What must insurance for main contractors cover?

While the use of subcontractors is on the rise to redress a shortage of skilled workers, this is not matched by main contractors' understanding of their resultant insurance liabilities


  • Nick Smallcorn

26 May 2022

Engineers and Architects Brainstorming and Planning on a New Project

UK construction companies are facing a severe and growing shortage of skilled workers, such as joiners, bricklayers, electricians, plasterers and other tradespeople as Brexit and COVID-19 continue to hit home.

The exodus of EU nationals has accelerated the skills drain, raising the risk of major delays to construction projects.

To exacerbate the problem, a significant proportion of the UK's construction labour pool is approaching retirement age. According to the Construction Products Association, 223,000 workers have left the industry since 2019, with almost half being skilled workers aged 45–55 – the primary age demographic in the workforce. The rise in employer National Insurance (NI) payments could also have a negative impact on construction firms already struggling with labour and materials shortages.

The consequence of this skills and workforce attrition is likely delays to projects and increasing construction costs. However, the use of subcontractors is mitigating this to some extent, as main contractors turn to this flexible labour pool to boost their resources on large projects.

Clarifying contractors' insurance liabilities

The relationship between the main contractor and subcontractors can be a close one and is certainly mutually beneficial. Main contractors rely on subcontractors to provide specialist skills as well as an adaptable and responsive labour force, while subcontractors need main contractors to provide them with a reliable pipeline of work.

Nevertheless, there can be some confusion and misunderstanding among parties about which is ultimately responsible for the correct provision of liability insurance cover. The main liability insurances in this context are:

  • employer's liability for employees, and for any persons for whom the subcontractor may act as labour master

  • public and products liability, for injury or damage to third parties or their property

  • professional indemnity insurance, to cover financial loss to third parties as a consequence of an error or omission in the execution of the subcontractor's professional activities.

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Why both parties share insurance burden

Legally, the main contractor is responsible to its client for the completion of the construction project. To guarantee that this happens, any subcontractors employed by the main contractor must make certain that they have suitable liability insurance of their own in place to undertake work on the latter's behalf.

Additionally, the main contractor must ensure that it has cover in place for any such work by the subcontractor. It is a misconception for a main contractor to believe that the work is correctly insured if it has not taken out cover itself for the types of activity conducted by the subcontractor. Both parties' policies must provide adequate cover for any work carried out in all respects.

On the face of it, this may seem a duplication of costs and effort: but it makes sense. Should a relevant event occur in relation to the subcontracted works, the claim is likely to be brought against the main contractor in the first instance, since it is the party that has a legal agreement with the client to carry out the work.

If the main contractor has failed to take out cover in respect of the subcontracted activities, there is, effectively, no insurance cover at all for these. Without cover, there can be no provision for legal defence costs, or for the costs of passing on – subrogating – the claim to the subcontractor and its insurer. For this reason, the main contractor's and the subcontractor's insurance policies must be checked to ensure parity of cover before any work begins.

'It is a misconception for a main contractor to believe that the work is correctly insured if it has not taken out cover itself for the types of activity conducted by the subcontractor'

Distinguishing bona-fide and labour-only subcontractors

The way in which bona-fide and labour-only subcontractors are categorised can lead to uncertainty about their respective insurance responsibilities. Recognising these distinctions is fundamental to understanding the specific insurance requirements.

When they are contracted to do a job, bona-fide subcontractors usually supply their own labour and tools, and either their own materials or method statement or both. They are also responsible for conducting their own risk assessments and, crucially, for arranging their own insurance cover.

In contrast, labour-only subcontractors and temporary labourers work under the direction and control of the contractor, which is responsible for conducting risk assessments and ensuring that safe working practices are observed on site.

In other words, the main contractor acts as their labour master. Furthermore, labour-only subcontractors aren't responsible for arranging their own insurance cover, although some may have their own policies.

For the sake of clarity, all references to subcontractors in this article are solely to bona-fide subcontractors.

Insurance arrangements vary with worker status

Another area of confusion concerning liability and insurance often arises when the main contractor hires labour from a recruitment agency or a guild. A misconception among some contractors is that the labourers they engage will already have their employer's liability insurance provided by that agency or guild.

This may be the case; but in the event of a claim it is likely that it will be the main contractor's policy that will be the one to pay the claim.

Instead, it is the main contractor's responsibility to ensure that it has the appropriate employer's liability insurance to cover temporary workers. By law, an employer must hold employer's liability insurance if it employs people in the UK, or for any persons for whom it acts as labour master.

Consequently, anyone working under its direction and control must be regarded as an employee. The only exception is bona-fide subcontractors, which as discussed occupy a different category.

The contractor should also ensure that its public liability policy covers temporary workers, to protect against potential claims from third parties for personal injury and property damage.

In light of the ongoing shortage of workers and skills in the construction sector, if a contractor finds that it is depending on labour from recruitment agencies or guilds to fulfil contractual requirements it should make sure that its disclosures under its liability insurance accurately reflect the source of labour. It should also ensure that such persons are neither permanent employees nor bona-fide subcontractors.

Construction insurance specialists can offer advice

Given the complexities, misunderstandings and potential pitfalls involved in insuring subcontractors and temporary labour, a contractor should seek guidance from a construction insurance specialist from the outset. The contractor's insurance requirements will after all depend on the specific circumstances of a project and the workforce mix that it entails.

Nick Smallcorn is commercial director at the Clear Group

Contact Nick: Email

Related competencies include: Business planning, Contract practice, Insurance

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