has lapsed and there’s a fire or something then the builder is going to be liable for the whole place."
Liability on a $100,000 renovation then extends to the whole building, which may cost upwards of three times that to replace, Hutton says.
“So in that case, it’s important that we add ‘existing structure’ coverage to the construction policy, which includes public and professional liability."
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