Liability Insurance – advice to insureds, brokers and insurers

Focus on Insurance

Timely advice on liability insurance especially for sole traders

Several times this year I have been asked to assist a sole trader, typically a tradesperson, who finding that it is difficult to work for yourself has retired or stopped working for themselves and become an employee. They then cancelled or let lapse their public liability policy. They have then been accused of being liable for some loss, injury or damage which they may or may not be guilty of. They then find that they do not have the protection of their insurance program to protect them as it was lapsed or cancelled at the time the loss, damage or injury occurred.

Let me start with the position the sole trader finds themselves. As a sole trader, that is not operating under the protection of a company structure (a Pty Ltd) the tradesperson or anyone else working as a sole trader has unlimited liability. That is, if they are found to be legally liable for a loss, damage or injury then all their assets such as their family home, investment properties, investments, home contents, car, boat, jewellery, everything is at risk. I cannot over emphasis the risk here. People in this situation literally lose their home and the shirt off their back. 

Even the cost of investigating the allegations and defending a lawsuit or demand can be expensive. If it goes to trial it may cost $100,000 or more and not all the costs will be recoverable from the other side. There will always be costs which will have to be borne ultimately by the defendant. Without the protection of insurance, you should not forget the financing costs while you wait for the outcome of the trial? 

Worse still if the sole trader loses, without insurance they will be up for the quantified amount of the loss, damage, or injury, the other side’s legal fees plus interest, and their own legal costs. Some events also attract statutory fines or penalties. 

The risk for a partnership is arguably even greater as the partners are jointly and severally liable for each others actions. 

Jointly liable means that the partners are each liable up to the full amount of the relevant obligation. So if a two people in a partnership take a loan from a bank, the loan agreement will normally provide that they are to be “jointly liable” for the full amount. If one party dies, disappears or is declared bankrupt, the other remains fully liable. Accordingly, the bank must sue all living co-promisors, for the full amount. However, in suing, the creditor has only one course of action, i.e., the creditor can sue for each debt only once. If, for example, there are three partners, and the creditor sues all of them for the outstanding loan amount and one of them pays the liability, the creditor cannot recover further amounts from the partners who did not contribute to the liability. 

The opposite of joint liability is several or proportionate liability. Here the parties are liable for only their respective obligations. A common example of several liability is in insurance is a panel of co-insurers on an insurance program. If one insurer fails to pay a claim, then the Insured can sue only that insurer, and the other insurers on the policy have no liability. 

For the sake of a few hundred dollars a sole trader or partnership can often obtain greater protection against business risks by purchasing a shelf company and then in many ways they limit their liability to the value of the company. Banks, landlords and other creditors will usually require a director’s guarantee as they know the power of the company and want to still protect their position. 

I am not a registered Australian Legal Practitioner and so I recommend that if you or your client wants to learn more they speak to their own lawyer or accountant. 

I now turn to the protection of the public liability or products liability policy. The essential element of a public liability policy are: 

• The insurer will pay to, or on behalf of, the Insured 

• Legally liable to pay

• As compensation (excluding punitive/exemplary damages)

• For personal injury/property damage

• That happens during the policy period

• Caused by an occurrence

• Within the geographical limits of the policy

• For events which occur in connection with the business

Each of these items is worthy of not just a blog entry but a chapter or even a book in its own right. It is the issue of happening during the period of insurance that I wish to focus the next section of this posting. 

The intention of a modern day public liability policy is to provide protection to the Insured against bodily injury and property damage but only for those that occur during the period of insurance. 

The important point to take away from this is that event or act giving rise to the bodily injury or property damage may take place in a prior period (perhaps with a different insurer, or when the insured had insurance), but it is the time when the bodily injury or property damage occurred which is what is looked at. I repeat the bodily injury or damage must occur during the period of insurance for a public liability policy to respond

This means that if there is no policy in force when the bodily injury, loss or damage occurs then there is no cover under any policy. Therefore it is necessary for a sole trader or partnership to continue to arrange and carry public and if appropriate products liability cover even after they cease to trade. 

A couple of the cases that prompted me to write this blog involved insulation batt installers. When the poorly executed government insulation scheme was wound up, a great many sole traders found that the business they had started was stopped dead in its tracks. With no income many cancelled their insurance while others simply did not pay the renewal when it came through. 

The cause of a great many house fires were put down to electrical fires when no other cause could be easily found. Since all the publicity of the problems with insulation this has become the new smoking gun and is recorded as a possible cause more and more. 

So let us say an installer put the batts in 2 years ago finds himself with a letter of demand from someone whose house burnt down yesterday. He/she will have to mount (and fund) an investigation and defence and may ultimately be found legally liable. If his or her public liability policy was not in force at the time of the fire, regardless of whether they had insurance at the time of the installation, they have no insurance protection.
This is different from the ‘claims made’ wording which offers protection for any claim notified during the period of insurance, regardless of when it occurred. Claims made wordings are found in management liability policies covering professional indemnity, directors and officers etc. Here the trigger is not the date of the negligent act, nor the date of the injury or damage but the date the loss, damage or injury becomes known to the Insured and they are required to immediately advise their insurer. Again holding insurance protection well after the business has ceased to trade is necessary. 

There are two stings in the tail. The first is that it may be necessary to carry on paying on insurance for many years to be fully protected. Most people do not like paying insurance but at least when you are trading, the cost of insurance is a legitimate tax deduction. When the business is no longer trading, there is no business income to fund the premium and no right to claim a tax deduction.

The second sting is that some insurers refuse to offer public or product liability cover to a sole trader, partnership or company if they are no longer trading and making an income. I feel that this is simply not reasonable, particularly when a sole trader has so much at risk. I cannot see why in all good conscience if a sole trader has been good enough to insure while they are in business why, particularly if their claims history has been exemplary, that they do not continue to offer them protection bearing in mind that they are not creating any further potential liabilities. 

Conclusion 

For the sole traders and partnerships out there, please consider spending the money and setting up a company to better split your liabilities from your assets. Either way please ensure you retain adequate public liability insurance well after you have stopped trading. You may also need products liability and or management liability as well. 

For the brokers, please counsel your clients against cancelling public liability insurance mid term and advise them of the need to purchase “run off” cover/protection after they cease trading. 

For the insurers, please consider your underwriting philosophy. It was the industry that changed the trigger on public liability from the time and date of the negligent act. One of the reasons was to reduce the long term liability and to assist in pricing. We cannot leave our clients in the intolerable position of not having liability insurance in this ever litigious world. Surely a year by year cover can be priced and offered. If the industry does not do this voluntarily it will cause the ruination of many to the point that government will legislate. 

Disclaimer: This post has been prepared as a guide and is not intended to exhaustive. While the utmost care has been taken in the preparation of the article, it should not be used or relied upon as a substitute for detailed advice or as a basis for making a business, financial or insurance decision.

3 responses to “Liability Insurance – advice to insureds, brokers and insurers”

  1. Andrew Alisdiar says:

    Great post. Thanks for this

  2. Andrew Alisdiar says:

    Great post. Thanks for sharing such a valuable post.

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