Insurance and contractors: have you got it covered?

Hiring a contractor or sub-contractor is often appealing to time-poor, cash-strapped small business owners. One big reason is that they take care of their own insurance (as opposed to the business owner having to provide coverage for them, as is the case with employees). But what if things aren’t quite that straightforward?  

Imagine the following scenario. You hire a plumber to fix a leak at your workplace. He solders a pipe and your building catches fire. What was a $200 job results in $1 million in damage. You go after the plumber only to discover he doesn’t have the right (or any) insurance or assets you can get your hands on. If you have the right property insurance you may receive a pay-out. But what if it only covers you up to $500,000? Chances are you’ll be left with a shortfall and that could sink your business.

“It’s crucial for small businesses to check that contractors and sub-contractors have their own insurance in place. You should request a copy [of the policy]”, says John Clark, Steadfast Broker Support Manager.

What policy? Well, that depends on the job but a humble suburban tradesman will often have contract works, public and products liability, professional indemnity and workers’ compensation insurance. Err on the side of caution when checking that any contractors or sub-contractors you use show you all the relevant policies to provide proof, so you are unlikely to be left on the hook if they, or one of their team, starts a fire or falls over and breaks a leg.

” It’s crucial for small businesses to check that contractors and sub-contractors have their own insurance in place. “

Employee or sub-contractor?

It’s a question that causes confusion but one that business owners need to be clear about to avoid insurance issues in a worse-case scenario.

In theory, an employee works in the business while sub-contractors run their own business and supply a service. For example, the wait staff at a restaurant are likely to be employees while the person who cleans it (and provides similar cleaning services to other restaurants) is likely to be a contractor or sub-contractor.

In practice, the lines can blur. For example, a person can be a contractor for tax purposes but still be deemed an employee when it comes to workers’ compensation insurance. If someone a business owner thinks is a sub-contractor can be classified as an employee (under any circumstances), that business owner has a lot more liability than they realise, should anything go wrong.

Each state and territory has its own rules around the demarcations between employees and contractors/sub-contractors for workers’ compensation, so checking the relevant websites is a good place to start. Then seek legal advice if you’re worried you might have an employee on your hands rather than a contractor or subcontractor.

Workers’ compensation and public liability

Workers’ compensation insurance is compulsory for all employers in Australia to protect employees if they suffer a work-related injury or illness. The same goes for sub-contractors who hire workers to help with a job. “If you employ people, get advice as to your workers’ comp obligations in your state or territory,” says Clark.

So, what should you look out for?

As with most things business – related, it’s always best to get it in writing. That is, have any contractors or sub-contractors you use sign a contract before they step foot on the premises. Contracts need to be properly drafted and spell out the chain of liability, to give both parties legal protection. All parties – employers, contractors and sub-contractors – should pay special attention to indemnity clauses that can shift all liability for death, injury or loss onto them.

“People often rush in and sign a contract without looking at it carefully. If you go on to make a claim your insurance might not cover you because you signed something you shouldn’t have,” says Clark.

One common but important exclusion is contractual liability. This can exclude insurance cover if you sign a contract that reduces your rights to less than they normally would be at common law (for example, if you agree in a contract not to sue a contractor for their own negligence).

If you’re an employer or sub-contractor who wants some expert guidance about insurance matters, talk to a Steadfast insurance broker today.