A defence business can have the insurance limits its contract asks for and still have significant gaps in cover.
The answer comes down to the work being performed, the responsibilities the business has accepted and the wording of its policies. This is why insurance needs to be considered before the contract is signed.
For businesses providing services or products to the defence industry, a new contract can change their exposure considerably. Their insurance needs to keep up with those changes.
Understanding what the business actually does
“Defence contractor” is a broad description. A business providing project management services has very different exposures from a company designing equipment, supplying aircraft components or developing software.
Even within the same business, the responsibilities can change from one contract to the next.
For example, a consultancy might initially supply engineers who work under a customer’s direction. If it then agrees to take responsibility for delivering a complete design package, its exposure changes. That should prompt a review of both the contract and its professional indemnity insurance.
As brokers, we need to understand what the business delivers, who checks and approves the work, and how the customer will use it. Those details allow us to explain the risk properly to insurers and assess whether the proposed cover is suitable.
A certificate of currency only tells part of the story
A certificate of currency confirms that a policy is in force when issued. It does not show all the conditions, exclusions and limitations that determine whether a claim will be covered. Defence’s own guidance makes this distinction.
Checking the policy limit is only one part of the review. The business description, insured services, policy wording and endorsements also need to reflect the work being undertaken.
For example, some liability and technology policies contain aircraft products exclusions. Depending on the wording and the component’s use, these can affect a business supplying parts incorporated into an aircraft, even where that business does not operate aircraft itself.
These details can make a substantial difference to the protection available.
The contract and the insurance need to be reviewed together
Agreeing to accept a liability under a contract does not automatically mean an insurer will cover it.
A contract may require a business to accept responsibility beyond what would otherwise apply, including liability for another party’s actions or guarantees about performance. Depending on the policy, some of those obligations may fall outside the insurance.
Defence’s ASDEFCON Insurance Handbook recognises that contracts can create uninsured liabilities and that insurance cannot cover every risk a contractor accepts.
The broker and legal adviser should therefore be involved before terms are agreed. The legal adviser considers the contractual obligations, while the broker assesses how those obligations interact with the insurance available.
Where there is a gap, the business has an opportunity to negotiate the terms, adjust the scope or make an informed decision about accepting the risk.
That becomes harder once the contract has been signed and the price agreed.
The policies need to work together
A defence supplier may provide advice, supply equipment and install software under the same contract. Its professional indemnity, public and products liability and cyber policies need to be considered together.
For example, a public liability policy may exclude claims arising from professional services, while a professional indemnity or technology policy may restrict cover for bodily injury or property damage.
If a design or software error could damage a customer’s equipment, those provisions need careful attention. Having both policies does not automatically resolve the gap.
A useful starting point is to consider what could realistically go wrong during the work, then assess which policy is intended to respond and what limitations apply.
Cyber security does not remove the need to assess cyber cover
Defence businesses can hold sensitive information and rely heavily on their systems to deliver work. A cyber incident could interrupt operations, compromise customer information and affect their ability to meet project deadlines.
Strong security controls are essential, but a business can still face substantial costs following an incident.
Cyber insurance can assist with incident response expenses, certain liabilities and business interruption, depending on the cover purchased. The review should consider what information the business holds, the systems it relies on and the consequences of an interruption.
The relationship between cyber cover and professional indemnity also matters, particularly where the business develops software or provides technology services.
Bring the discussion forward
A new tender, a change in services or greater responsibility for design and delivery should prompt a conversation with the broker.
Providing a clear and accurate explanation of the work helps insurers assess the exposure. Supporting information should be shared in line with the project’s confidentiality and security requirements.
The review also needs to consider what happens after the work is completed. Professional indemnity is generally written on a claims-made basis, so continuity of cover, the retroactive date and any need for run-off cover require attention.
Business owners should understand which risks their insurance can cover and which they will retain. That information should form part of the decision to accept the work and the price charged for it.
If your business operates in the defence industry or is considering a new contract, contact Tim Hardy at MGA Insurance Group to discuss whether your insurance reflects the work you are taking on.
Tim Hardy
Branch Manager
MGA Insurance Group – Melbourne
MGA Insurance Brokers Pty Ltd ABN 29 008 096 277, AFSL 244601.
This article contains general information only and does not take into account your objectives, financial situation or needs. Before acting on it, consider whether it is appropriate for you and read the relevant policy wording or Product Disclosure Statement.
