Arbor Insurance has highlighted that Australian businesses using contractors rather than employees may face different insurance and legal exposures, at a time when New South Wales reforms are changing how professional indemnity (PI) risk is allocated in the construction sector.
In an insight for business owners, Arbor Insurance said organisations often weigh full-time employment against contractor engagement based on cost, flexibility, and specialist skills, but workforce structure can shape how insurance policies respond to injuries, property damage, and professional services claims. “As a business owner, choosing between hiring full-time employees or engaging contractors is often about flexibility, cost, and access to specialist skills. Contractors can be a smart solution, but many businesses don’t realise that this decision can significantly impact their insurance cover, legal obligations, and risk exposure,” Arbor said.
Arbor noted that in some Australian jurisdictions, contractors may be treated as employees for workers’ compensation and certain insurance purposes. In those cases, a business can be held responsible if a contractor is injured or if their work leads to loss, damage, or injury, even where contractual arrangements indicate otherwise. The firm also pointed out that some policies exclude contractor injuries or damage caused by contractors unless the relationship is declared and specifically covered. The firm said that relying on contractors to arrange their own professional indemnity or public liability cover “is rarely sufficient,” as cover limits, exclusions, or policy wording may leave principals exposed to uninsured loss.
According to Arbor, outsourcing work does not remove a business’s duty of care. Companies engaging contractors or external workers may continue to owe legal and statutory duties, including providing a safe working environment, checking that workers are competent for the tasks assigned, and confirming that appropriate insurance arrangements are in place. Arbor said one way businesses manage these exposures is by using a contractor management system that documents how contractors are selected, inducted, and supervised, as well as safety requirements, site rules, and compliance processes. It added that state and territory WorkCover authorities make available tools such as induction checklists, toolbox talk templates, risk assessment materials, and competency guidelines.
The firm also said businesses that use contractors often review their insurance programs, including workers’ compensation treatment of contractors, PI extensions for contractor errors, public liability worker-to-worker provisions, and management liability cover for directors, officers, and managers where claims, penalties, or investigations arise from contractor-related incidents.
Arbor’s focus on contractor risk sits against commentary from Gallagher on the impact of New South Wales’s Design and Building Practitioners Act 2020 (DBP Act) and the High Court’s Pafburn strata defects decision on construction liability and PI structures. In its analysis, Gallagher said the developments have “far-reaching implications for [the] Australian construction sector – and the professional indemnity insurance required across entire projects.” The broker said the statutory duty of care under the DBP Act is non-delegable and retrospective, and applies across building classes and a wide range of participants, including individual employees and directors.
The duty is not limited to corporate entities and extends along the delivery chain to builders, designers, subcontractors such as electricians and plumbers, project managers, supervisors, developers, and others with substantive control over building work. It is owed to current and future owners and attaches to the building rather than to specific contracts, enabling economic loss claims from subsequent purchasers and other downstream owners. Gallagher noted that the duty has a look-back element, applying to work carried out up to 10 years before the legislation commenced where damage is identified after 2020. That feature can bring older projects into scope and create exposure for directors, officers, and practitioners who have since left or sold their businesses.
Gallagher described Pafburn as a landmark decision because it confirms that breaches of the DBP statutory duty of care give rise to non-delegable, vicarious-style liability. Under this approach, developers and head contractors cannot rely on New South Wales’s proportionate liability regime to limit their share of DBP duty claims by pointing to subcontractor conduct. They can instead be held responsible for the full cost of rectifying defects, even when multiple parties contributed. To seek recovery, principals may need to bring cross-claims against subcontractors, consultants, and suppliers involved in the works. Gallagher expects this to increase dispute complexity and duration and to add pressure to defence and coverage costs for PI insurers, particularly on multi-party projects with layered contracting structures.
The DBP Act also contains a requirement that contractors, subcontractors, and consultants maintain PI cover “adequate for their potential liabilities.” That provision has been deferred each year since 2020 and is currently postponed until July 1, 2026, with its eventual commencement still uncertain. Gallagher said developers and head contractors are reviewing contracts and risk frameworks, including scopes of work, subcontract conditions, minimum PI limits, and PI policy terms dealing with DBP exposures, retroactive dates, and coverage for employees, directors, and related entities. It also warned that, given the retrospective reach of the duty, it “could also apply to company directors who have recently retired or exited the business.”
Although the DBP regime applies only in NSW, Gallagher noted that other jurisdictions are considering building quality and defect frameworks and that “other states are expected to follow,” with Victoria reported to be progressing reforms with similar objectives. In this context, the broker said it is “recommended that all construction sector business organisations and owners access the support of an industry specialist broker who can help navigate the increased professional indemnity liability exposures and ensure you have the right protections for your business and employees for your projects.”
These legal and regulatory developments are occurring in a construction PI market that, according to Lockton’s 2025 snapshot, has been stabilising after a previous hard phase. Lockton reported that premium rates have broadly returned to levels insurers regard as sustainable, which has coincided with increased capacity and more insurers writing or expanding construction PI portfolios. Lockton said insurers in some cases are prepared to increase line sizes on existing accounts or consider reduced pricing where insureds show stable claims experience and measured growth. The broker observed that small and medium-sized enterprises are more likely than large, complex, or multinational groups to see these shifts in pricing or capacity. Underwriters remain cautious on cross-border exposures and large or technically complex projects but are more open to competitive terms where risk information is detailed and governance arrangements are clearly documented.
In relation to cladding and fire safety, Lockton noted that PI cover, previously heavily constrained, is now more commonly available, typically with aggregate limits, higher excesses, and exclusions for some consequential losses. Standard International Underwriting Association wordings continue to underpin much of this capacity, but blanket exclusions are less common than during the peak of market concern. For insurance professionals, the combined commentary from Arbor, Gallagher, and Lockton points to the need to align contractor engagement practices, contractual risk allocation, and PI program design with evolving statutory duties and a PI market that is adjusting in terms of capacity, pricing, and appetite.
