Insurance 101 for Tradies - The Trades Coach

Written by Ben Rickard, Builtin Insurance, New Zealand’s Trade Insurance Experts

At Builtin we deal with thousands of tradies up and down the country, so we know insurance isn’t anybody’s favourite topic! While it’s not something you want to think about, it is something you need to have, and need to have properly arranged. Having to replace an expensive asset that’s been stolen or damaged, or getting tied up in an expensive liability issue can hammer a small business, not only financially, but they can take an emotional toll on the contractor and their family too.

For larger firms their exposure to risk is greater, as is their capacity to manage it. For company managers and directors, getting the right professional advice and having good risk management practices in place, including insurance cover, is a critical (and legal) duty.

Most of our customers want what we call the “Goldilocks Package”: not too little, but not too much. That’s what we help our customers with every day.

In this article we share some basic risk management questions, as well as the headlines of the key policies contractors need to consider. What you need will vary according to your specific operations and business set up, but this should serve as a good overview to get you started.

SETTING OUT YOUR SITE – THE FRAMEWORK

The first place to start is with a basic risk assessment of your business. We recommend breaking this down into chunks: physical assets, potential liability issues and income & financial risk. We haven’t mentioned health & safety here, which is obviously a key area of risk, as this is well covered by other resources and systems, such as HazardCo and SiteSafe. Also, while there is insurance that can cover the legal costs of defending a health & safety prosecution, and pay reparations awarded to an injured party, insurance cannot legally pay fines under health & safety law.

Assets

Do you have an asset list? This is a register of all the tools and equipment your business owns. For accounting purposes this is used for depreciation, for insurance purposes it helps identify what is at risk. Each item should be named, with its replacement value, serial number, date of purchase. There are plenty of phone apps to help (Hoist is one), and the Police also run SNAP.org.nz for this purpose. An asset register will also help get any claim you make sorted quickly.

Your tools can quickly add up, whether it’s lasers, meters, cameras, testers or power tools. Theft and damage can be insured, but not usually wear and tear or mechanical breakdown.

The main questions to ask yourself are:

What effect would the loss of a big chunk of my equipment have on my business? Both in terms of the cost of having to replace it and our ability to keep working and finish the jobs I have lined up?
Is it worth a monthly or annual insurance premium to cover this risk?

Liability

What are the issues you may face that could cause a third party (such as your client, a neighbour, local council, employee or other contractor) to hold you responsible for a loss they have suffered due to your actions (or inaction)? Some examples may include:

Incorrectly installed pipe fitting resulting in water damage
Hitting underground services when digging
Gas leak leading to an explosion
Walking past an expensive marble benchtop and chipping it with your tool belt
Employee disputes, such as from discrimination, bullying, harassment, unfair dismissal, not being paid correctly (eg. holiday pay)
Health & safety failures that could result in injury and/or prosecution by Worksafe
Failing to follow a design, plans, specifications or installation guide correctly

Income & Financial Risk

If you unexpectedly became sick and couldn’t work for a period of time, what effect would this have on your business and your income level? ACC only covers accidental injury, not illness, so you can’t rely on it for things like cancer, heart disease, diabetes, mental illness etc.

Secondly, what effect would it have on your business if the same happened to a key employee? If they were off work for a significant period of time would you struggle to bring in new work, coordinate your teams, liaise with customers, manage projects?

Finally, how dependent are you on being paid by contractors you work for? What would happen if they defaulted on payment or didn’t pay retentions they have held back?

GETTING THE JOB DONE – THE RIGHT TOOLS

Below is an overview of some of the key policies that landscape contractors need to properly manage the risks you have now identified.

ASSET INSURANCE OPTIONS	COMMON EXCLUSIONS
Insuring property from damage or loss.
COMMERCIAL VEHICLES – full cover includes accidental physical loss or damage to your vehicle, as well as your liability for damage or injury to other people and their property caused by the vehicle. Cover can also be limited to third party liability only or include third party liability, fire & theft. Trailers should be insured under a vehicle policy, and other equipment on wheels or tracks, such as diggers, scissor lifts and bobcats, can also be included. Some items that are attached to trailers but can be removed from them may be best covered under a contractors plant policy.	Mechanical breakdown. Liability for property being carried on or in the vehicle (some policies have a limited extension for goods in transit). Damage caused by the vibration or weight of the vehicle.
CONTRACTORS TOOLS, PLANT & EQUIPMENT – covers loss or damage, including tools and equipment you’ve hired (if included). Many policies are for market value only, but specialist insurers can give replacement value cover.	Mechanical breakdown. Theft “in the open air”, such as from unlocked vehicles or unsecured sites (some policies do include this).
MATERIAL DAMAGE – protects your buildings, as well as stock, plant and machinery located at a specific site such as a yard.	Building defects, defective design, materials & workmanship.
CONSTRUCTION (CONTRACT WORKS) INSURANCE – protects the project from hazards such as theft, accidental damage, storm, fire and natural disaster. This could include site preparation, earthworks, retaining walls, fences, decks and any other work that could suffer damage, for example through storm, flood, fire or earthquake. Subcontractors need to consider who should be responsible for arranging this. If you’re sub-contracted to a builder they would generally arrange cover for the project, including the work of all subbies (the policy should state this and it’s a good idea to check). If you’re working directly for a homeowner or commercial property manager you need to consider whether the work is best insured by their current insurer (generally preferable) or if it is a standalone project (without any existing structures involved) that can be insured separately.	Damage to existing structures (can be added), consequential loss, contractor’s tools and equipment, partial occupation, workmanship & design.
TRANSIT INSURANCE – are you responsible for transporting materials? These may be covered by extensions to a contract works policy if designated for a specific job, otherwise a transit policy needs to be arranged.	Deliberate negligence. Improper packing.

