As a business owner you’re well aware of the need to have all your insurance policies in order. Professional indemnity insurance is particularly important if you provide advice for a living. This covers you if your client suffers a financial loss and alleges or proves the loss was attributable to an error or omission in the advice you provided.
However, when you know your own insurance is up to date, it can be easy to overlook the need to check the professional indemnity insurance your suppliers or contractors have. A simple yes or no question regarding whether they have insurance isn’t enough to ensure every adviser is covered in the ‘chain’ of advice being provided.
What professional indemnity insurance covers
Professional indemnity insurance covers you for any claims against you as a result of your client experiencing financial losses after following your advice or because of a mistake on your part. It can cover your client’s financial claims and it can also help pay the cost of legal representation to defend yourself against their claims.
Sometimes a client may bring a case against you that you’re not liable for. However, you still have to defend your good name, and the costs can run into hundreds of thousands if not millions of dollars, even if you’ve done nothing wrong. To protect your professional reputation, you need to defend the claim rather than settle quickly but the costs of doing so may make it a less attractive option. With professional indemnity insurance, you can protect your reputation and minimise business disruption in the meantime.
Contractors aren’t covered by your insurance
If you use contractors to deliver projects, you may think they’re covered by your existing professional indemnity insurance. However, this is unlikely and, in fact, your policy may specifically state that actions undertaken by contractors are not insured.
When reading some policies it may appear that contractors are covered, however it is more likely that only you, the insured entity, is covered. The policy may only be providing cover to you for the errors and omissions of contractors. The contractor themselves is unlikely to be covered.
Depending on your professional indemnity insurance policy, it may be possible to add cover for contractors to your existing policy. It’s important to speak with your insurance broker to confirm whether this is the case in your circumstances.
If you can’t add them to your own policy, contractors will need to have their own professional indemnity insurance, as well as public liability insurance. If they don’t, you could be opening up your business to litigation as a result of their actions, whether accidental or otherwise.
What you need to do
When you hire a contractor and before they start any work for you, it’s essential to ask for a copy of their certificates of currency, proving they have the required insurance policies in place. Their insurance provider should be able to email these certificates immediately.
Make a note of when their policies expire. If they expire during the time the contractor is working for you, then you must ask to see their renewed certificates to protect yourself. If you only work with a small number of contractors then you may be able to manage this manually. However, if you regularly work with contractors or manage a large number of contractors, then it could be worth putting a system in place that can automate part or all of this process for you to ensure you never accidentally employ an uninsured contractor.
You can protect yourself further by stipulating these requirements in the contracts you sign with third parties. This way, you can terminate the contract if the supplier fails to provide proof of insurance.
What to do next
Regardless of what profession or industry you’re in or how big or small your company is, you can’t afford to be financially exposed by an uninsured contractor. As well as the financial cost there’s the reputational damage that it can cause your business when a contractor makes a mistake or causes a problem while working on a project you own.
Here are three steps you can take right now to protect yourself:
- Check now
If you’re working with contractors right now and you haven’t seen their certificates of currency, then you should ask for these without delay. If the contractor can’t provide them, then you need to seek legal advice regarding whether you can terminate the contract without attracting legal penalties.
2. Confirm regularly
Make a plan to regularly confirm that all your suppliers and contractors are adequately insured. Talk this over with your local insurance broker and risk advisor to ensure you’ve covered all the potential risks.
3. Review your own policies
Make sure your own house is in order. It can be easy to treat insurance as a set-and-forget aspect of doing business but it pays to review your insurance policies regularly. Your needs could change and, if you don’t update your insurance in line with your changing needs, you could end up under-insured. Even if your coverage is adequate, it’s always possible that you may be able to get a better deal by working with an experienced broker.
To find out how to avoid a sticky situation due to inadequate professional indemnity insurance,
contact a NZbrokers member today.