What is ‘injury to contractors’ risk?
So in a nutshell, the risk is it’s work cover recovery claims made against a principal contractor where there’s an injury that occurs to a subcontractor that they’ve engaged.
That sounds a little bit roundabout, but effectively if you’re engaging a subcontractor to do some work as opposed to an employee, that subcontract is not covered by my workers’ comp policy, they’re a third party company. So if they get injured, there’s no impact on my workers’ comp insurance, they’ll have their own workers’ comp insurance and that’s where the claim is made. Now that’s been happening for decades and decades and decades.
What’s changed with workers’ compensation insurance and contractor injury?
What’s changed recently is that work cover schemes in primarily the eastern seaboard states (if not all by now) have been running at a loss. They’re bleeding money. Governments run the programmes so they’re looking at ‘how do we actually get to the stage where we’re not needing to continually tip money into these schemes to actually run, not profitably, but run and at least break even.’ Because at the end of the day, any extra money they have to tip in is taxpayer money.
There are three ways they can improve the sustainability of these schemes:
- Reduce the benefits – most governments aren’t too keen to push out news that they’re reducing workers’ compensation benefits.
- Increase premiums – we’ve already started to see that some of the premiums are increasing across the states.
- Recovery – what clients need to be aware of from a public liability risk perspective is that workers comp schemes are now looking at a claim once it’s completed and looking at why someone was injured at your worksite and who might be at fault? So perhaps the subcontractor didn’t undergo induction or raised issues around safety, and if something like that is on file, then straight away their recoveries team will sue the entity that hired the subcontractor because they didn’t keep them safe.
Key takeaway: There is still a duty of care that a contractor has to a subcontractor just as they do an employee. Even if they have their own work cover, the schemes have the ability to investigate if there was any negligence on behalf of a range of business, could be the scaffolding company, the principal contractor or the site builder.
This will continue to be an area of focus, particularly in the electrical contracting space, where, if we look at our ten largest claims over the last seven years, six of them (including the largest one) were workers comp recovery claims. We’ve observed that over just the past few years, the average cost of these claims has skyrocketed, from $60,000 to nearly $400,000. We regularly see the first letter of demand coming in at over $1,000,000. So this is where the industry is being bled from a public liability perspective, with workers comp effectively trying to recoup losses directly against the public liability policies of contractors. This is very much a risk faced by the building and construction industry because these are the trades that typically do have more workplace injuries than other industries.
Insurance solutions, risk management and contractor injury
The insurance solution already exists as a safety net for this risk, under your public liability policy, but often you’ll find that the standard excess for those types of claims is $25,000. Some might have a larger excess but each insured needs to have a look at their own policy wording or speak to their broker to get clarification around level of cover.
What you can do to protect yourself and your business is to ensure you follow industry best practice in regards to work, health and safety for both employees and contractors. With subcontractors, check that you’ve got adequate contracts in place and make sure there’s an obligation on the subcontractor to take responsibility for their own health and safety and not just rely on the principal contractor to do that. But the principal contractor still needs to make sure that they’re doing their part, they’ve got safe work methods statements in place and they’re conducting inductions and checking that the people on site are adequately skilled and have enough knowledge to conduct the work they’re being paid to do.
Also, a big one is that if the principal contractor is made aware of an issue or risk, you need to respond to it (and, we’d suggest, document that you’ve responded to it) and not set it aside to deal with later. Everyone’s busy but this is one of the clear triggers that can come back and be used as evidence in the case of a claim.
Another consideration might be to consider the overall benefit of using subcontractors versus employees – comparing the wages versus increase in workers’ compensation premium, etc. That’s more of a holistic business decision, but we’ve seen more contractors weighing this up.
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