IT Contractor Insurance - Professional Indemnity PI Cover

Background

Professional insurance is a necessity in today's increasingly litigious environment, and none more so than for sole contractors/self-employed freelance consultants, whose very livelihood can be jeopardised by the threat of legal action from an unhappy client.

This article outlines the key professional insurances available for sole contractors. While the industries in which the sole contractors operate may vary, the issues remain broadly the same.

Current situation

Hiscox estimates that there are around 250,000 freelancers, contractors and consultants in the so-called "emerging professions" in the UK. These emerging professions include IT, management consultancy, marketing and public relations. These sectors are still in their infancy in terms of developing professional standards, which include insurance requirements. They are also the sectors where the contractor market is experiencing strong growth.

Research conducted in 2005 by Hiscox and the Chartered Institute of Public Relations (CIPR) found 72% of freelance PR consultants do not have PI cover, despite their businesses being arguably the most at risk from a major claim made against them.

At the same time, nearly two in five (39%) of IT companies do not have any form of PI cover, according to a survey conducted by Hiscox and CNET Direct in Dec 2004. PI claims against IT companies have increased dramatically in recent years, and while this trend has particularly impacted larger companies, it is now extending to smaller IT consultancies and sole contractors. IT companies are increasingly being required to purchase PI by their clients under the terms of their contracts. And some clients are demanding that their IT companies, including sole contractors, have the same level of cover in place as other far bigger IT companies.

Other current issues in the market include the impact of an increasingly transient contract workforce, often on project-based contracts, as well as the intellectual property implications of freelancers moving between agencies.

In addition, SMEs (including contractors and freelancers) are aiming to increase their share of public sector business opportunities, which involves a complicated tendering process.

Types of professional insurance

Insurance can mitigate against the risk of legal claims, and is ideally suited to sole contractors because the (sometimes huge) risks are shared by many policyholders, making the cost to the contractor proportionate to the size of their business. Indeed, the cost of defending a PI claim far exceeds the premium cost and can threaten the very existence of many small businesses.

The main types of professional insurance that apply to sole contractors are:

Professional Indemnity (PI) Insurance: this covers you for liabilities that arise from any professional advice or services you provide. Having this type of cover is now considered to be best practice and, in some cases, essential by clients. As an example of this, many UK government departments will require their contractors and consultants to have at least £5 million of PI cover.

Policies typically cover:

- Negligence or breach of a duty of care
- Negligent misstatement or misrepresentation
- Infringement of intellectual property rights
- For the cost of putting things right, if this will prevent a claim for a greater amount being made against you
- If a client refuses to pay any amount you are owed for work you have done, where this will prevent a larger claim against you

Directors and Officers' (D&O) Liability Insurance: as a director, officer or manager of any company, you are automatically exposed to unlimited personal liability. D&O liability insurance is designed to protect individuals' personal assets from claims brought against them. It is often viewed as a necessary pre-condition of employment and many directors refuse to consider a position without it.

General Liability Insurance: this cover is also described as Public and Product Liability. Anyone who has visitors to their business premises or who visits clients' sites needs public liability insurance. It covers you for claims against you from third parties for personal injury, or property damage (an accident caused by someone tripping over a computer cable, for example).

Other relevant insurances

Sole contractors should also consider other types of insurance relating to their workplace, including:

Office Contents and Computer Equipment: this insurance will cover your office equipment including furniture and computers, stock, stationary and documents. Your contents are covered for events such as theft, fire, water damage from burst pipes and malicious damage. However, you need to be aware of the insurer's definition of "contents". For example, Hiscox provides a broad definition to include telephone systems, goods in transit and even works of art and home office contents.

Portable Equipment Insurance: this is designed for professionals who are transporting electronic equipment when working away from their business location or are based at a client site. The insurance will cover accidental physical loss (including theft) or damage.

Examples of equipment covered include Blackberries or other PDAs, digital cameras and laptops. It is usually sold as an add-on to a contents policy, and you should check for worldwide or EU options.

For information on Hiscox's range of policies for consultants and contractors, simply click here.