Hiring a contractor is often appealing to time-poor, cash-strapped small business owners. One advantage that’s attractive 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.
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, contractor’s insurance or assets. If you have the right property insurance, you may receive a payout – but there’s a risk it will only cover part of the damage, say $500,000. The business may be left with a shortfall that could sink it.
“It’s crucial for small businesses to check contractors have their own insurance in place. You should request a copy of their certificate of currency and ideally the whole policy,” says Neil Cousins, Steadfast Broker Support Manager.
The right policy will depend on the job. But a suburban tradesman will often have contract works, public and products liability and professional indemnity insurance. Err on the side of caution and ensure contractors show you at least certificates of currency for all the relevant policies to provide proof they are insured. This reduces the risk you will be exposed if they, or one of their team, starts a fire or falls over and breaks a leg, for instance.
Either their insurer or sometimes their insurance broker should be able to provide the certificate of currency.
Once you get the certificate and/or policy, you should check if the limits of liability or sums insured look enough for your job and their overall business with other clients.
Unfortunately they could not renew their policy, so you also need to check their insurances pre any expiry dates for your job.
“It’s crucial for small businesses to ensure all their contractors have appropriate contractor’s insurance in place”
Employee or contractor?
It’s a question that may cause confusion, and businessowners need to be clear about the difference to avoid insurance issues in a worst-case scenario.
In theory, an employee works in the business while 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.
In practice, the lines can blur. If someone a business owner thinks is a contractor is an employee in all the circumstances, that business owner has more liability than they may realise, should anything go wrong.
So, what should you look out for?
In business, it’s always best to make sure all agreements are in writing. That is, ensure contractors sign a contract before they start working for your firm. To give all parties legal protection, contracts need to be properly drafted and spell out the chain of liability. All stakeholders – employers and contractors – should pay special attention to indemnity clauses that can shift liability for death, injury or loss onto them.
“People often rush in and sign a contract without looking at it carefully. But if you go on to make a claim, your insurance might not provide cover if you signed a document you shouldn’t have,” says Neil.
Contractual liability is one common but important exclusion. This may exclude insurance cover if you sign a contract that reduces your rights to less than they would normally be under common law, for example, if you agree in a contract not to sue a contractor for their own negligence.
As this shows, it’s essential to understand how insurance works, especially the fine print, to ensure the right cover is in place.
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