Insurance companies offer many differing versions of cover, some are better quality than others. So it is important to understand what your particular policy covers.

Typically, policies will generally provide cover for:

• Legal costs incurred in the defence or settlement of a claim;
• Cover for others who may be acting on behalf of your business when the incident occurred
• Loss or damage of goods – which are in your care, custody or control which you do not own
• Loss or damage of someone else’s property that occurs while performing your service
• First aid expenses at the time of incident
• Injury to others who sustain injury whilst visiting your premises

There are exclusions, which can include:

• Employer’s responsibility for injured workers (a workers compensation policy in your business’s domiciled state/territories is a requirement)
• Aircraft products
• Motor vehicles (including mobile plant and equipment which are registered, or should have been registered at law)
• Asbestos
• Punitive damages (damages awarded where a judge believes you acted so badly that extra damages are awarded)
• Liquidated damages (damages usually agreed to in a contract which specifies the total amount of compensation an aggrieved party should get, if you breach certain part(s) of the contract).
• Gradual pollution
• Product recall
• Contractual liabilities (liabilities assumed under contract which you would not be liable for at common law, that is if you enter into a contract which assumes the liability of others, if the law would not consider this your liability had you not signed the contract).

Depending upon your business’s structure, there are other considerations including;

Subcontractors

Subcontractors are independent third parties who provide services on behalf of another business (let’s call that business “the insured”). The insured will often engage subcontractors for all sorts of reasons, including specialisation in one particular service, unplanned increased short terms workloads or sometimes a preference to use a subcontracted workforce. It follows that subcontractors can help the insured expand and specialise the services offered by their businesses.

As subcontractors are completing this work for the insured’s customers, on the insured’s behalf, the insured could be held vicariously liable for that work.

If there is third-party injury or property damage caused by a subcontractor, the insured will generally be the one who receives a demand from the third party.

As subcontractors are not normally covered under the insured’s liability policy, it’s good business practice to confirm that any subcontractors being engaged hold adequate liability insurances. This can generally be achieved by obtaining a certificate of currency, a copy of which should be kept on file. Where a subcontractor is being used for a particular contract or will be working for your business for an extended period, it’s also a good idea for the insured business to be named as a principal under the subcontractors’ liability insurance. Therefore, if the subcontractor is responsible for a claim, it will be made under their policy and the business will be protected for any vicarious liability as a principal.

Sometimes subcontractors don’t have their own public & products liability insurance policies in place which can put the insured (& their insurer) in a difficult position. Insurers may have to pay the claim and then seek to recover from the subcontractor, with no guarantee of success.

The insured is also potentially liable for injuries sustained by subcontractors in the performance of their work for the insured. The subcontractor will likely have their own workers compensation policy. If they do, the subcontractor’s workers compensation insurer will finalise the workers compensation claim, and they may seek recovery from the insured’s liability insurer if they are deemed to have contributed to the injury. This is typically known as a Worker to Worker claim, they can take years to become known and can be very expensive.  It is for this reason that worker to worker claims usually have a much higher policy excess/deductible, typically between $15,000 & $25,000, although depending upon the potential exposures, higher deductible may apply.

Labour Hire Staff

It is not unusual for injuries to occur to labour hire staff, contractors, sub-contractors or employees of any contractors or sub-contractors whilst they are performing work for or on behalf of the business. The business owes a duty of care for the health and safety of these workers.

Labour hire staff are generally owed a greater duty of care as they operate totally under the instruction and supervision of the business. Subcontractors and their workers are considered “self-directed” and more responsible for their own health and safety, however, the business still owes a duty of care to them.

Each state/territory has their own workers compensation programs. Typically, an injured worker claims from their employer’s workers compensation insurer. The workers compensation insurer investigates the circumstances of the claim and looks for opportunities to recover some (or all) of the cost of the claim from the host employer. Should the workers compensation insurer attempt recovery from the host employer, the host employer will naturally seek indemnification from their Public & Products liability insurers. As mentioned above, these liability claims are often generally long tail in nature and can be substantial in cost.

