Subcontractor Warranty and the Tender Deadline
Kauri Builders Ltd is a residential renovation company with 14 staff and $4.2 million annual turnover. It holds a contract works policy and a public liability policy with a $2 million limit. A new insurer offers a competitive quote on condition that all subcontractors hold at least $1 million public liability cover and that hot work is carried out under a permit. The director, Dave, says about 40% of the work is done by two regular subcontractors who have no insurance. He wants to answer 'yes' to the proposal question 'Do you engage subcontractors without current public liability insurance?' so he can get the certificate before a tender closes. The broker knows the subcontractors are uninsured. The proposal also asks whether the company has had any liability claims; Dave says there was a minor fall from a ladder two years ago, settled for $12,000, but he thinks it was 'not a claim' because no one sued. The policy includes a subcontractor condition and a hot-work warranty.
1. Identify the underwriting and disclosure issues and explain the consequences of answering the proposal inaccurately.
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The proposal question is a material underwriting question. Kauri Builders uses uninsured subcontractors for 40% of its work, and the insurer has expressly required all subcontractors to hold $1m public liability. Answering 'yes' to 'Do you engage subcontractors without current public liability insurance?' would be false. The prior ladder fall settled for $12,000 is also a claim or circumstance that should be disclosed, even if no proceedings were issued. Under the insurance law framework, an insurer may avoid a policy for a material misrepresentation or non-disclosure that is substantially incorrect; this is plainly material. The policy also contains a subcontractor condition and hot-work warranty, so a claim could be declined for breach even if the proposal were accepted. The broker must not assist in answering falsely; doing so would breach ethical and regulatory obligations and could expose the broker and FAP.
2. Advise Dave on how to proceed to obtain compliant cover before the tender.
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Dave should not sign the inaccurate proposal. The broker should explain the options: (1) arrange public liability cover for the two subcontractors and provide certificates; (2) use insured subcontractors for the tender work; (3) disclose the uninsured subcontractors and ask the insurer for terms, possibly with a premium loading, exclusion or condition; or (4) decline the work. The prior ladder claim must be disclosed with details. The broker should record the advice and the client's decision. If time is short, the broker can seek an interim binder or a quote subject to conditions, but cannot backdate cover or misstate the position. The tender deadline does not justify a false answer.
3. If an uninsured subcontractor causes a fire during hot work, how will the policy respond?
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The insurer is likely to decline liability or rely on the subcontractor condition and hot-work warranty. The insured has breached a condition precedent or warranty; the insurer may also argue that the risk was misdescribed. The contract works damage and any third-party liability could fall on Kauri Builders and its directors. Dave may face personal liability under health and safety or contract law, and the client may sue the company. The broker should notify the insurer immediately, preserve documents, and not promise cover. The lesson is that the warranty and subcontractor condition are not administrative; they define the risk the insurer agreed to.