Understanding your risk as a consultant, and finding an appropriate insurance cover, is vital to ensure any liability is minimised
The transition from an employee to an independent consultant can be an exciting one: new opportunities, independence, and control over your working future. But it can also be a daunting change that brings new risks, signing contracts, personal accountability and personal liability. A range of questions arise:
- Can I be sued?
- Do I fully understand what I am signing?
- What happens if I get sick?
- Is my house safe?
- How can I protect myself?
- What about when I retire?
Insurance is one of the key pillars of risk management, allowing a consultant to transfer their risk away from a personal liability to their insurer. Insurance is the one component of your business you always want to have, but never want to use. This becomes even more important in consulting practices – especially for sole traders or small businesses, where it is not just the business that needs protection but also the personal assets of the individual consultants.
In addition to your own protection, more and more frequently insurances are also becoming a commercial reality. In an increasingly litigious society, many businesses are quite staunch in their insurance requirements for all third parties they engage, and will not even allow you on their site without proof of insurance. So irrespective of your personal view of your risk profile, to be in business and to win contracts there is an underlying commercial reality that insurance is going to be a requisite item.
It is prudent for all businesses to carry insurance. To operate without insurance cover is to expose your clients to unnecessary risk which may deter them from using your services. As a consultant your utilisation of appropriate insurance offers risk management and protection to your client as well. In the event of a claim arising, both you and your client would much prefer an insurer to be involved and able to settle a claim as opposed to civil litigation that involves whether or not you have to sell your house to pay for the loss you allegedly incurred. For a profession as a whole to carry insurance adds a level of accountability and credibility, to ensure the protection of the client or consumer, and this is why a range of other consulting professionals (eg accountants, real estate agents, and mortgage brokers) actually have insurance as a compulsory part of their licensing regime.
What type of insurance?
Keeping costs down is always important – especially when starting a new business – so understanding the priority insurances to consider will assist in best allocating your expenditure. Insurance for consultants come under two key areas:
- third party covers that are designed to indemnify someone else if you cause them to suffer a loss (eg design errors)
- first party covers that are designed to indemnify you if you suffer a loss (eg someone steals your laptop).
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 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 covers usually are not large or complex as consulting businesses are generally portable and asset-light, but some key areas for a consultant to be aware of as the most frequently required insurance products are:
- portable property – can include laptops and cameras, as well as surveying equipment
- corporate travel – both interstate and overseas, includes medical as well as luggage.
- workers compensation – statutory product for injury to employees
- office insurance – if you have a static location that you work from
- income protection – consultants do not get sick leave so this becomes more important!
High risk areas
It is becoming all too easy for a consultant to jump on the internet, label themselves as an ‘engineer’ or ‘geologist’ and obtain a quote for insurance. Unfortunately this can be a real trap, as direct online products are deliberately simplified and designed in such a way that any deemed ‘high risk’ activity is automatically excluded in the policy wording. A consultant can never assume that just because ‘geologist’ is their business description, 100 per cent of their ‘geologist’ activities are being covered. There has even been evidence of one product on the market which can be purchased by an engineer that excludes the mining industry entirely.
The mining and metallurgy industry is diverse and specialised, and Australia is a world leader in this area. This creates a diversity in risk and insurance needs that require tailored advice.
A review of your insurance is always appropriate when your activities change, in particular if your consulting involves any of these areas:
- Resource Estimation and Valuation
- overseas work
- any environmental work
- physically going underground
- statutory responsibilities such as mine manager or site senior executive roles.
These are all trigger points where basic ‘off the shelf’ insurance products may not offer any cover. Simply purchasing an insurance policy alone is not adequate and you are at risk of being uninsured; your insurance needs to be tailored to ensure that your business activities are being covered and your assets protected.
Resource Estimation and Valuation
Resource Estimation and Valuation as governed by codes such as JORC and VALMIN form vital parts of the planning and feasibility stages of the mining industry, and are critical advices for both business planning and capital raising. The potential for estimations and valuations to get into publicly issued documents for investors significantly scales up the risk to a consultant providing the valuation, as people rely upon this advice to make investment decisions. ‘Investment Advice’ is a very broad term commonly excluded from insurance unless explicitly negotiated in, and it is important for consultants who are able to give advice compliant under the JORC or VALMIN code to know that their insurance not only covers mineral resource and ore reserve estimates, but also covers the valuations attached.
Australian consultants are frequently engaged to work overseas, whether for Australian-owned subsidiary sites in Africa or the Pacific, or fully foreign-owned sites in Canada, the US, and many other parts of the world. This creates a great opportunity for Australian consultants, but it is important to declare the source of income and also locations worked in to ensure that you have adequate insurance both for the territories you work in and also their jurisdictions. It is common for insurers to exclude any North American work, and in some cases limit your insurance strictly to Australia and New Zealand. Therefore if you are engaging in overseas work, whether physically travelling overseas or simply being engaged by a foreign company, you need to ensure your insurance limitations are commensurate with your contract terms. It is far more expensive and difficult to have to go to court overseas so this is definitely a situation where you want your insurer to be managing things.
