Engaging subcontractors to assist with specific tasks or heavy workloads is part of a normal business model. It is important to be aware, however, that when subcontractors undertake work for and on your behalf, you pick up the contingent liability for their work.

Most insurance policies will contain a subrogation clause, whereby you and your insurer have the right to take legal action against the subcontractor if their own negligence caused an insurance loss. Insurers do this as a means of recovering the amount of the claim they have paid, effectively redirecting the claim compensation towards the negligent party.

The right to subrogation is always dependent on the type of engagement you have entered into with the subcontractor, in that you have not agreed to provide them with indemnity for their work.

Insurers recommend, to mitigate risk, that if accounting firms do engage in subcontracting work they ensure that their subcontractors carry their own Professional Indemnity Insurance (PI insurance) for their work. That way should a problem occur as a result of your subcontractor’s work, there is insurance cover to rely on.

Claim scenario

An accounting firm engages a management accountant on a subcontractor basis to provide projections for a new venture. The management accountant’s role includes taking into account relevant tax implications. The accounting firm did not enter into a formal subcontractor agreement and did not request that the subcontractor obtain their own PI insurance.

The projections provided by the management accountant were wrong and the client lost in excess of $500,000. As the client had engaged the accounting firm to undertake the work, the firm was liable and the claim was paid. The insurer then sought to invoke their subrogation rights but found that the subcontractor had no insurance. As a result no recoveries were made and the entire loss was written against the firm’s own PI insurance policy.

Access more guidance on people management.

To explore PII for subcontractors, contact Fenton Green & co at cpa@fentongreen.com.au