Do you really enjoy playing the odds?

By Cedric E. Stephens, Contributor

Question: I am a self-employed mechanical engineer. I recently entered into a three-year contract to maintain the food-processing plant at my ex-employer's factory. I have 15 persons on my payroll. At peak, the number may climb to 40 employees. What types of insurance do I need?

­ H. M., Kingston 5.

Answer: Your needs fall into two broad groups. Group I is obligatory. They are required by the terms of your contract. The coverages in group II are optional. They depend on your attitude towards risks. If you are risk averse, you are likely to buy coverages in this group. On the other hand, if you are not fazed by uncertainty, you may chose to bear the risks instead of transferring them. The other scenario could see falling near the middle of the two extremes. If I knew where you fitted along the "risk tolerance continuum," my job would be far simpler.

Compulsory insurances:

Let's start by looking at the compulsory insurances. Clause (9) of your contract, which deals with indemnification, points us in the general direction. It reads: "The contractor hereby indemnifies -- against any loss, damage or liability which -- may suffer as a result of any act, matter or thing affecting the provision of the this service -- in relation to the provision of this service--" A critical word in the passage is "indemnifies." It means, according to my dictionary, "to reimburse for expenditure made." In other words, you are contractually bound to pay your principal [ex-employers] for any loss that they may suffer in your providing maintenance services to the plant at their factory.

Clause (10), Damage to Contractors' Employees, adds more clarity to Clause (9). It says [1] your ex-employers are not liable for paying compensation in respect of injuries to your employees (except where such injuries are caused by their employees). The inference here is that this will be one of your duties. [2] Provision 2 restates part of Clause (9) by stating that: "the Contractor shall keep -- indemnified against such damage or compensation -- and against all other losses and claims for injury or damage to property."

Finally, clause (11) deals expressly with insurance. It says that the contractors, i.e., you, "--shall insure against any damage, loss or injury which may occur to any property of any person -- in the sum of $15,000,000." This means in simple language, that you are required to buy Employer's and Public Liability Insurances. The former speaks to your legal liability to your employees. They could suffer job-related injuries. This could arise from an unsafe system of work. Carelessness on the part of other workers could also result in injuries. Public Liability Insurance refers to legal liability for injuries to persons other than your employees.

In this group would be all other persons who had access to the plant. It could also include persons on nearby premises. Note also the reference to damage to property. The use of welding torches, for example, would increase your potential liability.

PL and EL Insurances are compulsory because of your potential legal liabilities. The $15 million limit in my opinion, is very low. Clause (9) refers to "all losses and claims."

It is not limited to $15 million. A local court awarded an employee $23 million for a work-related injury earlier this year. Buy a $30-50 million limit, if you are risk averse like me. For Public Liability, I recommend at least $100 million.

Other Coverages:

How much will you earn from this contract? Is it your sole source of income? If you answer the second question yes, you are fully dependent. If no, you are partly dependent. Whatever your dependence you can buy insurance to protect your income. This could happen if your ex-employers' business was damaged by a fire or hurricane. This type of coverage, business interruption, is vital to the success of most types of businesses.

Contact your broker or insurer for more information. Ask them to carry out a detailed analysis of your needs.

Cedric E. Stephens is the founder of Insurance Help-Line, a telephone-based advisory service and co-host of a radio programme, Risky Business. If you need free advice, write to the Financial Editor or contact Mr. Stephens at aegis@cwjamaica.com <mailto:aegis@cwjamaica.com.

Back to Business