Pollution continues to be a major talking point in the insurance industry, especially in the wake of the recent very public BHP disaster in Brazil. The management of wet tailings and treatment of waste and by-products all require specialist advice where consultants are often utilised, as well as more broader pollution risks surrounding things like dust and the storage of consumables. While some policies blanket exclude all claims relating to pollution, better policies will offer some cover so long as a loss directly arises from your professional services but the best insurance available will have no pollution limitation whatsoever.
Mining engineers in particular need to be wary of their insurances when it comes to going underground, even if it is just to inspect work. Insurers will also consider whether there is any responsibility to manual work being done underground (which is where statutory roles come into play) or even if any blue collar work is being done by the consultant themselves. An issue can unfortunately arise where a consultant is required to get public liability to visit a mine site and do an underground inspection, however the liability cover they purchase will not actually cover them being underground.
Insurers are especially wary of the statutory roles because they can carry the legal responsibility for the safety and health of the mine staff on the site. For a mining company, this offers an opportunity to sub-contract out of some responsibilities as the employer. For a consultant considering taking on any statutory role by contract such as a senior site executive, mine manager or shift supervisor it should be done in the full knowledge of the legal responsibilities attached. Depending on the risk appetite of the consultant, this may be a role you prefer to not take on unless you are confident that you have appropriate insurances in place.
Will your professional indemnity insurance offer cover when it counts? This can all boil 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 – and to be fair to the insurance industry that is not an unreasonable stance to take.
There are some key areas of risk to keep a lookout for where businesses attempt
to create one-sided contracts that pass off a disproportionate level of risk on to the consultant:
- any contracts that assume ‘all’ risk and ‘all’ 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.
Not only are these contracts not fair and equitable between a consultant and their client, but they also create a significant commercial risk to the consultant. If a breach of contract is alleged above and beyond what your insurance may cover, the additional liability goes back to the consultant directly and will be coming out of their own pocket.
Things like hold harmless agreements, or waiving subrogation or proportionate liability rights, all prejudice your insurer as they cannot pursue any contributory negligence, which will impact the extent to which your insurance policy is able to adequately protect you. Consultants are often providing a part of a much larger contract with many parties involved, so the difference between you only being required to pay for your percentage of the loss versus being required to pay for the entire loss can easily be tenfold.
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.
Subcontracting and insurance
If you are being engaged on a subcontract basis to work with your client jointly on a larger project, never assume you are being covered by their insurance. Their insurance will likely protect them for the work you are doing on their behalf, but it may not extend to 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. It is possible for insurances to extend to cover subcontractors, but if your client offers this always seek confirmation in writing. 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 so beware!
Turning this scenario around, if you need to engage a subcontractor to assist you on a large contract or contribute additional services outside of your area of expertise, always be aware of the risks associated. Your contract with your client may require you to guarantee any subcontractors you use have the same level of insurance as you, and to mitigate any risk to your business it is advisable that you seek evidence of your subcontractor’s insurance policies just as you are required to evidence your own.
When a large loss arises courts can often look to whoever has insurance in place to pay for a loss so ensuring that your subcontractors carry their own insurance is a critical component of your own risk management strategy, as you do not want to be left having to pay for the loss caused by someone else.
A common question is ‘once I stop working can all my insurances be cancelled?’ The correct answer is that most policies can, but professional indemnity cannot.
Professional indemnity works on a ‘claims made’ basis which means you require active insurance at the time the claim is made, as opposed to when you gave the advice. This differs from most other insurances which work on an ‘occurrence’ basis and your insurance just needs to be active when an event occurs. As a result, in the situation that you cease consulting whether through returning to employment, retiring or selling the business, consideration has to be given to the potential longevity of the risk attached to your advice.
Businesses are aware of this too though: they also know professional indemnity works on a claims made basis. They understand consulting agreements will not only say that professional indemnity is required, but it will also stipulate a duration after the completion of the contract that cover must be maintained for. This duration is often between three and seven years (using statute of limitations as a benchmark); however, durations as long as ten years have been seen in client contracts. This is a really important planning piece, especially if you are only intending on doing one or two short term contracts as you might be signing up to a requirement to purchase a minimum of four years cover. If you are planning on costing insurance into your fees for the job, or if you are planning on ceasing consulting soon, be especially wary of these clauses and factor in added costs accordingly.
Thankfully, the insurance industry does handle these risks well. When no active advice is being given and cover is only required for past work, insurers will offer discounted coverage to reflect the decreasing risk and will also allow clients to purchase a single policy that runs for multiple years – an especially helpful offering if you are selling your business as you will have access to a cash flow to fund the multiple year coverage.
Managing your risk
As a consultant, clients will engage you to offer them a specialist service they cannot do themselves. Insurance is no different. There are too many areas that can cause issues to consider arranging your own insurance as being effective risk management.
A good insurance broker should not only be able to arrange you appropriate policies that cover your business activities, but they should also be able to explain why the insurance is appropriate, understand the key risks to your industry, review your contracts to identify on any gaps or uninsured risks, and be a trusted advisor to your business.