11 minute read
5 Worst Nightmares for a Trade Business Owner
5 Worst Nightmares for a Trade Business Owner How you can protect yourself from them
There are many risks that you face when working in the trades, and even more when you own a trades business.
As the owner you’re not just worried about yourself, but you’re also responsible for your team and your clients.
As business owners we can take the attitude of “that’s how it is” and live with those risks, or we can try to protect ourselves against them.
We’ve put together a list of five nightmare scenarios for any trade business owner. In some cases they are real-life stories from our own clients.
A large client goes under without paying you Your work results in the death of a third party One of your team suffers a major injury at work A new home you are building is destroyed You suffer an injury that leaves you unable to work
1. A large client goes under without paying you
We’ve heard so many horror stories from subcontractors who’ve had a builder go into administration owning tens or hundreds of thousands of dollars.
An electrical contractor client of ours had a company fail whilst owing him $150k. For a large electrical contractor that may be easier to swallow, but for a bloke with a handful of staff it was a massive hit.
As in many of these cases, once the administration and liquidation period is over, there is nothing left for the subcontractors and other unsecured creditors.
The damage caused goes far beyond the money lost. The stress and impact on your mental health can sometimes outweigh the financial impact. For many tradies this is seen as a risk of being a business owner, but you can protect yourself financially.
Trade Credit Insurance Trade credit insurance protects you against losses caused by a client going into administration or bankruptcy etc.
In the event that one of your clients fails, the insurer will pay you the bulk of the outstanding amount.
The insurer will still try to recover money through the administration process, and if they do happen to recover additional funds they may share some of that with you, in order to achieve a full recovery for you.
The main downside to trade credit insurance is its cost. At the very low end you’re looking at an annual premium of around $5k, and for a business with revenue of around $1 million you can expect to pay at least $10k.
So it’s not cheap, but if we look at that electrician of ours who lost $150k on one job, no doubt they would have happily paid the $10k premium if they knew.
Whether or not you should have trade credit insurance really depends on the types of clients you’re dealing with. If you deal with a lot of smaller clients, especially domestic clients, you’re not going to get any benefit from it.
But if you do a lot of work for a small number of clients, leaving you with large exposures to single companies, then it’s certainly worth considering.
Try putting it this way… What would happen if one of your top three clients failed and couldn’t pay you? If it wouldn’t bother you, then you might not need the cover. But if it meant having to put off some staff, or having to re-mortgage your house to pay the bills, then you probably do.
One of the great things about being a tradesman or a builder is that you can stand back and admire your work. The huge number of tradies using Instagram shows this perfectly in action.
You want families to enjoy the house you’ve renovated, or the deck you’ve built, or the new lighting you’ve installed.
The last thing you want is for that work to cause harm to your client or their family, or perhaps one of their visitors to the home. But sadly, it can and does happen.
Given we’re talking about “nightmare” scenarios, let’s look at a very nasty one. Thankfully the builder involved was not a client of ours.
In 2008 there was a gathering of school mothers out on a deck. The house was a beautiful old Queenslander in the blue-chip Brisbane suburb of Ascot.
The structure failed, and multiple people suffered serious injuries, whilst sadly one of the mothers lost her life.
Whilst one could say it was a tragic accident, there’s always going to be legal action following an event like this.
In this case it was the builder who previously worked on the deck and a building inspector who were sued for millions of dollars by the family of the deceased as well as those who were injured.
Public Liability Insurance If your work results in property damage or personal injury to a third party, and you are found to have been negligent, your public liability insurance will respond.
In the case of the deck, the building inspector most likely wouldn’t have been covered by public liability (see section below), but the builder would have been provided that there was negligence involved in their building work.
Public liability will generally form the core of any tradie or builder’s insurance portfolio.
Professional Indemnity Insurance In some cases your negligence wasn’t to do with your physical work, and instead was related to the design or professional advice you provided. We don’t know the full story with how the deck collapse investigation panned out, but it could be that there was no negligence with the physical building work undertaken, and instead it was the design or the inspection of the deck that was the issue.
In this case, it could be that public liability will not respond, and instead it will be professional indemnity insurance that is required.
Your Trade Risk broker can go through this in more detail with you, but if you’re providing design or advice services, and especially if you’re charging a separate fee for this work, you’ll most likely need professional indemnity insurance.
This is a very broad way of looking at it, but you could say that public liability relates to your physical work, and professional indemnity relates to your non-physical work such as design and advice.
Working on a construction site can be dangerous. We all know that and accept that risk when working.
A nail through a finger might be joked about and posted on social media, but what if something really serious happened? What if one of your tradies suffered an injury that left them critically injured, or worse…?
Any good business owner is obviously going to feel terrible about the injury to their team member and the impact it’s going to have on their family. From a financial perspective, the best way you can manage this is through insurance.
