BALANCING ACT: Subcontractors putting excess on the rise

Over the recent years, the construction industry has seen a rapid increase in premiums. As construction activity has increased and the demand for skilled labour has risen, many businesses in the sector have turned to contractors and subcontractors to bridge the staffing gap. While sub-contracting or labour hire services offer a solution to skill shortages, it brings forth a unique set of challenges for insuring construction projects.

With increases in the frequency of injury and workers' compensation claims brought by contractors and sub-contractors, this has had a knock-on effect on premiums and excesses, with businesses heavily reliant on contractors for their projects feeling it the most.

As insurance brokers with a diverse construction portfolio, we've seen a growing apprehension among insurers when it comes to covering public liability if a business has a substantial portion of its revenue allocated to sub-contractors.

The balancing act between benefits and risk

Principal contractors, when managing the risks and work health and safety plan of a construction project, often see subcontracting as a strategic move to help mitigate risk. The premise is straightforward ‑ subcontractors bear responsibility for any personal injury or property damage resulting from their negligence. Many principal contractors also require subcontractors to have adequate public liability insurance before getting on-site, often with a minimum sum insured of $20 million.

However, insurers are cautious about this seemingly simple transfer of risk. The primary concern revolves around workers' compensation. In recent years, insurers have faced substantial payouts due to workplace injuries. In some instances, settlements in court have deemed principal contractors as 'quasi employers' when they have actively engaged in the training, induction, and supervision of subcontractors.

Principal contractors have a responsibility to provide a safe workplace, ensuring that the project's safety protocols, and operational procedures are understood. If an injury arises out of this duty not being met, a subcontractors' workers' compensation insurer may seek to recover a portion of the payments from an insured's liability policy. This is known as a 'Worker-to-Worker' claim. These often take a long time to resolve due to multiple parties being involved and can be much more costly than a typical public liability claim.

Reduced appetite, leading to high excesses

In response, insurers have taken measures to manage risks associated with contractor and subcontractor payments. There is a reduced appetite for businesses with contractor payments exceeding 15-20% of revenue. Insurers willing to cover such risks may impose separate premiums for the specific 'worker-to-worker' exposure and it's not uncommon that high excesses, ranging from $50,000 to $250,000 may be applied to 'worker-to-worker' claims.

Helping mitigate rising costs

The situation is slowly improving. We believe we've seen the peak of rising excess levels and early signs for 2024, show that a potential increase in competition for the insurance market is promising for businesses. However, there are factors to consider when assessing your insurance program.

Consult a specialist insurance broker

Partner with an insurance broker who has a deep understanding of public liability in construction and for contractors and subcontractors. At Austcover, our teams are experienced in helping principal contractors manage their insurance program, through thorough analysis of their situation and implementing risk management strategies to help reduce premiums.   

Split sub-contractor payments

When disclosing subcontractor payments, provide a detailed split between labour, plant, and materials. By isolating the labour component of your payments and focusing the insurer on the specific 'worker-to-worker' public liability exposure, your premiums can potentially be reduced.

Maintaining a balanced outlook

By working closely with specialised brokers to proactively manage insurance programs, a principal contractor can be better informed of the complexities of using contractors and sub-contractors on their projects. Ensuring they can meet their skilled labour needs while helping to mitigate their potential liabilities.

Austcover Pty Ltd. Operates under AFSL No. 241799. Any advice provided in this document does not consider your objectives, financial situation or needs. You should consider if the insurance is suitable for you and read the Product Disclosure Statement (PDS) and Financial Services Guide (FSG) before buying the insurance. If you purchase this insurance, we may charge you a fee for our service to you. Ask us for more details before we provide you with any services on this product. PDS available on request.