In Australia, contractors make up 7.6% of the employed population, with 1.1 million independent contractors recorded in the Australian Bureau of Statistics’ (ABS) most recent (August 2025) Characteristics of Employment dataset.
Whether it’s construction, professional services, maintenance, transport or trade work, engaging contractors is a common part of doing business. However, many businesses assume that because a contractor is responsible for their own work, the contractor’s insurance will automatically respond if something goes wrong.
In reality, liability and insurance do not always sit with the same party.
Depending on the circumstances, a business engaging a contractor may still face legal responsibility, significant financial loss, project delays or claims that fall outside an insurance policy’s response. Understanding who may be liable, what insurance each party carries and how that insurance operates is an important part of managing contractor risk.
Recent Australian court decisions highlight why businesses should carefully consider the insurance implications before engaging contractors and subcontractors. While contractors generally operate independent businesses and are responsible for maintaining their own insurance cover, these cases demonstrate that liability does not always rest with the party performing the work. Depending on the circumstances, principals can remain exposed to claims arising from the actions of specialist subcontractors, making it essential to understand both the allocation of liability and the adequacy of insurance arrangements before work begins.
Why principals can remain exposed to subcontractor defects
The construction industry employs around 9.3% of workers, of which contractors and subcontractors make up substantial numbers. It’s common in construction for a contractor to engage subcontractors to complete specific, specialised tasks.
When this happens, the original contractor becomes known as the principal, and can be held responsible for the quality and outputs of the subcontractor as a recent High Court of Australia case in NSW demonstrates.
A residential building had defects and the owners decided to sue the builder and developer. The builder and developer argued that subcontractors were at fault, and liability should be apportioned to them, using the proportionate liability defence under the Civil Liability Act 2002 (NSW).
When the case went to the High Court, it determined that based on the Design and Building Practitioners Act 2020 (NSW) (DBP Act), principal contractors, the builder and developer, were fully liable under a non-delegable statutory duty for the subcontractors’ work.
From an insurance perspective, this highlights the importance of principals ensuring they have appropriate liability cover in place and not relying on the assumption that responsibility will automatically transfer to subcontractors. It also reinforces the value of engaging appropriately insured subcontractors, as recovery options may be limited if a subcontractor lacks adequate insurance or financial capacity.
Control of the work can determine liability
In a different example, a subcontractor was found responsible for the injury of their employee because they were in control of the way the work was done.
Held in the Queensland Court of Appeal (QCA), Sawyer v Steeplechase [2025] QCA 2 involved a principal contractor in construction working on a residential project, a subcontractor who completed concreting works and an injured worker.
The worker injured their back in the course of concreting activities, and lodged a claim against the principal contractor for unsafe work conditions. This was dismissed by the courts because it was the subcontractor who was responsible for the conditions that the work was undertaken within.
As licenced specialists, with experience and skills, the subcontracting concrete business controlled the way the work was done, including the site safety. The worker was performing under the direction and control of the subcontractor, and within the subcontractor’s area of expertise.
This case highlights that specialist contractors and subcontractors can retain primary responsibility for injuries arising from their work, particularly where they control the work methods, supervision and safety systems. For contractors, maintaining appropriate insurance is essential because liability can arise even when working within a broader project controlled by another party.
Having insurance doesn’t guarantee recovery
Even where insurance exists, recovery is not guaranteed. Policy wording, notification requirements and claims triggers can all affect whether cover responds. Businesses that assume insurance will be available after a loss may find themselves unable to recover if policy conditions have not been met.
In 374, 376 New South Head Road Pty Ltd v SMLXL Projects (NSW) Pty Ltd [2025] NSWSC 886 that’s exactly what happened.
The principal, New South Head Road Pty Ltd sought to claim directly against the contractor, SMLXL Projects (NSW) Pty Ltd, for deficiencies in design and supervision during a project. The contractor had gone insolvent, and the principal was pursuing recovery through their professional indemnity insurer.
The Supreme Court of New South Wales found that while the contractor SMLXL’s arguable liability and insolvency wasn’t disputed, because the principal didn’t issue a demand in line with the insurance policy wording, they ultimately didn’t meet the conditions required to trigger the policy.
The court refused because key policy condition of a written demand had not been met.
What businesses should consider before engaging contractors
These examples demonstrate that managing contractor risk involves more than simply determining who is legally liable.
In one case, the principal contractor remained fully responsible for defects caused by subcontractors. In another, liability sat with the specialist subcontractor that controlled the work. In the third, recovery was unavailable because policy requirements had not been satisfied.
The common thread is that liability outcomes and insurance outcomes are not always the same.
Businesses engaging contractors should understand:
- who may be responsible if something goes wrong;
- what insurance each party is expected to maintain;
- whether policy limits are appropriate for the work being performed;
- how contractual obligations interact with insurance cover; and
- whether policy conditions could affect the ability to make a claim.
Requesting certificates of currency is an important first step, but businesses should also consider the scope of cover, policy limits and any contractual requirements that may impact the allocation of risk.
Depending on the nature of their operations, contractors may need to consider:
- Public and products liability, which covers property damage or personal injury to another
- Professional indemnity, if they give advice or provide a specific skill
- Workers compensation, if they have employees
- General property to cover equipment or tools
- Credit insurance, in case a debtor goes bankrupt
- Contractual liability, if the principal or head contractor passes on some or all their liability via the contract terms.
Businesses engaging contractors should consider whether these covers are appropriate for the work being undertaken and whether policy limits align with the potential exposure.
In a layered contracting environment, liability does not always sit where businesses expect. Recent court decisions demonstrate that responsibility may rest with a principal, a contractor, a subcontractor, or in some cases become difficult to recover altogether.
The most effective approach is to consider both liability and insurance before work begins. By understanding contractual responsibilities, verifying insurance arrangements and ensuring cover is appropriate to the risks involved, businesses can reduce the likelihood of unexpected financial exposure.
While the cases discussed arise from construction projects, the lessons apply across many industries that engage contractors and subcontractors.
If you’re unsure whether your contractor arrangements or insurance program adequately protect your business, speak with your EBM Account Manager.
