"I'm Covered Under My Client's Insurance Policy": The Dangers of a Half Truth for Clients and Subcontractors

In the world of business, especially in sectors like consulting or contracting, the issue of insurance coverage can sometimes lead to misunderstandings or misinterpretations.

One common misconception that comes up more frequently than others is the belief that being covered under a client's insurance policy provides comprehensive protection against all liabilities.

However, this notion, while partially true, can conceal significant risks and pitfalls if not fully understood.

Indemnity and Liability Insurance: A Comprehensive Safeguard

It's true that Professional Indemnity and Public Liability insurance typically extends coverage to acts undertaken by subcontractors on behalf of a business. This means that in the event of any professional errors, omissions, or negligence on the part of subcontractors while performing services for the business, the policy can provide protection.

But here’s the vital piece of information that is often overlooked, this inclusive coverage is designed to address potential liabilities arising from subcontractors' actions and protect the policyholder.

The Reality of Subrogation

As I have said on many occasions to clients’, everybody is very friendly until a large claim occurs. The notion of being covered solely under a client's insurance policy neglects a crucial aspect of insurance dynamics: subrogation.

Subrogation is the right of the insurer to pursue a third party that caused an insurance loss to the insured. In simpler terms, if a loss occurs due to a subcontractor's actions, the insurer may seek recovery from the subcontractor's insurance.

Relying solely on a third parties insurance policy could leave the subcontractors business exposed to potential gaps in coverage. If the subcontractor's insurance is insufficient or non-existent, they may have to personally defend themselves at their own cost.

Conversely, not checking that a contractor has appropriate insurance could cause issues with the payment of a claim or void a client’s policy.

Understandably when we talk about subrogation it's natural for clients to worry about the potential consequences of insurers pursuing closely linked parties, such as subcontractors. However, the reality is often more nuanced than one might expect.

Balancing Act of Subrogation

Subrogation involves the insurer stepping into the shoes of the insured to pursue recovery from a third party responsible for an insurance loss. While this process may seem straightforward, insurers must carefully consider several factors before deciding whether to pursue subrogation. These factors include the amount at stake, the estimated recovery costs, the clarity of the case, and the likelihood of success.

Contrary to common perceptions, insurers are not as litigious as clients may expect. In many cases, insurers opt for a pragmatic approach, taking into account the overall cost-effectiveness of pursuing subrogation. This means weighing the potential recovery against the costs associated with litigation, including legal fees, time, and resources. If the recovery costs outweigh the amount at stake or if the case is not clear-cut, insurers may choose not to pursue subrogation.

Another crucial factor in the subrogation equation is determining whether the party responsible for the insurance loss acted negligently or breached their contractual obligations. Insurers assess the evidence and legal implications to determine the likelihood of success in recovering damages from the responsible party. If there is uncertainty regarding negligence or liability, insurers may exercise discretion in pursuing subrogation.

Importance of Independent Contractor Insurance

We understand that some clients may push back against the requirement for contractors to hold their own insurance on the basis they don’t want to lose a particular individual when trying to enforce. While this sentiment is understandable and in certain situations insurers can agree to include contractors, it's essential to emphasize the broader implications and benefits of independent contractor insurance for both parties involved.

While it may seem redundant or unnecessary to the individual on some occasions, having independent insurance ensures that they are covered for the activities they are undertaking which more often than not are likely to be different from the companies they are contracting for.

Requiring contractors to maintain their own insurance coverage should be seen as a standard risk management practice, adding an extra layer of protection and minimising potential conflicts or disputes over insurance claims in the event of a loss.

Consider this scenario: Would you want to entrust your project or investment to someone who doesn't have insurance coverage in place?

Clients are not only protecting themselves but also ensuring that contractors have the necessary financial resources to address potential liabilities and risks.

In essence, it's a win-win situation that promotes transparency, accountability, and professionalism across the board.

The Responsibility of Contractors

It's crucial for clients to understand their responsibility when verifying and retaining insurance documents for their subcontractors. While clients may not always need copies of these documents, it's expected that they periodically review and confirm that subcontractors have adequate insurance coverage in place. Failure to do so could expose clients to unpaid claims or increased premiums in the future if subrogation is not an option.

Conclusion: A Holistic Approach to Insurance Coverage

In conclusion, while it may be tempting to rely solely on a client's insurance policy for coverage or to assume that contractors are covered, it's essential to understand the potential limitations of such arrangements. A holistic approach to insurance coverage involves ensuring that subcontractors have their own independent insurance in place, in addition to any coverage provided by the client's policy. By understanding the intricacies of insurance dynamics and taking proactive steps to mitigate risks, businesses can better protect themselves against potential liabilities and some very difficult conversations in the event something does go wrong.

Moving Forward Together

If you have any concerns or questions about subrogation or insurance-related matters, please feel free to reach out. We're here to provide guidance, address your concerns, and ensure that your insurance coverage meets your needs and expectations. Together, we can navigate the complexities of risk management and insurance, forging a path towards greater security and peace of mind for your business.