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Do Sub-Contractors Need Their Own Insurance?

A recent High Court’s decision that a roofing firm which caused a fire at a high school in London was not protected by a project policy has raised serious questions over the reliance by sub-contractors on these types of insurance policies. Our Sales & Marketing Director, Mike Dickinson, discusses how sub-contractors could be vulnerable as a result of the ruling and what steps to take to protect your business from higher risks.

Mike said: “Traditionally, main contractors on larger construction projects take out a project policy to cover damage to the existing structure and possibly the contract works being undertaken by the sub-contractors working on site. In the event of damage to the property, the project policy insurer would simply cover the loss rather than each sub-contractor going to their own insurers to recover the cost of their own damaged contract works; avoiding lengthy delays in the completion of the construction.

“However, in a recent case, the High Court found the roofing firm wasn’t protected by the project policy because the terms of the sub-contract required that they should maintain their own insurance. Usually a construction contract contains a clause requiring individual sub-contractors to take out insurance to cover their own contract works, along with Employers Liability and Public Liability. This is even if there is a project policy in place. “The difference with this case was that the project policy insurer dealt with the property loss, but then sought to recover their outlay from the sub-contractor that caused the damage. The Court allowed the project insurer to recover the loss from the sub-contractor, as the construction contract had required that the sub-contractor take out their own insurance.

“This ruling has really called into question the effectiveness of project insurance. It has wide ramifications for sub-contractors as you can no longer rely upon a project insurer to pick up a loss in the event of damage you cause to a property. It’s essential therefore that you ensure adequate cover is taken out to cover potential liabilities.

“At the start of a project, check the contract carefully. It often stipulates that the sub-contractor must be insured, and if so, it’ll say what insurance you are required to have. Generally, the main contractor will require the sub-contractor to have public liability insurance and will specify the indemnity limit that policy needs to have. The indemnity limit is the maximum that the insurance will pay in the event of a claim. The standard indemnity limit in a public liability insurance policy is usually £2m but often contracts will insist on £5m or even higher.

“Even if the main contractor is insuring the project, they won’t be insuring all of the risks that a sub-contractor faces. A project policy is unlikely to cover your plant, machinery, tools and equipment, so you will need an insurance policy to cover those.

“It is more important than ever for sub-contractors to understand the risks attached to their works and the potential losses they could face and ensure adequate insurance cover is in place to cover any eventuality. Just as you employ an accountant for your accounts and a lawyer to deal with your legal issues, an insurance broker will help you understand and identify all the potential risks and ensure you have the right level of cover to protect your business.”

If you have any questions about your insurance needs, contact us on 0115 947 0032.

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