If the worker is one of your employees they will be covered by your workers compensation insurance.
But we know in the building industry plenty of businesses use subcontractors, and this is where things can get a little messy…
Even if you have engaged a worker as a subcontractor, they could be a deemed worker and therefore must be covered under your workers compensation.
This is good from one perspective, as it means the person is covered. But that’s only any good if you have your workers compensation setup correctly.
It could be worth speaking with your accountant or the relevant workers compensation provider for your state for further clarification.
Workers Compensation Insurance As insurance brokers we don’t deal with workers compensation, but it would be neglectful of us not to raise it as an important for of insurance for your trade business.
In most Australian states workers compensation is administered by a government body, such as WorkCover in QLD and iCare in NSW. Other states have their own different contacts.
Personal Accident Insurance Going back to what we said about subcontractors, if your worker is classed a genuine subcontractor and not a deemed worker, they will not be covered by your workers compensation.
You could say that it’s not your problem, and as a subbie it’s their own responsibility to look after themselves.
Legally that’s probably fine, but you’d still feel pretty bad if they lost their income on your job right?
Some larger building companies have made it mandatory that all subcontractors have their own personal accident or income protection insurance.
It’s certainly worth considering if you want to ensure your subbies are looked after should they be injured on your site.
4. A new home you are building is destroyed
As a good builder you make sure your site is locked up and safe every night.
Now imagine turning up to the worksite one morning to see that your new build has been reduced to a pile of rubble.
It could have been caused by a storm, arson or malicious damage. How it happened doesn’t matter as much as the fact that you’ve just lost everything. New build destroyed Who is responsible financially? As the builder, in most cases it will be you. It’s not the homeowner’s responsibility until handover in most cases.
If the house was just at frame stage you’re still going to be hurting financially, but it probably won’t ruin you. What if the house was virtually complete though? You could be down a few hundred grand.
But hold on… You have public liability insurance, which covers property damage, so all is okay! Not so fast…
Whilst public liability insurance does indeed cover property damage, the policy will only respond in the event of negligence.
Public liability is designed to respond in the event that your negligence results in property damage or personal injury to another person. If there is no negligence, there is no claim.
If you ensured the site was safe and secure, and you did nothing wrong (or negligent) which contributed to the damage, your public liability insurance is not going to cover the claim.
Contract Works Insurance What you need in this case is contract works insurance.
Contract works insurance covers your projects whilst they are under construction. It can cover the structure itself, along with the materials located on site.
Most importantly, contract works does not rely on your negligence, which is where public liability insurance kicks in.
Picture this… You’ve done your apprenticeship, spent a few years working for someone else, then a few more years building your own business. You’re finally at the point where you’re making some good coin and the hard yards are paying off.
You borrow some money for an investment property, then another big mortgage to build your dream home. You have decent amount of debt, but business is good and it’s all comfortably manageable.
Then one Friday afternoon you trip and fall from a second storey deck your team is building.
You end up in hospital with a broken femur and fractured vertebrae. The doctor reassures you that you’ll make a full recovery, but also that you’ll be off the tools for at least six months.
Suddenly it feels like everything is about to fall apart… How are you going to keep looking after your family and covering your mortgage repayments whilst you can’t do any work?
The last ten years of hard slog is about to ruined thanks to a Friday afternoon trip…
But then you remember, your broker at Trade Risk gave you a quote for personal accident insurance a few months ago, and you went ahead with it!
Personal Accident Insurance This type of cover goes by a few different names, but we’ll stick with personal accident insurance. Despite the name, it can also include cover for illness depending on the option selected.
Personal accident insurance can cover a large percentage (typically 85%) of your income for a period of time whilst you are unable to work due to injury and illness.
Continuing with the case study above, the tradie would simply have to provide a medical certificate from the doctor confirming the injuries and the amount of time expected to be unable to work.
There are quite a few different options when it comes to waiting periods, benefit periods and benefit amounts, but your Trade Risk broker can run through these with you and provide a few different quotes.
Don’t risk it all We know from ten years of experience that not every trade business owner is going to take out every type of trade insurance that can help them.
Some do though, especially those who truly appreciate the value they have created in their business and are willing to invest a very small percentage of their revenue to protect it.
We’re happy to talk to you about what you do and don’t need, and what types of insurance might give you the best “bang for buck” for your budget.
We don’t want you to spend all your money on insurance, but if something goes wrong in your business, we at least want to know that we gave you all the options and you knew what you could have insured yourself against.
If you’re an existing Trade Risk client and would like to discuss any of the above forms of trade insurance please contact your account manager, or for new clients please call us on 1800 808 800.
www.traderisk.com.au 1800 808 800
