How much and what insurance do contractors need?

I'd like a dollar for every time we get asked that question. The short and simple answer is...enough insurance. But how much is enough?

The correct type and amount of insurance cover for contractors depends on how their business is structured and what legal requirements need to be complied with. Differences in state legislation throw in another 'wobbly', particularly when working in several states.

To identify the specific insurances your business needs, you should 'audit' how you earn your income to arrive at a snapshot of your business. Ask yourself, "What does my business do?"

Issues to consider:

• Are you a licensed contractor who is required to qualify with a private insurer for home warranty? Does your business employ others?

• Could you describe your business as 'supply and fit' for private homeowners only, or do you provide services for other businesses?

• Do you subcontract to builders or developers, or do you provide services for an employment or trade referral agency?

• Does your business provide a design or specification facility as part of your services?

• Do you advise clients on product or installation matters?

• Do you have an office or factory, or work from home?

• Are your materials stored in a yard, factory, warehouse, or in your garage or back yard?

Auditing your business for insurance purposes is a part of an ongoing risk management program. Risk management is protecting your business from future litigation. Identifying your insurance needs and arranging sufficient cover is one of the most important business decisions you will make. Don't just buy on price and hope for the best.

Get professional advice

Building and contracting is not something your insurance broker is usually trained for. Just as you are the expert in your field, so is your broker in the insurance field. It's all about training and expertise. The right broker will give you the right recommendation; it's their profession. Even they carry insurance for the advice they give. A qualified insurance broker will help you with your business needs analysis and recommend a package of insurances to ensure you're adequately covered.

Essential insurances

Completing the total insurance needs analysis on building or contracting activities shows the need for:

• Home Warranty Insurance - Legal requirements vary from state to state as does the name. All states require builders to qualify and provide their clients with warranty cover for at least six years in the event the builder is bankrupted, goes missing or dies during the warranty period.

• Contract Works - Also known as construction insurance, this covers the project against fire, theft, vandalism, storm and water damage.

• Public and Products Liability - Protects against third-party damage or loss caused by you or your product, covering property damage or loss and personal injury or loss. The need for liability cover applies to both the principal and subcontractors.

• Professional Indemnity - Covers against claims for professional advice, design, contract administration and project management. Be careful with this - not all policies are the same! Check the detail before accepting any proposal.

• Personal Accident and Sickness - Thought should always be given to the possibility of an illness or accident which would reduce your capacity to run the business and earn enough income. Income protection is an essential part of protecting your interests, as business costs don't stop. Small businesses rely on principals earning income, so in the event of a debilitating illness or injury, who will pay the bills?

• Workers Compensation - If your business employs others, you may be required to register them for workers compensation. Requirements vary between states, so it will be necessary to understand the relevant legislation to make sure you comply with your local requirements.

• Plant Equipment and Tools - What would happen to the business if you lost all your tools and equipment at once? How much would the down time cost you? Professional tools earn professional income. What's the real value of your tools - replacement or loss of earning capacity?

• Motor Vehicle - Mobile businesses rely on effective mobility. The right vehicle and fitout can be quite expensive. The risk of being immobile and not being able to get to the job with all that you need is an inconvenience you can do without. If you have the vehicle under lease, you'll be required to carry full insurance cover, but what about the older vehicle you use as a backup? Is it covered? Can you risk it damaging others?

• Home or Commercial Office - Smaller home-based businesses are usually under-protected. Data is crucial to most businesses so what happens if computers are stolen? Personal injury, home and contents, workers compensation, public liability and materials all need to be assessed. If you're unsure about your risk, ask your broker to do an audit on the business. Remember, it is never a problem until there is a problem.

Packages

Your broker will be most helpful to you in packaging your requirements together. Brokers work for you; and they are legally obligated to provide independent advice on needs and products. Some insurance packages can be bought 'off-the-shelf' and contain a range of essential covers for you. 'Trade Pack', for example, combines general insurances into a single policy: public and products liability, general property, plant, equipment and tools. Warranty, workers compensation, professional indemnity, personal accident and illness, motor vehicle and home or office covers need to arranged separately. Ask your broker to prepare a total brief of the insurances you need, including the costs.

What if you're just subcontracting?

If there's an event which causes injury, damage or loss to a third party, the head contractor/builder's public liability insurance should protect all on site. An injured party could be an innocent party living near the site, a visitor, a subcontractor or un-invited guest. They would make a claim on the head contractor/builder, which could be for personal injury, loss of property or damage.

The basic procedure is that the insurance company will investigate the claim, ascertain the cause, apportion blame, arrive at a settlement and pay the injured party. You need to understand how insurers view 'apportion blame'. To an insurer, being able to lay the blame for the claim at someone else's feet is paramount. Finding the perpetrator of the damage means the insurer can make a claim on someone else. Insurers are not in the business of giving away money and will look at any way to share their liability.

If you, as a subcontractor, caused the damage, expect the insurance company to come after you to recoup some or all of their payout to the injured party. To the insurer it's just good business practice. If the subcontractor doesn't have his own public liability cover, the result could be financially disastrous. So it's advisable for subcontractors, even while covered by the head contractor/builder's policy when contracted, to have their own public liability cover.

Insurance Audit

In summary, I would advise you to assess your risk, identify insurance requirements, call a professional for advice, act on the advice, review risk and insurance requirements annually and review risk if your circumstances change.

For further information contact BuildSafe Insurance Brokers or visit www.buildsafe.com.au