Warning to Business Operators: New Insurance Gap Exposed!

The State Government changed the workers’ compensation legislation late last year such that workers who are injured in the course of their employment from 15 October 2013 will not be able to sue their employer for common law damages, unless their degree of permanent impairment (DPI) exceeds 5%.

Statistically this will drastically reduce the number of common law claims against employers for which WorkCover Queensland is the insurer.

The impacts of this change are now starting to be understood. Injured workers, even if having suffered an injury resulting in a DPI of 5% or less, can still bring a common law damages action against another party they consider negligent. For example, an employee of a labour hire company could still sue mine operator who was the “host employer” at a mine site where the injury occurred.

Another example, is an employee of a subcontractor may still sue the principal contractor responsible for a building site where the worker was injured.

Existing Gap

There has for many years now, and unknown to many employers and contractors, already been an insurance gap for an employer in circumstances where the employer had a contract with, for example, a host employer or principal contractor. If a principal contractor on a building site had the benefit of a contractual indemnity clause and/or a clause requiring the employer to insure both themselves and the principal contractor against claims by an employee of the employer, which are commonly found in these contracts, then the employer can still be sued by the principal contractor based on those contractual obligations.

WorkCover Queensland have for many years had a stated position that they will not cover the employer for any amounts payable to the other party under such contractual obligations.

Many employers and contractors are unaware that they have this gap in insurance risk. It is understandable employers think by having a WorkCover policy, they will be protected by WorkCover whenever a claim arises as a result of an injury to one of their employees no matter where they are working.

However, the shock that many employers in our experience have unfortunately been exposed to, is that if an injured worker sues them and also a third party such as a principal contractor on a building site, and that other party then sues the employer under the contract requiring to be indemnified for the worker’s claim, WorkCover wash their hands of that claim by the other party.

So WorkCover may pay something to the worker to resolve the worker’s claim against the employer, but leave the employer in effect on their own to meet a contractual claim by the other party. In this way the employer can still bear the brunt of much of the cost of their own worker’s claim despite having workers’ compensation insurance!

New Gap

The new and additional insurance gap which has now emerged since 15 October 2013 is that if an employer has signed a contract with a host employer or principal contractor again using the same examples, and one of its employees is injured, if the DPI is 5% or less, the injured worker cannot sue the employer.

Therefore WorkCover are not engaged at all in relation to a common law damages claim. However, if the other party is sued by the injured worker and there is a contractual indemnity and/or joint insurance clause in the contract, the employer can still be sued by the other party and not have any WorkCover protection at all. We are aware some labour hire companies are seeking gap insurance to respond to these gap risks. We understand the insurance is very expensive and only available from a small number of providers.

Conclusion

Besides warning our clients to be conscious of these gaps, the purpose of this article is really to emphasise the importance of making sure any indemnity or coinsurance clauses in contracts are properly drafted to protect you in these situations, and minimise the risk of you having a successful claim against you in circumstances where you have no insurance coverage.

A claim against you for which you have no insurance coverage for, can be devastating. Please contact us to have us review any contracts you are considering entering into so we can give you advice about any indemnity and insurance clauses included in the contract. The changing or deletion of a few words in the “fine print” can make all the difference!