With the increase in use of contract labour over the past decade, this has become a major underwriting issue for liability insurers.

Therefore, some insurers are completely excluding cover for these types of claims. Others are imposing substantially higher policy excesses / deductibles, such as mentioned above.

Contractual Liabilities

Public & Products liability policy wordings will normally exclude contractual liability, although nominated (or designated) contracts might be considered by insurers with the provision of relevant information, such as the scope of works, contract value, term, indemnity and insurance requirements.

However, the general position at Common Law is each party is responsible for their own acts or omissions. Contractual liability seeks to modify this, which can be used to clarify responsibilities or sometimes used to the principal’s advantage. Indemnity clauses, such as “Hold Harmless” clauses can vary the Common Law position. There are many variations of hold harmless clauses used by lawyers when drafting contracts, however, the most challenging is where the contract principal is being held fully harmless under the contract, so the contracted party is agreeing to pay all claims irrespective of the cause, under the contract. These contractual liability clauses are likely to increase your liability in the event of a claim. Clearly, this type of clause should be avoided as it is usual for insurers not to provide cover for this increased liability.

Subject to certain qualifications, the Australian Consumer Law protects small businesses from unfair terms in standard form contracts, eg contracts offered on a “take it or leave it” basis. Please refer to the Australian Competition & Consumer Commission for further details.

Nominated (or designated) contracts may be endorsed on to a liability policy and if acceptable to insurers they will likely include a higher excess for any “liability assumed under contract” and attract additional premiums.

Principals’ Indemnity

Under a contract, the Principal is the entity that engages a Contractor to undertake certain agreed works or activities.

Insurers are regularly asked to include the Principal for their interest on their Contractor’s Public and Products Liability insurance policy as the Principal is seeking to protect themselves from any vicarious liability arising from claims caused by the activities of their Contractor.

Sometimes, the Principal will even ask to be noted as a named insured on the Contractor’s insurance policy. However, insurers will generally meet such requests with reluctance due to the potential for claims which may arise from outside of the contract or even due to the liability of the Principal.

How can insurers satisfactorily facilitate this? By agreeing to a Principals Indemnity clause.

The Principals Indemnity clause effectively includes the Principal as an insured party in respect of their vicarious liability, but only to the extent required by the contract or agreement and subject to normal limits, terms, and conditions of the policy.

It should also be noted that most contracts will also include a waiver, where the contractor will be asked to waive their rights to recover against the Principal. These can generally be considered by insurers on a case-by-case basis.

The Importance of Obtaining Appropriate Legal Advice

These are complex areas, which means it is prudent business practice when you are considering entering into relationships with another parties, such as customers, suppliers or subcontractors, to obtain appropriate legal advice and arrange written agreements which set out the terms of engagement, including insurance arrangements.

For example, it is important that agreements do not contain contractual liability clauses which may increase your liability in the event of a claim, and are excluded from general and public liability insurance policies.

Prudent business practice dictates that when you are considering entering into a relationship with subcontractors, it is important to obtain appropriate legal advice and arrange written agreements which set out the terms of engagement, including insurance arrangements.

With respect to subcontractors, rather than insureds trying to arrange for subcontractors to be included within their liability policies, we believe that subcontractors should hold their own appropriate insurance policies, and this aspect should be included within the relevant subcontractor agreements. This will help protect you against claims arising from the actions/inactions of subcontractors. This will also help protect your liability policy from unwanted claims and any subsequent losses against it, which will likely carry increased future premiums and other impositions resulting from a claim that is partly or wholly attributable to your subcontractor. Further, as part of your standard business practices, you should periodically obtain certificates of currency from your subcontractors to keep on file and refer to in the event of a claim.

Finally, you should consider obtaining appropriate legal advice to ensure you are not attempting to disguise employment relationships as independent contracting arrangements. Fair Work inspectors, operating under The Fair Work Act 2009, can seek the imposition of significant penalties for potential contraventions of sham contracting arrangements.