What Impact Do Contractors Have on Your Insurance Covers & Risks?

As a business owner, you may be weighing up the pros and cons of hiring full-time employees or contracting out some of the work to individuals. But have you considered the risks and impact on your insurance cover and talked to your insurance adviser about your plans?

Hiring individual contractors can be cost-efficient and fill knowledge gaps in specific areas or projects. However, additional risks to manage and insurance covers to update include workers’ compensation, professional indemnity, public liability and management liability.

What is the Risk?

When you hire contractors, you are delegating certain tasks and responsibilities and taking on a person who can be deemed your employee in some states and territories.

If they make a mistake, don’t meet your requirements or get injured, then you are likely to be held at least partly responsible for any injury, losses or damages that occur. Many insurance policies exclude injury to contractors or loss or damage caused by contractors, so it’s recommended that you talk to your insurance adviser to understand the risks and manage any gaps in cover.  

Replying only on the contractor to have their own professional indemnity or public liability insurance probably won’t provide sufficient protection for you or the company. They won’t have the same amount of insurance, leaving you to pick up the pieces.

If you engage contractors and external workers, you will likely have a legal and statutory duty of care to the workers. This duty of care can be best managed by creating a contractor management system, which includes checking to see if they have appropriate insurances in place.

Manage the Risk

Your insurance advisor is a professional that can help you manage the risk of engaging contractors, both through engaging professionals to assist in reviewing or updating your contractor management system and notifying your insurers of the use of contractors. You can then decide how best to manage the risk of hiring contractors and update your insurance as needed.

Contractor management system

This document sets out the procedures that need to be followed when you hire a contractor or external worker. It should include the steps taken to select the contractor or external worker, guidelines for their induction and supervision when onsite. You will need to ensure that all legislative and industry requirements for maintaining a safe work environment are addressed in this document. Free checklists (including Inductions, Toolbox meetings, Risk Assessments, and Competency) can be found on your State or Territory WorkCover website, for example, the Tasmanian WorkCover site.

Insurance

Hiring contractors and external workers create additional risks that must be discussed with your insurance adviser. Most insurance policies will need to be updated, and your may need to consider additional insurance covers, such as workers’ compensation for the contractor, extending your professional indemnity to cover mistakes made by the contractors, or a worker-to-worker extension for your public liability. Management liability should also be considered to provide personal protection for the directors, executives and managers against legal action and damages relating to the business.  

Get the Right Advice

Most businesses hire contractors or engage external workers, so it’s important to get the right advice about managing the risks to protect the contractor, your customers and your business.

Lack of the right workers’ compensation cover for contractors can be very expensive. The business could be responsible for paying all medical bills, plus any lump sum damages if the person is permanently injured, for an injury. In addition, your managers could be personally liable for fines and penalties.

Your insurance adviser is a professional that can work with you so that you can make an informed decision about the risks, and also recommend required changes to your insurance cover.

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Contact us today for professional advice and assistance.

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