What’s the risk with underinsured subcontractors?

Today subcontractors are a key component of the supply chain and a foundation for the business model that both principal and specialist contractors have adopted to operate efficiently. With every part of the supply chain there is a risk if a subcontractor fails to perform or causes disruption. Here Neon Mavromatis, from insurance specialist Kerry London, highlights the risks of employing underinsured subcontractors.

Managing risk in the supply chain is something all businesses should be aware of – and it is no different when subcontracting. The requirement is arguably more pressing than ever, as the culture of claiming increases throughout both the commercial and public worlds.

Contractors – risks and mitigation

With risks apparent both up and down the supply chain, contractors are arguably the most vulnerable. There is vulnerability from up the chain, as they depend on prompt payment of invoices in the same way as their subcontractors depend on them. Credit insurance – traditionally an expensive option but becoming more affordable as the economy improves – may be an option here.

The main threat to contractors, and the one which we come across increasingly and regularly in our work, is the risk of the underinsurance of subcontractors.

Usually, the principal contractor will have Public Liability insurance cover for at least £5 million, preferably £10 million, to cover the myriad of mishaps which may take place during the course of their contract. Subcontractors, who may prefer to pay the lower premiums for a policy offering less cover, may have less comprehensive cover than required by the terms of the contract.

If a subcontractor who is insured for just £1 million Public Liability cover causes damage to a property needing £2 million of repairs, two things may happen, depending on the wording of warranties or conditions.

The best case is that the principal contractor picks up the tab through their own insurance, with their insurers recovering the first £1 million from the insurers of the negligent contractor. However, this is likely to result in an increase in premiums which can make a significant difference to the prosperity of a business. If the subcontractor’s insurance policy condition or warranty is sufficiently onerous, then the principal contractor could find themselves having to fund the entire repair costs. This is because they are in breach of a policy condition that allows their insurers to refuse the claim in full.

Contractors should also make sure that the staff tasked with sending out contracts or purchase orders to subcontractors and tradespeople are sufficiently trained in understanding the importance of these issues. They may seem like minor affairs, but the consequences can be huge and employees should understand that.

We would advise contractors that the onus is on them to check covers and limits for all their subcontractors.

No matter who is addressing the risk, the general principles must be the same – be thorough, take advice if necessary and make sure that all paperwork and policies are in order prior to work commencing. While the burden of being thorough may be viewed as costly and time-consuming, across the board the risks and consequences of failing to do so may not be worth taking.