When everything you have – reputation, livelihood and even the roof over your family’s head – rides on your consulting practice, it pays to reduce your risks.
The exciting transition from employee to independent consultant opens new opportunities, independence and control over your working future, but it is a daunting journey with new risks, signing contracts, personal accountability and personal liability. Insurance is a key pillar of risk management, allowing a consultant to transfer their risk from a personal liability to their insurer. In addition to your own protection, it is common for insurance to be a commercial requirement. In an increasingly litigious society, many businesses are staunch in their insurance requirements for all third parties they engage, and will not even allow you on their site without proof of insurance. For consultants, use of appropriate insurance offers protection to your client. In the event of a claim, you and your client would much prefer an insurer to settle a claim than civil litigation where you could lose your house to pay for the loss you allegedly incurred.
Understanding the priority insurances to consider will assist in best allocating your business’s expenditure. Consultants should be aware of two key areas: first and third-party insurance. Third-party insurance indemnifies someone else if you cause them to suffer a loss (for example, through design errors).
Third-party covers are often mandatory in consulting contracts, and the products that are key to a consultant’s business include:
- Professional indemnity – the key product; your advice or service is your core business and therefore your core risk.
- Public liability: required to get on site, for accidental bodily injury or property damage.
- First-party insurance indemnifies you against loss of portable property. First-party covers are not usually large or complex because consulting businesses are generally portable and asset-light, but key areas for a consultant to note are laptops, cameras and surveying equipment.
- Corporate travel: interstate and overseas; includes medical and luggage.
- Workers’ compensation: statutory product for injury to employees.
- Office insurance: if you have a static location from which you work. Income protection: important because self-employed consultants don’t get sick leave.
Simply buying an insurance policy is not adequate and you are at risk of being uninsured; your insurance needs to be tailored.
It is becoming all too easy for a consultant to jump on the internet, label themselves an architect or engineering consultant without full detail of their occupation to obtain a quote for insurance.
Unfortunately, this is a serious trap, because direct, online products are deliberately simplified and designed so that any deemed ‘high-risk activity’ is excluded in the policy wording. You can never assume that the core activities that make up your role are covered. Review your insurance when your activities change, in particular if you are involved in: Design and construct, or design and manufacture. For example, are you contracted, qualified, or insured for design advice? If not, then you should not be the sole approver of any design variation or you may be working overseas in deemed high-risk industries. You may have a statutory role, for example a management role where you may carry the legal responsibility for the safety and health of contractors on a work site. These are all trigger points where basic ‘off the-shelf’ insurance products may not offer any cover. Simply buying an insurance policy is not adequate and you are at risk of being uninsured; your insurance needs to be tailored to ensure that your business activities are covered and your assets protected.
Will your professional indemnity insurance offer cover when it counts? This boils down to what you sign. Insurance does not offer cover for any assumed or contractual liabilities where you may sign up to additional risks above and beyond common law provisions. It is important to seek advice and gain some understanding of terms that can create a one-sided contract that disadvantages the consultant such as: You assume all risks and losses, Waiving subrogation rights, Waiving proportionate liability rights, Hold harmless clauses, A failure to limit liability to the actions of the consultant Clauses requiring work to be completed to a ‘high’ or the ‘best’ standard Warranty and guarantee clauses.
The implications of such contracts have the potential to be devastating. One consultant whose contract we reviewed was engaged to provide services for a three-month period for $50,000, so believed his liability was limited to that. Actually the clauses in his contract also held him liable for any losses caused by other sub-contractors, and had him agreeing to pay to all losses his client suffered, irrespective of how much of it was his fault. Ensuring your contracts are equitable, and as best you can aligned to your insurance policies, is the best way to keep your personal risk minimised. When reviewing a contract for potential conflicts with insurances, it is always also advisable that the consultant seeks independent legal advice as to the actual interpretation and application of the contract terms.
If you are engaged as a subcontractor to work with your client, never assume their insurance covers you. Their insurance will likely protect them for the work you do on their behalf but it may not cover you personally. The risk is not that you will be sued by the end client (as they will likely engage the principal contractor), but that the principal contractor’s insurer will bring you into a claim via a ‘subrogation action’ where they believe you have contributed to the loss. A common misconception is that if your client does not require you to have insurances this is because you are being protected by their insurance – this is rarely the case. Turning this scenario around, if you need to engage a subcontractor on a large contract or contribute additional services outside of your area of expertise, always be aware of the associated risk. Your contract with your client may require you to guarantee any subcontractors you use have the same level of insurance as you, so it is advisable that you seek evidence of your subcontractor’s insurance policies just as you are required to evidence your own.
A good insurance broker should not only arrange appropriate policies to cover your business activities, they should also explain why the insurance is appropriate, understand the key risks to your industry, review your contracts to identify gaps or uninsured risks, and be a trusted adviser to your business.
If you would like an insurance quotation please contact Professionals Australia Insurance and Superannuation services on 1800 800 998 or complete the form on our website – http://abcountrywide.com.au/professional-insurance-home/professional-indemnity/
Your contacts for PI cover at APESMA Insurance and Superannuation Services are Matt Kuc, Greg Hansen and Sara Mithen. As a Professionals Australia member, you can contact them at any stage for an obligation-free quotation, or let them know your renewal date and they’ll contact you at the appropriate time to provide you with a quotation.
This advice and comments are provided in the capacity as an insurance broker and should not be construed as legal advice. Separate legal advice relating to the interpretation and implication of this article for your individual circumstances should be obtained.
Matt Kuc is the Manager of Affinity & Schemes with Austbrokers Countrywide. Matt has specialist experience in running large Professional Indemnity Insurance schemes in close relationship with major industry associations. He also has a portfolio of his own clientele. With in excess of 10 years insurance and risk management experience, his key skills are in technical and analytical areas. His particular specialisations are in Professional Indemnity Insurance, Directors and Officers Liability Insurance and IT Liability Insurance. Matt’s portfolio includes a large number of IT, Engineering, Accounting and Financial Planning Consultancy businesses. He has Bachelor of Commerce majoring in Management/Finance.