Companies set up internal labour hire arrangements to achieve flexibility and reduce costs, but they rarely think of the insurance implications, which is leading to a growing risk of workers’ compensation claims flowing through to general indemnity policies.

An internal labour hire structure – which sets up a separate legal entity under a parent company – can lead to claims against the parent group’s general liability policy from both the workers’ compensation insurer seeking recovery and the worker pursuing a civil claim when workers’ comp payments are exhausted.

Berkley Insurance Australia CEO Tony Wheatley says such structures introduce significant liability exposures from duplicated claims and premium loadings.

The existence of separate legal entities in the same organisation differentiates internal labour hire from the use of external labour hire companies. It can effectively insure the same group of workers under two different policies, but with gaps in coverage and increased exposure.

“This has become a significant issue for the insurance industry as more companies use this structure, resulting in what are fundamentally workers’ compensation claims landing on the liability policy of the related entity,” Mr Wheatley told insuranceNEWS.com.au.

He has found many business owners are unaware of the risk, and he wants brokers to tell clients how insurance claims may play out.

Finity partner Estelle Pearson says civil claims from injured workers are typically lodged years later.

The claims are usually complex and incur high legal costs because there are multiple parties. The time delay means insurers are unaware claims are building and find they have underpriced the risk.

Ms Pearson says insurers will eventually respond by increasing prices and putting in high deductibles, and a business owner may end up unaware they do not have full cover.

John Van de Poll, partner at law firm Hall & Wilcox, is seeing deductibles increase to $50,000-$100,000, and says while a workers’ compensation claim is lodged almost immediately, it can take years to resolve a civil damages claim.

He believes companies set up internal hire labour arrangements to reduce their workers’ compensation premiums, but the result can be an increase in their general liability policies, “which historically have been a bit cheaper”.

The general insurer is in effect subsidising workers’ compensation arrangements, he says. “It is very frustrating for liability insurers.”

Mr Wheatley says there is a good chance any workers’ compensation claim from internal labour hire arrangements will come back to the corporate entity, but he has found parent companies tend to dismiss the risk as a workers’ comp matter.

He says an often-forgotten impact is that the cost of claims will flow through to both the labour hire entity and the parent company at renewal time, so the same organisation effectively incurs two premium increases.

He says brokers should ask clients about internal labour hire arrangements so they can identify risk early. They can clarify employment responsibilities across entities and ensure full disclosure to insurers before policy inception.  

“There is a potential issue around disclosure that brokers need to be aware of. They should ensure clients understand the effect of these arrangements on their liability policy and the doubling effect on their business.”

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