In the past two years, many business owners have experienced significant premium increases as their businesses rely more on the use of sub-contractors to keep up with increasing demand in a tight employment market.
Since the arrival of COVID-19 and its various lockdowns, our clients have been telling us their biggest challenge to growing their business is finding the right people. This has seen many clients look to sub-contractors and labour hire firms to fill the need for people power. This can prove to be a good solution to the current shortage of staff; however, it does come with its issues.
As a specialist business insurance broker to the mining and construction industry sectors, the number one issue we advise our clients on is that Public Liability insurers get very nervous insuring businesses with large sub-contractor payments.
In this article, we want to share why insurers are less likely to insure a business with a large percentage of revenue paid to sub-contractors.
Sub-contractors: short term benefits for long term risks?
Many of our clients (who act as a ‘principal contractor’) see the use of sub-contractors as a way to reduce their risk. Which can be understandable: any personal injury or property damage caused by the sub-contractor’s negligence is the responsibility of the sub-contractors and they must indemnify the principal contractor for any claims which arise from their actions.
In addition, as the principal contractor, they ensure the sub-contractor has the appropriate insurance coverage. Usually this will include Public Liability insurance up to a minimum sum insured of $20m.
But if the sub-contractor is liable for their negligence and they have appropriate insurance, why do insurers see businesses who use them as higher risk?
There are several reasons; however, the biggest risk factor is Workers Compensation. In recent years, public liability insurers have paid out significant claims that have arisen from a workplace injury. This is due to the Workers Compensation insurers seeking recovery from the ‘host employer’ for any personal injuries sustained whilst at the designated workplace. Whilst the legal employer may be the sub-contracting entity, there are a number of cases where the courts have awarded against the principal contractor due to their role being deemed to be one of a ‘quasi employer’.
The risks of being a quasi employer
The principal contractor being deemed to be a ‘quasi employer’ has been established where they provide the training, induction and supervision of the sub-contractor whilst on site. This is particularly relevant where the work site is deemed to be a specialist environment such as a mine site. This type of work will require a specific induction, and training will be required prior to going on site. As a result of this workplace induction, the courts have found that the principal contractor is deemed to have the onus of responsibility to provide a safe workplace. Any personal injury that arises as a result of this duty of care not being met can result in a claim against the principal contractor as they are deemed to be the ‘quasi employer’.
Public Liability insurers have grown increasingly concerned at the escalating exposure of what is deemed to be ‘worker to worker’ exposure. They argue that the intent of a Public Liability policy is to provide indemnity to an insured business against third party claimants – i.e. individuals and entities that are outside of the business. Workers are deemed to be a part of the business and the long history of Public Liability Insurance in Australia has always seen workers compensation or employer’s liability be a separate class of insurance. In fact, this is still the case with Workers Compensation insurance being managed differently within each State and Territory. Queensland, NSW, Victoria and NT are state run schemes, whereas NSW, ACT, Tasmania and WA are insured privately in accordance with the Workers Compensation Act in each region.
What has changed is the trend of Workers Compensation insurers seeking recovery for workers compensation claims from principal contractors or the ‘host employer’. The courts are increasingly finding in favour of the workers compensation insurer, which is resulting in large claims against the liability insurers of principal contractors.
Do your sub-contractor payments make up a significant portion of your revenue?
Due to the growing number of ‘worker to worker’ claims, liability insurers have responded in a number of ways to address this growing exposure. There is a reduced appetite for businesses who have large sub-contractors payments as a percentage of revenue. Anything above 15% of revenue is deemed a large amount. Secondly, insurers who are able to consider insuring these risks will charge a separate premium for the specific ‘worker to worker’ exposure. This can make up a large portion of the premium payable. Thirdly, the insurers will impose very high excesses on any ‘worker to worker’ claims. The excess levels for worker to worker can range from $50k any one claim up to $250,000 depending on the size of revenue and the relative percentage of sub-contractor payments.
What can you do to avoid these rising costs?
The first important step is to work with a specialist business insurance broker who is an expert in Public Liability insurance. In particular, ensure your insurance broker has a deep understanding of the issues in regards to the use sub-contractors and the liability implications. Crucial Insurance and Risk Advisors is a good place to start if you need advice from an independent insurance and risk advisor.
Step 2 – Split your sub-contractors payments between labour, plant and materials
When disclosing your sub-contractor payments to your business insurance broker, make sure you provide a split of you sub-contractor payments between – Labour, Plant & Materials. In many cases the Plant & Materials component of your total sub-contractor payments can be significant. If it is, then you only want the Public Liability insurer to underwrite your ‘worker to worker’ exposure based on your labour component, not the plant and materials.
Step 3 – Reduce sub-contractor payments where possible
For instance, in many cases the sub-contractor is probably deemed an employee if they only perform work for you as the principal contractor. From an insurance perspective, it is easier if the contractor is deemed an employee.
Contact us if you would like to have an open chat about your insurance, and how you can combat risks and rising premiums.
This article was written by Tony Venning,
Managing Director at Crucial Insurance and Risk Advisors.
For further information or comment please email firstname.lastname@example.org.
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