Managing business risk – Liability

Last month, we provided a simple framework to help you manage property risks in your business. In our second article in a four-part series, we focus on liability 

Construction is a risky business, more so than most, yet many builders don’t spend enough time really understanding their risk environment and putting in place strategies to manage, avoid or transfer that risk.

Four Areas of Risk

• Property
• Liability
• Financial
• Personal/Family

Many builders worry more about “liability” than they do about crashing their car, experiencing a fire or suffering a break in – yet their liability insurance is likely to be less adequate than for all those scenarios. In many cases, the actual cost of a liability claim can be even greater!

Injury to people

When caused by an accident, this is generally covered by ACC and is paid through your levy. Illness or injury not caused by a specific event may not be covered by ACC. There are a number of things you can be held liable for:

• As an employer, your staff may hold you responsible for their injury or illness.
• If a member of the public is injured, or becomes ill, you may be held responsible for this.
• As a person responsible for site safety, you can be held responsible by Worksafe NZ.

There are many experts in the health and safety field who can advise builders how best to manage this risk. Worksafe NZ also provides a guide for employers on managing health and safety on the www.business.govt.nz site.

While you can’t insure for health and safety fines, you can cover the cost of a prosecution and any reparations awarded to the injured party. You can also insure against an employee’s ongoing costs if you’re found responsible for their illness, or injury, and it’s not covered by ACC.

Damage to property

You will have a detailed site health and safety plan to protect people from injury (and yourself from liability). But do you conduct the same assessment, including briefing your staff and sub-contractors, when it comes to the risk of property damage?

Ask yourself:

• What activity could result in damage to neighbouring property (eg high winds, heavy vehicles, subsidence)?
• If you’re doing an alteration or renovation, what activity could cause damage to the existing structure (eg climbing on roofs, dust contamination, moving materials around)?
• Have I identified where underground services are located?
• Have I secured the site if poor weather is likely?
• Am I following the best practice standard for this particular activity (eg cleaning glass, doing hot work)?
• Am I comfortable with my workers’ and sub-contractors’ practices and workmanship?

Remember, with public liability insurance, you’re not just insuring to fix damage if it occurs, you’re insuring your liability for the damage. For it to be a claim, your liability must be established first. But, just as with a car accident, it’s not your responsibility to determine whether you were liable – if you want your insurer to pay, you need to let them decide that for you.

Causing a financial loss

This is the fastest-growing area of liability in the construction sector, driven by new legislation and greater awareness, and willingness, among the public to use the legal process when a problem arises.

You can be held liable if you make a mistake that causes someone an economic loss. The same applies to designers, engineers, surveyors, lawyers, accountants and insurance brokers or anyone providing a professional service. For this reason, it’s important to consider
the following:

• Is the advice I’m giving correct?
• Have I double checked the information I’ve been given (eg site layout, wind zone)?
• Is my team following the plans and specifications correctly?
• Am I using the right materials, as specified in the contract?
• Am I managing the project adequately?
• Do I have written authority for any changes I make to the specifications (eg design changes)?
• Am I happy with my team’s workmanship?

You’re responsible for your work for up to ten years, including to subsequent property owners.

If you, or one of your team, makes a mistake (or even if this is just alleged) you may want to be insured for the cost of defending yourself. The cover is called errors and omissions indemnity (or professional indemnity) – it covers you for acts, errors or omissions that cause someone an economic loss (where there’s no physical property damage or loss.) For more information, visit: www.builtin.co.nz/EandO.

Legal fines and penalties

Anyone in business is subject to laws and regulation, including potential fines if you’re found in breach of those laws.

The Building Act, Health and Safety in Employment Act, Fair Trading Act and Resource Management Act are just a few that relate to construction.

Fines under health and safety legislation can’t be insured for, but the policy will cover the defence costs of a prosecution and reparations. Ask yourself the question: “Am I complying with all the laws and regulations that apply to what I do?” In particular, but not limited to:

• Am I misrepresenting what I do? (Fair Trading Act)
• Am I building with a consent when it’s needed? (Building Act)
• Am I supplying all the paperwork necessary as part of a construction project? (Building Act)
• Am I building within my licence class? (Building Act)
• Am I meeting my resource consent conditions? (Resource Management Act)
• Am I taking all practicable steps to ensure the safety of myself and others? (Health and Safety in Employment Act)

Directors’ Obligations

If you’ve set up a company, you need to be aware of your obligations as a company director under the Companies Act 1993. You can be held personally liable in a number of circumstances, including trading while insolvent. This can also include other non-acting directors, such as wives and partners. Consider:

• Is my company financially solvent and, if not, am I still taking on new business (eg new jobs, buying materials)?
• Am I meeting my health and safety responsibilities?

More information

You can read more about this in our article “Directors of companies can be held personally liable” at www.builtin.co.nz/buildersinsurance.

The next article will focus specifically on risks that may affect your business’ financial situation, such as getting paid and dealing with bad debt.

Builtin New Zealand is a specialist in insurance for the construction industry. For more information visit www.builtin.co.nz, email Ben Rickard at ben@builtin.co.nz or call him on 0800 BUILTIN.