LIABILITY INSURANCE OPTIONS	COMMON EXCLUSIONS
Insuring your liability for injury, damage or loss suffered by another party. Usually includes cover for legal costs also.
PUBLIC/GENERAL/BROADFORM LIABILITY – covers your liability for accidentally damaging another person’s property (and in some cases injury). Every contractor should have public liability insurance. Customers will want to know that if you cause some damage there is an insurance policy in place to cover the loss.	Faulty workmanship (some policies include this). Defective materials, design and specification. Your own products. Damage you are not liable for. Gradual damage.
PROFESSIONAL INDEMNITY – protection if you’re held liable by someone for a financial loss they have suffered. Eg. use of the wrong materials, failure to obtain consents, arrange inspections or correctly sign off/certify the work, or failure to correctly follow a design or specification. Includes cover for legal costs and damages awarded by the court. It has been difficult for trade professionals to get indemnity cover that suits their occupation in the past, but this is now available from specialist insurers like Builtin.	Property damage. Financial estimates, surveys and inspections. Financial failure. Failure of products to meet the manufacturer’s specifications.
STATUTORY LIABILITY INSURANCE – cover for legal costs and fines levied under legislation such as the Building Act, Resource Management Act & Fair Trading Act. Fines for breaching health & safety law can’t be insured, but the policy will cover the legal costs and reparation payments if you are taken to court for breaching health & safety law.	Deliberate disregard for legal obligations.
EMPLOYERS LIABILITY – provides cover for your liability for injury to employees that is not covered by ACC.	Failure to take reasonable precautions to prevent injury.
EMPLOYEE DISPUTES – provides cover to defend allegations of breach of employment law, such as discrimination, unfair dismissal, bullying, harassment.	Deliberate disregard for legal obligations.
DIRECTORS & OFFICERS LIABILITY – protects directors & company officers from liability for allegations of mismanagement of the company, including legal defence costs. For example, continue to trade the business (take on jobs, buy materials, engage sub-contractors) while it is technically insolvent.
CRIME/FIDELITY – protects the company against financial loss due to the fraudulent or dishonest acts of its employees or other third parties. For example, theft by an accountant or bookkeeper, fraudulent use of a fuel card or merchant account credit.
LEGAL PROSECUTION DEFENCE COSTS – covers the legal cost of defending a criminal prosecution against directors, managers and employees for acts committed whilst going about their daily work. For example, an employee who gets into an argument with a customer or other contractor that becomes physical and an assault charge is laid.	Traffic offenses. Domestic violence offenses.

INCOME & FINANCIAL RISK OPTIONS	COMMON EXCLUSIONS
Insuring your ability to earn an income and your business’ financial stability.
LIFE – pays a lump sum in the event of your death.
PERMANENT DISABILITY – pays a lump sum in the event of permanent disability. This can be linked to your ability to return to your previous occupation, or to work in any job.	Self inflicted injury, failure to follow treatment advice.
TRAUMA – pays a lump sum in the event of certain illnesses that require medical attention and/or surgery.	Self inflicted injury, failure to follow treatment advice.
INCOME PROTECTION – pays a selected percentage of lost income if you become disabled or unable to work due to illness or injury. Beneficial in circumstances where ACC payments are limited or not payable. Can top up ACC or replace ACC.	Self inflicted injury, failure to follow treatment advice.
KEY PERSON – pays the company a benefit to cover the extra costs arising from the illness or injury to a key staff member. Eg. Employing a temporary replacement or outsourcing work to a third party.
TRADE CREDIT INSURANCE – pays a proportion of bad debts owed to you by a named debtor. This best suits contractors with large or long term contracts with large customers.
PERFORMANCE/RETENTION BONDS – guarantees performance of their contract by contractors. Offered in lieu of cash retentions and to ensure fulfillment of a contract. Most common in large projects.
BUSINESS INTERRUPTION – covers your lost profit or increased costs if your business is affected by an event that can be claimed under a material damage policy. For example, the closure of your premises due to an earthquake.	Loss from mechanical or electrical breakdown.

BACK COSTING – REVIEW REGULARLY

Once you have assessed your risk and arranged the right cover, you should make a time to review it regularly. A good time is around the annual renewal date of your insurance. But anytime your business makes a significant change should trigger a risk assessment. Have you taken on a bigger job, or a commercial job when you’ve been mostly residential? Are you working for a new customer? Have you bought new stuff, or taken on new staff?

With a good process, good advice and the right insurance and risk management programme in place your business will be set up to weather any potential storms.

This article is not exhaustive and you should conduct your own assessment of your specific needs, perhaps along with an insurance/risk management professional adviser. There are other policies to cover different risks. Individual policy wordings from different insurers may vary. You should refer to the specific exclusions in your own policy wordings and discuss them with your insurance adviser if you are unsure.

Builtin are New Zealand’s Trade Insurance Experts. For more information visit builtininsurance.co.nz, email Ben Rickard at ben@builtin.co.nz or call him on 0800 BUILTIN.