Professional indemnity insurance for contractors is increasingly becoming a necessity - some clients won’t even consider hiring you if your business isn’t covered. But what is professional indemnity and what level of coverage do you need? This guide will take you through the basics.
What is professional indemnity insurance?
Professional indemnity insurance covers you and your business against accusations and legal actions arising from professional negligence, perceived or otherwise.
If a client is unhappy with your work for whatever reason, whether they believe you’ve given them bad advice, breached copyright, mislaid or revealed confidential company information, they could decide to pursue legal action. If that should happen then it could prove financially catastrophic for your business.
Even if you don’t use it, holding professional indemnity insurance has some positive attributes. For example, it provides a powerful argument that you run an independent company if HMRC questions your IR35 status.
Professional indemnity coverage is important for the vast majority of contractors but if you provide any of the following services then it is especially advisable that you obtain PI cover:
- Consultancy and advice
This includes contractors who work in academia or private tutors. If your clients feel your advice was not helpful or helped them achieve their objectives then they may seek recompense.
- Design work
This type of work often throws up issues of intellectual property and practical considerations like faulty materials.
- Fitness training
Human bodies are fallible and if your profession carries with it the risk of a client becoming injured then it makes sense to protect yourself. This applies to fitness instructors, yoga teachers and physical therapists alike.
- Information technology
IT contractors’ professional indemnity insurance is an important part of an IT workers’ arsenal – there are many potential working issues from delayed lead times to data corruption.
Let’s look at an example:
Miranda is an IT contractor who is working for a private business. Part of her job is to supervise the migration of confidential data from one server to another. Miranda chooses to divide her time between her office at home and working client-side when it is necessary for her to be physically present to do the job.
Like most professionals in her position, Miranda uses her company laptop to undertake the assignment. The laptop has a significant amount of sensitive information stored on its hard drive, some of it encrypted, some of it accessible to anyone who knew how to look.
One day, when Miranda is driving to the client, she takes a brief rest stop, her car is broken into and her personal items stolen, including her work laptop containing her client’s confidential information.
This unfortunate event leaves Miranda open to a lawsuit from her client who could sue for damages, potential loss of profit and reputation because although she performed well and she was just unlucky enough to be the victim of a crime, Miranda still left her client’s business information open to attack.
Fortunately, Miranda has IT contractor professional indemnity insurance which will protect her against potential ruinous legal fees should her client decide to pursue legal avenues. Professional indemnity insurance for IT is an especially important business expenditure as so much of the work is portable and vulnerable to attack or compromise.
Do I need professional indemnity?
Contractor’s professional indemnity insurance is not a legally required form of insurance but as you will find if you run an uninsured limited company, a vast swathe of clients will be unwilling to work with you. It simply doesn’t make business sense to offer services to other companies without a safety net to provide financial remuneration for them and security for you and your business in the event that things go wrong.
It’s also worth considering what you would lose if you were forced to defend your company against charges of negligence:
- Legal costs
Regardless of the outcome of your case, you will have to hire a qualified lawyer to defend you. Legal fees are one of the largest outlays that your business will suffer, easily running into thousands of pounds. Even if the outcome is favourable, the cost of mounting a defence can easily destroy an uninsured limited company.
If your business is found to have been negligent in its duties then you are open to even more costs. You will have to pay damages to compensate your client for any lost business, earnings, time and labour. The total you have to pay could be enormously damaging and make it difficult for your business to recover.
As any contractor knows, one of their most valuable assets is their time. If you’re forced to mount a legal defence to protect your company then not only are you spending your hard-earned cash, you’re also taking significant time away from pursuing new business. This is especially important when you run a single-person limited company – that shift in focus makes your working life extremely problematic.
What level of coverage do I need?
The nature of your professional indemnity coverage will depend on a number of factors:
- Industry body membership
It could be that you belong to an industry body that requires a certain level of professional indemnity coverage as a condition of membership.
- Individual client requirements
Some clients require a very specific level of PI coverage and it will be a condition of your contract that you have this insurance in place.
- Your personal estimation
It can be difficult to properly estimate how much coverage you might need in any given situation. It’s worth taking a look at your client roster and evaluating how difficult things could become if they became unhappy with your work. A huge conglomerate is more likely to sue you than a small one or two person business – the scope of your work can help dictate how much coverage you might need.
Professional indemnity and public liability insurance for contractors often comes as a package deal and it’s worth shopping around to see what’s available. It can be cost-effective to take out all your business insurance with the same provider but it could also be that you require a more bespoke approach. The important thing is to take stock of your working practices to evaluate how much you have to lose and proceed accordingly.